Today in the second installment of the precious metal business, we look at the small business of buying and selling gold and in particular scrap gold (gold that is no longer of value in its original marketed form such as broken jewellery, one single earring etc) also known as the “cash for gold” business – a gold jewellery recycling service that buys old, broken, or mismatched gold jewellry.

Gold like any less precious metal is bought and sold on the secondary market by weight and that is the business we are looking at today: secondary market sold by weight, we are not interested in jewellery with valuation certificates we only care about how much it fetches on the scale. This is a business there will always be a market for, gold buyers are ubiquitous as everywhere there is demand for the precious metal.

The business
All this business does is buy gold at one place and sell it at another. (Different purities fetch a different price per gram 9/14/18/24ct). That is of course if you are not in the refining or not in the jewellery making, none of which we are looking at today. The closer you are downstream in the value chain to these endgames (refining, recycling) the higher the price you will get and the higher the price you will be able to pay people for their gold. This is important to note because there can be a lot of middlemen and the further upstream you are the less you will get.

The value chain
The first thing we need to look at is the amount of people in your value chain. If you are a small operator in a little town it is unlikely that you will be selling to the people exporting or refining. You will maybe take it to your nearest big town and sell it there, that buyer will in turn sell it further downstream. I say this because even the person you are selling it to may not sell to a refiner, they may sell to an exporter who will maybe go and sell it in the gold markets overseas like Dubai. The value you add in your little town is that you provide cash for gold without people having to travel far. Sure they can get a higher price themselves in town it costs money and time to travel.

Business model
All you need to run this business is a scale, money and a way to test the gold. At its smallest level, in certain areas there are people that used to go around on foot knocking on doors buying “broken “gold” and all they have is a scale. And they will usually be working with someone who sits in a car with the money, once the gold is weighed and person accepts the offer price only then is the money guy called. Now this is a business model I saw growing up. This business was a goldmine in (lower income) densely populated areas as people always had the random gold earring and broken jewellry laying around. But this is not your grandma’s South Africa anymore, this is Bheki Cele’s 70+ murders a day South Africa of utter chaos. And those areas have become significantly more dangerous to operate in. So unless you are a brave (or bad) person that can face the threat head on or you going to pay protection money to whichever gang calls the shots in that area this model is DOA.

The alternative to this is the traditional “man behind a glass” of buying in but in a business district close to those areas. But this is dangerous as well because gangs from those areas will usually carry out robberies in the business district close to them. The safest bet using this model is thus to operate in a mall but then your rent will go up quite a bit (and you will become less competitive as you need to pay less per gram).

The traditional way to buy in gold is the man behind a glass, and the customer comes in and he/she/whatever-pronoun puts it on the scale and the man behind the glass makes an offer. Gold buyers usually have a fixed price they pay per gram regardless of whether it is an item of jewellery or not. In theory a item of jewellery has a high resale value but this business does not care and treats it just by weight. An item of jewellery still has to find a buyer, ain’t nobody got time for that. Put the thing on the scale and go on with your day.

The money
This business has a value chain like other recycling, the buyer is rarely the end user and is merely a collection point. So usually it looks like this:
As a small business: You -> Harry Hollander -> Exporter or Refiner or Jeweller
As the business grows and you get more volume then you can deal with the ultimate buyer within the gold-by-weight chain directly and thus cut out your middle man.

The end buyers Exporter or Refiner or Jeweller will have a price they pay per gram. Let’s keep the maths simple. If they (the last people in your value chain seen above) are paying R200 per gram for 9ct. Then Harry Hollander will maybe pay R175 per gram and you will pay R150 per gram. Your profit will be R25 per gram, once you cut out Harry then you will make R50 per gram. It is unlikely that you and Harry Hollander will be making the same profit per gram. You will usually be making more as you will handle significantly less volume and Harry will sit on his arse and just put on the scale.

Once in Cape Town way back when South Africa was still a prosperous country, I picked up one of those teardrop earrings (which was popular with girls at the time) that had been partially stepped on and dented and scratched a bit. And I took it there to Harry Hollander who used to be in Adderley street opposite the Golden Acre (close to KFC) and I walked up gave him the earring and I think he gave me like R7 or something within seconds. He just casually took it from me, threw it on the scale and gave me the money.

Harry Hollander, such a lovely name, I’m not even sure if it was actually THE Harry Hollander but I just call anybody trading gold Harry Hollander. If you know, you know 😉