As gold loses its shine, this leading pawnbroker warns of a slowdown in trading.
Between 2009 and 2011, the price of gold pretty much doubled, driven by inflation-wary investors rushing to buy the yellow metal.
Up goes gold
Last September, as fears of a eurozone meltdown gripped markets, the price of gold surged to an all-time high of $1,924 an ounce. However, following the longest slump in the gold price in a decade, gold has slipped to $1,638 an ounce as I write. Nevertheless, although the gold price is down more than a seventh (15%) from its peak, it is still up 4.5% this year.
Even so, some analysts -- including those at Bank of America and Morgan Stanley -- predict that the price of gold will hit $2,000 an ounce before 2012 is out. Also, gold bulls have been encouraged by news that 81-year-old billionaire investment guru George Soros continues to buy more of the shiny stuff.
Fading pawn star
The 11-year bull market in gold -- its price has soared almost six-fold since end-2000-- is good news for British pawnbrokers, particularly Albemarle & Bond Holdings (LSE: ABM), the UK's largest listed pawnbroker.
In troubled times, gold -- known as the 'currency of last resort' -- can be a valuable asset, as hard-pressed consumers trade in their jewellery for much-needed cash. However, as the price of gold has come off the boil this year, this 'cash for gold' rush has started to run out of steam.
Hence, in a trading update this morning, A&B warned that growth has slowed at its gold-buying business. In the second half of 2011, growth (in terms of value of gold bought) was running at a breakneck 50% a year. Although A&B's gold buying has continued to grow in 2012, the rate of growth has slowed to 'middle single digits' in the past eight weeks.
A&B cautions that the lower gold price and reduced gold-buying activity have hit both volumes and margins. With its full-year profits expected to be 'below current market consensus' of £24 million, this profit warning caused its share price to slump.
As I write, A&B is one of the London market's worst fallers, with its shares diving 21p to 255p, down nearly 8% this morning. At this price, the firm is valued at almost £142 million.
Barry Stevenson, chief executive, commented:
"Whilst the very recent trends in gold buying are disappointing, we are very focused on driving income growth out of our expanded store base and exercising rigorous cost controls. The group is well positioned to respond to changing market dynamics and satisfy the fundamental demand for short-term cash and credit from a potential 10 million UK consumers. The Company expects to report final results in September and we look forward to providing a further update on strategy at that stage."
Amusingly, Stevenson also threw in a reference to the recent poor weather (which always smacks of desperation), saying: "It is too early to tell if this is a reflection of the reduction in footfall from the very wet weather in the period, or a developing trend."
A golden future?
With 215 stores across Britain, A&B is in pole position to take advantage of credit-hungry consumers battling weak wage growth, rising bills and public-sector cutbacks. Hence, if the price of gold does start climbing steadily once again, today's share slide could be an over-reaction.
At 255p, A&B shares are valued at 8.7% forward earnings and offer a prospective dividend yield of 4.8%, covered a generous 2.4 times. These are modest fundamentals for a market leader, so income-hungry investors might give Albemarle & Bond a whirl. However, given the nature of its business, ethical investors will probably give this pawnbroker a miss!
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> Cliff does not own any of the shares mentioned in this article.