In a small workroom in the back of Medina’s Jewelers in Santa Maria, shimmering gold submits to the long, thin flame of a hand-held torch, melting quick and smooth in a fiery orange crucible. The air smells the way tin sounds, thin and metallic.
The only sign of resistance are a few brief flashes of yellow, orange, blue, and green before storeowner Armando Medina turns off the torch to reveal a puddle of gold. It’s slightly charred but still brilliantly reflective. Poured onto a metal table, the puddle almost instantly congeals into an egg yolk-like consistency. Medina runs it under water a few seconds and then holds it in his hand. It’s little more than two ounces of 14K gold, worth about $2,200. That newly smelted nugget of gold, only five minutes before, had been two and a half bracelets—the chainlink ID ones popular in the 1970s—that someone had traded in for cash.
Medina has been buying gold for the last two and a half years, and once or twice a month he smelts scrap gold—gold that can’t be resold—and sells it to a refinery. Even the gold dust and scrap that results from the process is worth money.
“I once turned in all the dust and flakes from around my work station and they paid me $7,000,” he said.
“Now I make sure I clean up all the time,” he added with a laugh that indicated he thought it was funny, but not really.
Gold doesn’t have magnetic properties but it does seem to draw people to it. For hundreds of centuries men have fought for it, women have swooned over it, and it continues to have an
affect on global economies. Though it’s malleable and non-toxic, gold is a simple metal material with no real purpose and no practical value other than what value man gives it.
In a classic quote, billionaire investor Warren Buffett, who has many times advised against gold as a wealth-building asset, puts it this way: “[Gold] gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has
no utility. Anyone watching from Mars would be scratching their head.”
And yet its allure is indefinable.
Its rarity is marked by the fact that there are only 165,000 metric tons of gold in existence above ground. Put in simpler terms, if every single ounce of the available gold in the world was placed next to each other in a cube, it would only measure 20 meters in any direction, according to the World Gold Council.
Perhaps it’s that rarity and the tendency for humans to desire what isn’t in their possession—or maybe it’s simply because it’s bright and sparkly—but something about gold makes a person’s eyes light up.
“The way to understand gold best is to let somebody hold gold, a gold bar or pure gold coins like American Eagles, and watch their face the moment the gold hits their hands. No one can resist smiling; you just can’t not smile when you see it and feel its weight and warmth. It’s just that gut feeling you get,” said David Schraeder, spokesperson for the World Gold Council.
Currently the worth that is given to gold is at an all-time high. Gold climbed passed $1,700 an ounce this week, the result of a gold bull market spurred by a weakened dollar and recession fears. Speculation abounds that the market value of gold will skyrocket even higher, nearly doubling in price. Of course, like the stock market, horse races, or a Las Vegas roulette table, there is no way to know for sure what the market will do. But that doesn’t stop people from trying their luck at the game.
While some people are hedging their bets on the belief that the price of gold will continue to go up, and are therefore investing in gold bullion and American Eagle coins, others are taking advantage of the high price gold is fetching and cashing in—either because they stand to make a grand investment on their return or because times are hard.
Is it a good time to invest in gold?
“It’s tough to say, because people are always buying and selling. For everybody who says that gold is a good investment right now, there is somebody who is selling,” said Steven Frank, president of Secured Gold Buyers. The gold buying company travels the country doing road shows at which people are invited to stop in and sell their scrap gold on the spot. Secured Gold Buyers makes a couple of stops on the Central Coast every month.
Frank said any time can be considered a good time to sell gold, but it all depends on when the person wanting to sell actually bought the gold.
“Somebody who bought at $1,000 [an ounce] and sees it over $1,600 [an ounce] may think now is the time to cash out,” he said. “Then you have the other side; people who look at the economy and gold as a hedge to safely acquire assets at an unsafe time. They think, ‘I’m going to get in now because I think it’s
going to go to $3,000.’”
Local jewelry store owner Medina went to gemology school right out of high school. He learned how to refine gold and pull the alloy out of it. He even designs some of the jewelry he sells in the store. Throughout his career, he said, gold prices have never been this high. But even with his experience, Medina can’t predict what will happen next or if now is a good time to buy.
“If you think it’s going to go higher then, yes, it’s a good time to buy. Do I think it’s going to go higher? I wish I knew. But a lot of experts believe it will hit $2,500,” he said.
Gerry Stinn, owner of Santa Maria’s Stinn Jewelers, doesn’t mince words about his thoughts on converting money to gold as an investment.
“I won’t buy gold as an investment. It’s a bad investment,” he said, adding that he doesn’t buy gold from sellers. However, he does handle it frequently, especially when creating custom jewelry for clients, including museums all over the country.
He said when someone sells their personal gold they aren’t getting what they expect because of markups. He explained his statement with this scenario: If a couple came in and purchased a wedding set for $3,000 and asked if they would be able to sell it for $1,000, Stinn would tell them no because a jewelry store could buy the same set new and sell it for two to three times what the couple bought it for wholesale.
“And when someone buys gold as an investment, they have to also pay for storage, they have to cross their fingers that it holds value and if the stock market picks up the value drops,” he said.
Therein lies the risk with gold. Historically, its price has gone up when the rest of the economy is down. It doesn’t always follow that rule, however. An investor can purchase gold and then feel the hurt when gold unexpectedly drops sharply. That investor can hold on to his gold and wait on the price to rise again, but it won’t do anything for his portfolio because it doesn’t pay interest or dividends.
Andrew Millar, a financial advisor for Edward Jones in Santa Maria, is careful to explain that he won’t advise anyone on whether to buy gold, but he did supply a report on gold from Edward Jones.
According to the report, “No one knows what gold will do from this point, but we do know that this is not the first time that gold has risen dramatically, and we also know that large run-ups in price are often followed by sudden and sharp downdrafts. In fact, since 1970, the only other time that gold traded above $600, it also fell more than 50 percent in less than two years and more than 25 percent in a mere five months.”
And prior to this current decade-long bull market there was a decades long lull between the last sharp loss and rise to the original price. That means someone who purchased gold at the high of about $700 an ounce in 1981 would’ve had to wait almost 25 years just to see prices rise back to that amount.
It’s hard to find anyone who will speculate on what gold will do next.
Even members of World Gold Council can’t say where gold is headed. Council spokesperson Schraeder said while he can’t suggest whether it’s a good time to buy gold or speculate on what gold will do, he can shed light on the current factors that drive gold prices.
“The fundamental drivers of supply and demand that began the gold bull market about a decade ago are stronger now than when the bull market began,” Schraeder said.
Those drivers include two major structural shifts; the emergence of China and India as gold-buying countries, together making up 50 percent of global demand, and the loss of one of three major sources of gold. Historically there have been three sources of gold: gold mining, recycled gold, and the Central Banks. Interestingly enough in 2010 Central Banks switched teams and became buyers, creating a demand for gold.
How people make money selling gold
“You know what? People need money right now, times are tough,” local jeweler Medina said about clients trading unwanted gold for cash. All indications for most people prove he is right. With the fear of another recession looming, inflation, and a weak dollar, lots of people could use an infusion of extra cash. Sometimes that extra money may be lying in a drawer in their home.
Frank of Secured Gold Buyers is one of several gold buyers who come through town and offer to trade gold for cash. He said he has an open process in which he tests the gold, weighs it, and makes an offer right then and there. If the seller doesn’t like the offer, he isn’t pressured.
“People face a car repair and they have a small amount of broken jewelry, one earring, a class ring. It takes a little bit of gold right now to get a $600 or a $1,000 payout and it takes care of the car repair,” he said.
Secured Gold Buyers deals with about 4,000 customers each month. In the last 12 months the number of clients has been steady with no spikes because of the increase in gold prices. Frank said his customers fit a typical profile. They are 60 to 70 percent female because women usually acquire more jewelry (men, on the other hand acquire gold coins). Also, they are usually in the 35- to 75-year-old range, and many of them are repeat customers.
“It’s stuff you tend to acquire; you have to hold [on to] it, inherit it, it has to be in your possession for a long time in order for it to gain value,” Frank said.
Scrap gold gets melted into gold bars and sold to refineries. Gold bullion, or American Eagle coins, vintage jewelry, or
jewelry that can be resold, gets sold on the secondary market.
In jeweler Medina’s case, it’s sold at his shop for drastically reduced prices.
The price a seller gets depends on a lot of factors, including the purity of the gold, whether it has stones, and its age. Ultimately, the value sellers receive depends on when they bought the gold in the first place, how much they paid, and whether they’re mentally prepared to part with that gold. Frank said mental preparedness is important.
“It’s a great time for anybody wanting to sell. For those people ready to do so, it’s the perfect time,” he said. “There’s going to be a drop; it’s just a matter of time.”
Arts Editor Shelly Cone can be contacted at scone@santamariasun.com.
This article appears in Aug 11-18, 2011.