Gold and Silver Lessons from Pawn Stars

Despite being in a bull market for the past decade, precious metals are still widely under-owned by historical standards. The percentage of wealth held in gold and silver today fails in comparison to the last bull market thirty years ago. The investing world is heavily skewed towards paper assets, as traditional education methods focus on these types of investment vehicles far more than others. However, investors looking to diversify away from equities and bonds can learn about hard assets such as gold and silver if they watch close enough.

On Friday, Rick Harrison from the hit television show Pawn Stars appeared on CNBC. He discussed his pawn shop business and how it performs in the current economy, but his view on profits were very interesting in regards to gold. When asked about what kind of margin he tries to receive, Rick explains, “It just depends on what the items are. If you bring me a piece of art that might sit on the wall for two or three years, I’m going to give you maybe 50 percent of what I think I can get out of it. If you bring me a gold coin in the store that I can sell immediately right on the market, I’ll make one percent, I have no problem with that.”

Rick’s statement underlies a key characteristic of gold, which is liquidity. Gold is an asset that can easily be bought or sold in the market without causing a large movement in price or a loss of value. This characteristic helps allow gold to function as a medium of exchange around the world. It can be transported easily from one seller to the next buyer with little debate or confusion. While a painting may have value like gold, its price can be highly subjective and there is no telling when the right buyer will come along and purchase it. Furthermore, gold coins are more convenient to carry in your pocket than a painting. Even though gold as a percentage of held assets is very low, gold demand has been rising. Last year, gold demand totaled more than 4,500 tonnes, according to the World Gold Council. In comparison, gold demand in 2007 totaled about 3,100 tonnes.

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While Rick did not mention silver in the interview, a prior episode of Pawn Stars showed that the white precious metal is also appealing as a hard asset. In the episode, a young man named Jeff rolls into the Harrison’s family pawn store, located in Las Vegas, with a cart full of silver. In fact, he had 3,372 ounces of silver which he bought 12 years ago near a price of $5 an ounce. Similar to gold, Rick enjoys buying silver because its high liquidity makes it easy to resell. He explains, “I love to buy silver all day, everyday of the week, because there’s a set profit margin. I can sell it on the market immediately.”

The two agreed to a deal where Rick bought Jeff’s silver for about $33 an ounce. The purchase amount was relatively easy to calculate as both gold and silver are a unit of account. Their value is easily measured by weight and the prevailing market price per ounce. The transaction also showed the ability of precious metals to act as a store of value. Twelve years ago, Jeff’s stockpile of silver was worth around $17,000. However, he cashed out at the pawn store for $111,000. In the process, Rick even informs Jeff that silver has many industrial uses. Silver is the best conductor of electricity and nearly every cell phone, computer and television uses silver.

These two segments involving Pawn Stars provide examples of three key characteristics for gold and silver. The two precious metals are a medium of exchange, unit of account and a store of value. These are also requirements for traditional money. Currently, the U.S. dollar is the reserve currency of the world and is easily a medium of exchange and a unit of account. However, since governments and central banks have access to easily increase the money supply, the greenback’s store of value is being attacked by inflation. With more than 5,000 years of history behind them, gold and silver tend to hold their value over the long-term extremely well, as their worth is not eroded by a printing press.

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Disclosure: Long EXK, AG, HL, PHYS