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The price of gold has advanced materially over the past several years.  A shaky economy, increased stock market volatility, and possible inflation concerns are just a few of the reasons why the yellow metal is now trading near $1,400 an ounce, having briefly crossed that threshold.  By comparison, the average price per ounce in 2005 was just $445.  As you can see, over the past five years or so, the price of the precious metal has increased more than 200%.  In addition, a number of financial experts anticipate that gold’s run is not over.  In fact, some believe that within the next few years, it will reach $2,000 an ounce.

During the recent price surge, investors have flocked to a number of gold mining stocks.  In fact, AngloGold Ashanti (AU), Barrick Gold (ABX), and Goldcorp (GG) have all recently reached 52-week highs.  Although there is always downside risk, especially if the global economy recovers strongly, gold prices may well continue to rise if inflation accompanies that recovery, lifting these stocks to new highs.  For investors interested in gaining exposure to gold in other ways, however, we recommend taking a look at the publicly traded pawn lenders.

EZCORP (EZPW) is the largest pawn lender (by market capitalization) under Value Line coverage.  It operates more than 500 pawn stores in the U.S. and Mexico.  Cash America International (CSH) is another major player, with almost 700 pawn locations throughout North America.  Lastly, First Cash Financial Services (FCFS) has over 550 locations in the U.S. and Mexico.

pawn loan is a relatively simple financial transaction.  An individual borrows money (typically for a term of 30 to 180 days), the amount of which is based on specific collateral (most commonly jewelry, electronics, or musical instruments).  At the end of the term, the individual pays back the loan (plus interest), or the pawn lender keeps the collateral.  Cash America and EZCORP also offer payday loan services, which enable customers to receive cash immediately in exchange for their next paycheck (minus a fee).

Over the past few years, due to the subprime meltdown, housing market downturn, and other factors, most banks and traditional financial institutions tightened their credit standards.  The elevated unemployment rate caused more and more individuals to need cash inflows to cover short-term expenses, and in many cases, the banks continue to turn away these elevated-default-risk customers.  Thus, pawn lenders, which do not perform credit checks, continue to experience strong demand for their services.

Pawn transactions are commonly backed by gold jewelry and because of the weak employment picture, more and more individuals are failing to repay the loans.  Thus, the lenders have gained ownership of material amounts of the precious metal.  In turn, due to gold prices increasing, Cash America, EZCORP, and First Cash have been selling this merchandise for handsome profits.  If gold prices continue their ascent, this situation ought to repeat itself, causing the pawn lenders to achieve hefty earnings gains going forward.

As for the stocks, due to the companies’ positive financial results of late, as well as good near-term prospects, the three publicly traded pawn lenders are all trading near their 52-week highs.  However, we believe that new price levels will be reached if the gold rally persists.  In our view, those investors that believe that $1,400 an ounce is not the peak, should take a look at the pawn lenders.   

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.