Faltering gold rally could weigh on pawnbrokers

LONDON (Reuters) - Shares in British pawnbrokers, among the stock market's stronger performers thanks to soaring numbers of credit-starved consumers, could lose some of their luster as a blistering rally in gold prices falters.

Spot gold is down 10 pct from its late Feb intraday peak of $1,005 an ounce, using Reuters data, and some analysts reckon the precious metal has further to fall as rebounding stock markets dent its safe haven appeal to investors.

That would mark a setback for the UK pawnbroking sector, led by Albemarle & Bond (ALBH.L) and H&T Group (HTGR.L), which has been able to bolster profits by selling gold jewelry unredeemed by its recession-struck customers at historically high prices.

"Most investors have bought these stocks as a defensive play, but they may not appreciate their sensitivity if gold prices fall," said Noble analyst Nitin Arora.

MARGIN STRENGTH

High street pawnbrokers make money by advancing short-term loans secured against valuables, typically gold jewelry, pledged by the borrower.

They lend small cash sums in transactions that require no credit checks, providing a source of flexible borrowing that has become increasingly popular as mainstream banks tighten their lending criteria in response to the recession.

While all pawnbrokers are affected by falling gold prices, analysts say the UK's two publicly quoted companies are particularly exposed because the precious metal makes up the vast majority of their loan collateral.

This is in contrast to leading pawnbrokers in the U.S. and France, who accept a wider range of valuables such as guns, wine, and designer clothing as security.

In the UK, while only about 20 percent of pawned jewelry ends up being sold, the persistence and strength of the gold price rally has made this a far more profitable activity for pawnbrokers.

H&T's gross profit margin from scrap gold sales rose to 33 percent last year from 10 percent in 2005, a period during which the gold price more than doubled, while Albermarle's margin on retail and scrap sales combined climbed to 45 percent from 23 percent, Noble's Arora said.

Lucrative gold sales have bolstered the pawnbrokers' overall margins against the corrosive effect of a rise in the total number of items left unredeemed as the recession takes its toll on customers.

"There's no doubt that in the last 12 months, pawnbrokers have been buoyed by a very high gold price," said Daniel Stewart & Co analyst Justin Bates.

"(Falling prices) won't put them in a loss-making position, but it will mean they get less bang for their buck."

Daniel Stewart on Wednesday retained his " buy" recommendation on Albemarle despite the weaker gold price.

HEDGING TIME

Albemarle and H&T, Britain's biggest pawnbrokers by far with over 100 stores each, are sanguine about the impact of a drop in the gold price, emphasizing the relatively small contribution gold sales make to their revenues and profits.

"The majority of the business comes out of my pawn broking product which is not related to the gold price," John Nicols, chief executive of H&T Group, told Reuters.

However, Nichols said H&T, which in 2008 booked a 1.8 million pound ($2.62 million) profit from higher gold prices compared with group pretax profit of 10.9 million pounds, is likely later this year to hedge against a possible price reversal.

"I would suspect that in the next quarter, we might take that decision to hedge. We didn't take the hedge last year because we didn't think it (the gold price) was going to decline," he said.

Albermarle chief executive Greville Nicholls acknowledged that the company has "done very nicely, thank you" from high gold prices, with the yellow metal currently fetching a scrap value of 7.26 stg a gram, up from 5.83 stg in November last year.

But he said it would take a "dramatic" downturn to damage the group's performance, with customer redemptions so far falling only marginally despite the recession, and retail sales remaining strong as more bargain-conscious consumers desert mainstream jewelry stores.

"If gold halved in price, that would be an issue for us," he told Reuters.

Some analysts believe the current weakness in the gold price will in any case prove to be short-lived, predicting a rebound later in the year in response to resurgent inflation triggered by emergency public spending programs in the U.S. and Europe.

Last week, analysts at Edison Investment Research said gold could soon rise to a fresh record of $1,500 an ounce.

H&T shares closed at 195 pence on Thursday, having risen a quarter since the start of 2009 and outperforming the FTSE Small Cap Index .FTSC by 50 percent in the past year.

Albemarle shares closed at 180 pence, having outperformed the index by 25 percent over the same period.

($1=.6863 pounds)

(Editing by Mike Nesbit)