Faltering gold rally could weigh on pawnbrokers

By Myles Neligan and Lorraine Turner - Analysis

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.