Ellis Martin & David Morgan Discuss The Golden Envelope

April 24, 2009

Ellis Martin: I've been noticing something that I have not seen here before, David. I'm in the Greater Los Angeles area and in just a four- or five-block radius from where I am, there are at least four or five gold and silver shops that have sprung up and by gold and silver shops, [I mean that] they want to buy whatever you've got. It's quite a phenomenon.

David Morgan: Yes, we are starting to see more and more "gold buyers." In fact, quite a few have sprung up on television. If you go back about a year ago, to the best of my knowledge there was one gold acquiring company that had a mail-in envelope system. This is where you mail your gold jewelry that you don't want anymore to them in a prepaid envelope and they will mail you back a check. It shows all these happy people with cash in their hands, "I sent in my old gold and I got $600.00" and so forth. Well now there are two or three of them that are advertising on television.

Mr. Martin: David, these are the only new businesses opening up. Retail businesses are closing and what's moving in is this type of business and sometimes they are three doors down from each other.

Mr. Morgan: That's quite an indicator that people in the know are now trying to acquire gold and silver. The best way to do it is to buy it right. When you're selling jewelry you can be ripped off. Unfortunately, the people who are turning their old, no-longer-wanted gold into cash are giving these "buyers" more trust than they deserve, in many cases. Most would be a lot better off doing it with a reputable dealer. Problem is, most reputable dealers really don't want that business, and the reasons vary. But generally it goes like this: if you take a necklace to a coin shop, the dealer is required to hold that for thirty days; the reason for the holding period is that there's a possibility that the necklace was stolen from somebody.

So they have to check with the police reports, they have to check with the local pawnshops, and basically it's a huge headache for the coin dealer. It takes a lot of time. He has to set aside the articles, he has to inventory them, and if nothing flags, then he sends it in to the refiner and gets a check and then shows the check to the client. Of course, he has to take some fee for all the trouble and time it's taken to get the product refined and into raw form and to provide the client a check for their portion.

In most cases that check would be much larger going through a well established coin dealer than through the "golden envelope" routine. However, because most people are in a hurry and these types of operations appeal to folks because they are so simple, they do a great deal of business. It's a quick turnover-basically, you don't even get 50 percent of the value of the gold. In most cases, you usually receive anywhere from 10 to 20 percent of the value of the gold.

Now a lot of people don't know where else to go and, being in a hurry, they do the best thing that they can, and they mail in the jewelry pieces they no longer want. The people on the buy side have got a really great business because they're buying gold and silver for basically pennies on the dollar. They get a bunch of it, they ship it in every week or month, depending what their quantity is, and they receive the equivalent in either dollars or metal or some combination. It doesn't surprise me at all to see them popping up all over.

Mr. Martin: So what they are doing is not holding on to any of the product that they are taking in, whether it is rounds or jewelry, they are turning it for the immediate profit. Is that right?

Mr. Morgan: In almost all cases that's correct. I'd just like to go a bit further on this topic if I might. I've had consultations through the years on lots of topics, primarily having to do with the silver market in one way, shape, or form. But in the last two to three months, I have had three clients who have each had the same request, "How do I get into the bullion coin business?" And not the one that we were just discussing, but the ones where you basically retail gold and silver coins or gold and silver bars to the public. I thought that was extremely fascinating from the aspect that I haven't had anything like that happen to me for years.

Probably five or six years ago, Mike Maloney of goldsilver.com posed the same question to me. Mike wanted to start a gold and silver dealership, and I helped him as much as I possibly could. Mike is a bit of a phenomenon now. He is affiliated with Robert Kiyosaki of Rich Dad, Poor Dad fame and, again, his Web site is goldsilver.com. He's pretty well known, especially in the Los Angeles area, as being a real straight shooter. He's written a book on gold and silver investing and the monetary aspects of what happened at the end of these great inflations. But since then, I haven't had anybody ask me about starting a coin dealership, until recently-and three in a row! It's amazing.

Mr. Martin: What kind of investment do you think someone needs to make to get something like that started in these times?

Mr. Morgan: I would say these days the best way to start if you're small and want the lowest risk would be to start a coin business on the Internet. The only problem with an Internet-based dealership is lack of longevity. In other words, you put up a Web site and since you've only been there for a very short time, getting people to trust you can be a somewhat cumbersome. On the other hand, if you have a dealership that's in a brick-and-mortar building, people are a bit more confident going in and paying over the counter where they can bring in greenbacks and exchange them for gold coins on the spot, and both parties are happy. So that's the advantage to being in a physical building-you can get started very quickly and you can buy and sell almost immediately. An Internet business can certainly be accomplished-it just takes more time to build the trust factor. Your reputation is built pretty quickly and there are very few unscrupulous dealers in the industry, although it does happen.

Mr. Martin: Between the two businesses, which one would you advocate, the scrap business or the coin business?

Mr. Morgan: I would much prefer the coin business, yet I'm not against these scrap dealers. There certainly are a lot of people out there with gold or silver chains or whatever that they don't want. It's nice that there's a facility somewhere where they can obviously get something for it. It's just the way it's handled; as far as what it does for the client, it is a bit of a rip off in my view. But again, they have to pay for television advertising-think what that costs. They exist for a reason . . . I mean, people generally know that gold has gone up. They don't know how much. The scrap dealers provide a service, but I think the business aspect of it is a little on the shady side. I would much prefer to start a coin dealership. I think it has a lot of longevity ahead of it. I think there are going to be a lot of people who are going to be seeking physical metal in the years ahead. The only problem or caveat I see comes mainly on the silver side.

I could be wrong but I think that the demand side for physical silver and gold is going to be so strong that it's going to be harder and harder to obtain in, say, a couple of years. That doesn't mean that you can't get it. I just think it's going to be very difficult for large institutions that want to buy millions and millions of dollars of silver or gold at a time they aren't really going to be able to get it through the retail outlets. Now you might be able to obtain it using the ETFs, but it is still questionable that they have all the physical that they claim.

A precious metals dealership can be a lucrative business if you structure it properly. Of course like anything that's a good thing, it may get overdone. If you have the opportunity to acquire a coin shop that's already been in place for quite some time and you buy it at a reasonable cost, you could certainly do that and move in and start maintaining the business. In other words, just take over as a new manager; then, if they aren't very savvy about having a Web site surrounding the retail side or the walk-in side, definitely get a very big Web presence going as well. So you could have the best of both worlds, meaning you could have a physical location as well as a cyber presence. I think that would serve everybody the best.


Mr. Martin: Thanks, David, for this interview on the theopportunityshow.com. I'm Ellis Martin, executive producer. David Morgan of The Morgan Report is one of the most preeminent experts in silver, gold, and precious metals. He hosts a subscription-based Web site,silver-investor.com. David is also an author, having penned the book Get the Skinny on Silver Investing, available on amazon.com. He's a teacher, lecturer, world traveler, and once again we are pleased to have him here on The Opportunity Show. David, thanks for joining us today.


It is an honor to be,

David Morgan

Founder Silver-Investor.com

Mr. Morgan has followed the silver market daily for more than 30 years. Much of his Web site, www.silver-investor.com, is devoted to education about the precious metals.

David Morgan (Silver-Investor.com) is a widely recognized analyst in the precious metals industry; he consults for hedge funds, high net-worth investors, mining companies, depositories and bullion dealers. He is the publisher of The Morgan Report on precious metals, the author of Get the Skinny on Silver Investing, and a featured speaker at investment conferences in North America, Europe and Asia. You can receive a free 30 day trial subscription here http://www.silver-investor.com/joinfreelist.html

The symbol for silver ‘AG’ comes from the Latin word ‘agentum’ meaning silver.