What Are the Odds?

We’ve all seen the billboards, television ads, banners and whatnot, claiming that if you send it your old or unwanted gold trinkets, there’s a hefty payday waiting for you. Some of the television commercials are particularly high-pressure, with happy spokespeople talking about all of the wonderful things they managed to do with their huge gold windfall. What makes it all sound credible to the viewer is the near-record prices that gold has been selling for lately. After all, if gold is selling for over $1,000 an ounce, and you have several ounces of jewelry sitting around, that means you should be able to get several thousand dollars for it, right? What are the odds that something being advertised on TV by the late Ed McMahon could possibly be less than legitimate?

Well, according to an article that posted this week on The Boston Globe website, some of the “cash-for-gold” companies aren’t offering all that much per gram. In fact, 11% to 29% is the average range, but the Globe actually tried buying some gold earrings, just to see what they could get for them. The earrings sold for $62 (on sale) and had about $14.65 worth of gold in them (the rest of the price being “workmanship” and markup). The mail-in dealer they sent a pair to send back a check for $3.25...

Now, this is not to suggest that there is actual fraud going on here. The fact is, the mark-up of anywhere from 400% to 4,000% for “workmanship” and overhead is actually very common in jewelry; there’s also a matter of definitions, in that gold prices are given per ounce of 24-karat gold (the purest form), while a lot of gold jewelry is 14-karat or 10-karat, which are stronger and more durable. Even so, most of the prices quoted in the Globe story are listing gold prices at somewhere around $9.75 a gram, or a little over 27% of market price. And that doesn’t count the (apparently very common) cases where your “guaranteed” gold-return envelope mysteriously “vanished” in the mail, and the cash-for-gold company never got it in the first place…

What keeps this from being a scam is that none of the companies that engage in these practices make any claims about how much, exactly, you can make selling them your gold – or even what they pay per gram of gold in the first place. They also aren’t clear about how much they are charging you for shipping and handling, or for converting belongings of yours that look vaguely golden into gold ingots; metals extraction and recovery procedures aren’t actually that cheap, and neither are pre-paid insured shipping envelopes. It might seem like 77% is a large cut for the company to be taking, but $10 for shipping and handling and $1.40 for metals extraction aren’t actually large amounts of money in absolute terms. The real problem here isn’t so much deceptive advertising practices as it is people who can’t seem to grasp the idea of “something for nothing” being impossible, at least in a business context…

The simple fact is that companies do not exist to do wonderful things for the consumer; they exist to make money by providing value for their customers. McDonald’s does not exist to provide you with convenient and inexpensive nutrition; they exist to make money by buying basic ingredients (meat, potatoes) and adding value (processing, cooking) which you then pay extra for. Otherwise, you could just buy your own meat and potatoes and spent the time grinding, chopping, baking and frying until you got what you wanted. In the case of the gold-buying companies, you could take your $14.65 worth of gold, spend the money having it appraised, smelted, and made into ingots or wafers, and then sell it – spending all of the time, transportation, security, and overhead costs that would incur – and you’d probably be pressed to make more than the $6 the gold buyers in the linked story offered. Add in the shipping costs and insurance costs (along with the occasional pay-out to people who claim to have shipped you gold-like substances but really haven’t), and you’d probably have a hard time doing better than the 22% the “cash-for-gold” company in the story was offering…

None of this excuses the fact that these organizations are preying on people with a poor grasp of reality, of course. But if all companies were prohibited from making money on the greedy, the short-sighted, and the hopelessly credulous, the economy would collapse…

And you still couldn’t make thousands of dollars selling $14.65 worth of gold…