Give Me A Dollar and I’ll Give You 90 Cents Back
This is the purest business idea of all time – give me a dollar and I’ll give you 90 cents (or something less) back. Ridiculous, right? Yet, it happens in so many different forms that it’s somewhat surprising. Why would anyone in their right mind give someone a dollar just to get less money back? And, I’m not talking about you giving someone a dollar so that they give someone else 90 cents back. That’s money movement. I’m talking about a direct trade – you give someone money just for the privilege of getting less money back. It happens a lot and we’ve all participated in it.
Here are some ways this model exists in business – and I’ll rank order them by the models that give you the most money back to the ones that give you the least. I’m going to spend a little extra time on the last business which I think is the most onerous of them all. Here we go:
1. ATMs. The most obvious model – you give the bank a dollar, and they give you 98%-100% of it back every time you withdraw it from the ATM. Their service: accessibility and interest.
2. Travelers Checks. We all know that companies like American Express have made a great business in taking your money, and giving you 96%-99% of the value back in the form of a less liquid travelers check. What’s the embedded service? Insurance.
3. Check Cashing. Companies like Western Union will take your check and give you cash worth about 95%-99% of the value. Their value: liquidity, especially to the unbanked.
4. Currency Exchange. Companies like Travelex have made a great living taking your money, and giving you 90%-98% of the value back in the form of another currency. The implied service: local purchasing power.
5. Coinstar. These guys own the kiosks you see at the grocery store where you put in a bag of coins and they give you 90% of the value back in the form of cash. It’s an amazing business to say the least. What’s their underlying service? Money portability.
And last but certainly not least:
6. Gold Buyers. These companies allow you to trade in your gold jewelry, and they give you cash for the gold. Not a fair example you say? I think it’s very fair – gold is a currency and so are the dollars you’re getting in return. Their true service: liquidity.
Here’s why I think the gold buying services are truly the worst economic deal of them all. There are two compounding issues. First, these companies are not giving you anywhere close to value of your gold, dollar for dollar. While the above businesses give you 90%+ of the value of your dollar, some people who have used these gold buying services have calculated that they have received 17%-18% of the value of their gold. That’s an 80%+ tax right there. (UPDATE: This CNN report that came out today says gold buyers pay between 18%-60% of face.) But, let’s not stop with that. There’s a second compounding issue that can be material. Gold is an appreciating asset. The US Dollar is a declining asset.
Here’s the historical price of gold:
Here’s the strength of the US Dollar over the same time period:
[UPDATE: Just a note – past performance is not indicative of future returns. Either currency could go up or down from here. It’s unlikely that any currency fluctuation up or down would make up for the initial 80% tax though.]
Here are the real economics: let’s just say you sold your gold jewelry in 2003 where the actual gold value is $100. Let’s say you got $18 for that $100 of gold. And then let’s just say you held that cash until now. The purchasing power of that $18 has declined to ~$14 since 2003. Meanwhile, if you just held the $100 of gold in the form of the jewelry, it would now be worth over $350. I’m not exactly sure how to properly index two bifurcating currencies, but in a nominal sense, you traded something worth $350 for $14. You got paid 4 cents for your dollar. Instead of saying “We Pay Top Dollar” – these companies should say we pay you cents on the dollar.
[UPDATE: This is what happens when you whip together a blog post late at night. Since the gold is priced in dollars, the depreciation of the dollar is embedded in the gold price. So, I didn’t need the second chart so I double counted the impact of the dollar depreciation.]
Now to be fair – most gold sellers probably don’t hold their cash so the separation from gold’s appreciation and the dollar’s depreciation may not actually have time to play out. The seller gets the value of instant liquidity and they probably use it. In addition, the gold buyers do need to have infrastructure to appraise, melt, and monetize gold if they do it themselves. Nonetheless, the tax these companies charge to give you your money back is pretty onerous no matter how you cut it. But, it just goes to show, there’s always ways to get people to give you money in exchange for less money back.
Thinking About Thinking 
Good article and good insights, Larry.
Thanks Ravi – appreciate it.
Excellent point of views and real facts of today’s economy.
Very interesting example you have set.I really like your article.
PayPal is another one. How often do we use PayPal to send money to friends or organizations? It would be dollar for dollar if we used a check, but the convenience often trumps it.
Adam – I view this more as money movement. I can see the value of someone processing a payment between two distinct parties. There’s a lot to be done to make sure it’s a reliable transaction. This post is more about a transaction with yourself at the end of the day. But, you’re right, the next order beyond that is how much we should pay to move money between people. Money transfer is another example of this.
Actually on the note about ATMs, most ATMs are not owned by banks. They are privately owned. Look at the side of the next one at a gas station or grocery store.
John – actually, you’re right. Then it’s not the perfect example compared to some of the other examples. Thanks for the point.
>> there’s always ways …
no
there are always ways
Take money out of it. What’s an ounce of gold worth, in terms of an ounce of silver?
Money is a fabrication. What matters is what one commodity is worth in terms of another, not what it costs in dollars. This is why the stock market is running away recently: people are wiping their asses with dollars, so to stay constant in real terms, stock prices HAVE to rise. Just like gold.
Also, you’re just plain wrong about gold being an appreciating asset. Look over the long run, like 200 years. An ounce of gold has always been approximately equal to the price of a fine men’s suit, since around the 1800s. It fluctuates locally, but don’t bet on it for the long haul.
David – could you send us a long term chart on gold? That’d be interesting. I’m sure you’re right on gold, but for the purposes of the illustration in this post, the people trading in their gold aren’t going to live 200 years. So, I figure it’s more appropriate to see how gold is moving these days. Correct me if I’m wrong, I understand though that the long term chart on the dollar shows clear weakening of the dollar throughout time.
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If you were to invert the US dollar to the price of gold, you would see almost a direct sex-match to their prices.
The price of gold in US dollars matches the inflation rate of the currency. Not to say that the price of gold is going up, but the value of the US dollar is going down – making it more expensive to buy gold with US currency.
Not to say that I disagree with – I believe you make valid points. But the “price” of gold certainly is correlated to the value of international currency.
So to say “the price of gold via currency is going up” and comparing it to “the price of currency” itself, is misleading.
Interesting point non-the-less. And that is exactly why I do not use PayPal to accept payments for my business.
Scott, yeah, this is why I made the comment about not being quite sure how to do the math on two bifurcating currencies. The Dollar is priced against a basket of currencies in the chart. And gold is priced in dollars. So, maybe there’s some double counting going in the math. Or perhaps I should have used a dollar v. gold chart, rather than a dollar v. basket of currencies chart. I’m sure the broader point remains. But, your point is taken.
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Those charts could not be more misleading. First off, you do not need two charts, the cost of gold in dollars is sufficient. Either way, gold has been going up in dollars in the past 8 years. The problem with your analysis is that 8 years just doesn’t cut it, you need a much larger window. You state in the comments that you want to show “how gold is moving these days.” That advice sounds a lot like “buy high, sell low” to me.
Gold spikes during times of economic uncertainty, so it can be a good hedge in case you suspect bad times ahead. Cash earns interest and is liquid. One cannot replace the other — if you need cash or if you believe the economy will improve and it is a good time for investment, you need to sell your gold.
Ezra, you’re right, I didn’t need both charts. Not sure what I was thinking – that’s what happens when you blog late at night. I’m not sure the charts are misleading as those charts are real data. But, what they are definitely not is they are not predictive. “Past performance is not indicative of future returns” as they say. And the example of someone selling their gold in 2003 not getting a good deal is pretty accurate.
But, to your point, could gold decline against the dollar, possibly. Could gold appreciate against the dollar, possibly as well. It certainly seems to be as the Fed’s quantitative easing continues. But we’ll see. Whether gold declines or not, still not sure it’s a great deal to sell your gold because it’s hard to make up the first 80% tax.
Ezra – I added an update on the blog post per your comment.
“The problem with your analysis is that 8 years just doesn’t cut it, you need a much larger window.”
Fine. 40 years then. Price then: $35. Price now: over $1000. Average compounded annual price rise: 8.7%. Over long periods of time, gold tends to maintain its purchasing power. That’s why I do not consider it an investment, but simply static money. I consider an investment as something that rises *relative to gold*. Long-term example: Procter & Gamble shares, which as I recall returned an average 4% annual rate of return when measured in gold. Also the Dow Jones as a whole, which for over a century has gained an average 2% per year against gold. (Though since 2000 the Dow has *lost* 75% of its gold value — “averages” can really bite you sometimes.)
“Cash earns interest and is liquid.”
Yes, and back when gold was cash, it earned interest and was liquid too. (Hint: bonds existed then.) In point of historical fact, all manner of business was financed with contracts payable in gold at maturity (see real bills, gold clauses, etc.).
This gives lie to the notion that there’s “not enough gold” to finance human productive activity. Consider this quote from “Monetary Mischief” written in 1935:
“In his radio address on the subject the President said that there was not enough gold in the world to satisfy all the contracts made in its name, quite as if that were an important discovery of 1933 … We may be very sure, however, that the physical circumstance that there was never enough gold to go around has been well understood for generations ….”
So all the young people who think they’ve “discovered” an inherent financial flaw in the gold standard have done no such thing, and should do some more reading.
It is incorrect to call these fees a “tax.” A “tax” is the price I pay to avoid dispossession and incarceration. The fees you discuss are not that.
Patrick – fees is the better word. There is a secondary definition of tax that is “a burdensome charge, obligation, duty, or demand.” I’m using the first definition.
I understand completely. I am not one to split hairs over minutiae, but this particular issue really grinds my gears because it suggests a moral equivalence between Coinstar and Government. If you don’t pay Coinstar, you’re stuck with small change. If you don’t pay Government, you’re stuck in a cage.
And anyone who does not like the price they get for Grandma’s gold bracelet is free to establish a competing gold buying service. Offer more. But watch your costs, e.g. power, equipment maintenance and depreciation, labor, taxes, regulations, shipping, insurance, marketing, etc. and try to make at least enough profit to recoup initial investment.
The amount of gold in circulation stays relatively constant – gold mining produces about as much as we lose from industrial usage. Due to fractional reserve banking, the number of dollars in circulation increases over time: dollars are created in huge sums every day by private banks. This means that the value of gold has actually been constant, in terms of buying power, while the value of the dollar (and all fractional reserve currencies) is decreasing.
A more interesting set of graphs would be generated by plotting the cost in gold and dollars of other items, eg fine men’s suits, petrol, houses, etc.
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nice post, larry…
i like your perspective. 🙂
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it seems what the white-collar criminals do: money laundry, right?
hey haw are give me maney
i use both gold and silver bracelets because for me, they are both great bracelets to wear ‘;,
Almost everything we buy works this way. Every good you purchase is marked up in price from what the seller paid for it. The true value you receive is always less than what the seller receives. So trading money for goods or services you nearly always receive less value in exchange. It’s just more apparent when we take away goods and services and just show exchanging money.
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