Tesco is taking advantage of rising gold prices. Is it good or bad news for pawnbrokers, and will other retailers be tempted to follow in the grocer’s footsteps?

Why are we talking about it now?

The UK’s biggest retailer Tesco is taking on the pawnbrokers as it guns for a slice of the cash-for-gold market. The grocer is trying out Gold Exchange, run in partnership with independent pawnbroker Ramsdens, in 15 stores and online.

Why is Tesco entering the market now?

Gold prices have soared rising to £900 an ounce compared with £385 in 2007, making for healthy margins for pawnbrokers reselling gold. High street specialist H&T Pawnbrokers last week increased its profit forecast for the 2010 calendar year because of “significantly increased profit from pawnbroking scrap”.

Gold trader and jeweller Albemarle & Bond reported double-digit like-for-like growth in its pawnbroking pledge book in the four months to the end of October 2010.

With VAT up and low wage growth, many observers expect 2011 to bolster the market further.

What effect will Tesco Gold Exchange have on pawnbrokers?

Tesco has entered the market aggressively, offering £10 per gram for nine carat gold until the end of January, compared with £6.50 at H&T Pawnbrokers.

“Net-net it’s going to have a negative effect. Tesco will take some share, particularly if it offers higher rates, which it is,” says broker Numis Securities analyst Andy Wade.

Despite this, Wade says high street specialists should emerge relatively unscathed because Tesco’s service, which operates by post, is more likely to hit other postal operators. Wade says consumers who use high street pawnbrokers want cash-in-hand.

Some speculate that Tesco’s entry may widen the market. Cash Converters chief executive David Patrick believes Tesco’s venture could attract new audiences to gold trading, while Wade believes Tesco’s marketing campaign may grow the existing market. Other big players are already in the market. Signet’s H Samuel began buying gold in 2009.

Does the gold market have long-term appeal for mainstream retailers like Tesco?

Broker Finn Cap retail analyst Duncan Hall thinks Tesco’s trial is just that on the evidence so far. “If it was intending to roll the service out you would imagine it would acquire rather than carry it out through Ramsdens,” he says.

Wade points out that the partnership is risk-free with little cost involved. “It’s clearly a market where there’s money to be made. But is it worth other retailers entering? Once Tesco is in the marketplace the margin you can make diminishes.”