Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



2 Stocks for Gold Lovers

"I never look at it like I'm wasting money when I buy gold" -- Big Sean

Clearly, rapper Big Sean is bullish on gold's intrinsic value and its ability to hedge inflation and provide a liquid alternative to cash -- at least that's what I assume he means.

However, gold has another practical use: as a predictor of future outcomes for providers of instant cash solutions.

So break out your shovel and annual reports, as we mine for insight on how SPDR Gold Trust (NYSEMKT: GLD) can be used to help us better understand EZCORP  (NASDAQ: EZPW  )  and Cash America International  (NYSE: CSH  ) .

Pawning gold
As Cash America CEO and President Daniel R. Feehan wrote in his 2012 letter to shareholders: 

The $500 per oz. spike in spot gold prices during 2011 (roughly from $1,400 per oz. to $1,900 per oz.)...Spurred consumers to liquidate their unwanted gold jewelry at an accelerated rate.

Fast-forward to today, and with gold falling as of late, it's hard to blame customers for not pawning gold at the metal's current lower rate. This is clearly reflected in Cash America's most recent 10-Q, in which commercial merchandise -- sale of gold -- is down 42% from a year ago.

EZCORP seems to be in the same boat, with 60% of pawn loan collateral being jewelry, a majority of which is gold jewelry. Moreover, with pawn loans and jewelry scrapping making up 45% of the company's total revenue, it's no wonder the stock has fallen.

It's like you're my mirror

Source: Yahoo! Finance. 

If there was any question before about whether pawn stocks fall with the price of gold, this chart certainly makes a strong case in the affirmative. Similarly timed drops look most obvious around the month markers for March and May.

That said, moving further down the chart to June 2013, EZCORP fell significantly harder than competitor Cash America. This, along with other less dramatic falls over the year, makes Cash America look like a better option if you're worried about the changing of gold's tide. Cash America makes more unsecured loans than EZCORP, which could be the reason for the variance. 

The other side of the story
To this point, I've made a pretty compelling case -- if I do say so myself -- for EZCORP's and Cash America's stock prices fluctuating along with the SPDR Gold Trust.

To try to strengthen the case further, I ran correlations between stock prices over the past three years, and ended up with a moderate positive relationship between both Cash America and EZCORP when compared to gold.

However, upon rerunning correlations for stock prices over just this past year, things looked a bit different. EZCORP correlates to gold at 0.7, which is a particularly strong positive correlation. Cash America, on the other hand, has a -.1 correlation -- almost no relationship at all.

So what exactly is going on here?

For me, the big takeaway here is Cash America's ability to hedge against gold. By placing a greater emphasis on its loan business -- currently up 7.4% when compared to the first half of 2012 -- the company was able to protect against risk while continuing to acquire new pawn shops -- more than 70 this past August alone.

This doesn't mean that investors should necessarily dump the more-gold-tied EZCORP for Cash America. In fact, by using a "gold collar," EZCORP essentially has an insurance policy for locking in the price of gold -- within a range. It's no cure, but it'll keep the bleeding to a minimum until gold turns around.

Ultimately, while the price of gold is an important indicator for both businesses, owners of EZCORP are well advised to keep an even closer eye on the fate of the yellow metal and understand the impact that it has on EZCORP's bottom line.

More gold stocks
Looking for more commodities-based ideas? Download the free report, "The Tiny Gold Stock Digging Up Massive Profits." The Motley Fool's analysts have uncovered a little-known gold miner they believe is poised for greatness; find out which company it is and why its future looks bright -- for free!

Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2685856, ~/Articles/ArticleHandler.aspx, 9/26/2016 1:37:56 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 2 days ago Sponsored by:
DOW 18,261.45 -131.01 -0.71%
S&P 500 2,164.69 -12.49 -0.57%
NASD 5,305.75 -33.78 -0.63%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

12/31/1969 7:00 PM
CSH $0.00 Down +0.00 +0.00%
Cash America Inter… CAPS Rating: ***
EZPW $10.12 Up +0.22 +2.22%
EZCORP CAPS Rating: ***
GLD $127.65 Up +0.08 +0.06%
SPDR Gold Trust CAPS Rating: **