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 and Cash America International .

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

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.

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The article 2 Stocks for Gold Lovers originally appeared on Fool.com.

Dave Koppenheffer has no position in any stocks mentioned, and neither does The Motley Fool. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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