The Bullion Report for September 7, 2011: Gold Scrappers

Last week's unemployment report highlighted what many gold bugs were probably already eager to tell people - the economic troubles are likely far from being over. Issues with debt are hanging like a black cloud over the markets on both sides of the Atlantic. Growth in more than a couple of countries has slowed, recovery seems like a vapor of a dream, and persistent joblessness is undermining confidence levels for the average American. These things and more can start to affect another side of the supply of gold - scrap sales. Let's take a look at how that arena shapes up right now, and what impact - if any - it might have on prices.

Gold scrap - that's all the gold supply that comes from places other than mines. Plenty of people probably imagine chains or gold jewelry turning up at pawn shops, but lately there are plenty of places that deal exclusively in the purchase of old metals that people are prepped to part with. A lot of that probably stems from the years of higher gold prices seen since the onset of the current economic downturn. There are "We Buy Gold" signs all over the place with some shops even offering appraisal by mail services. Of course the whole point of these places is to buy your less-than-dear jewelry and turn it into a profit, often by paying less than the spot price for precious metals.

So how might this affect market prices for precious metals?

Like any market fundamental, there is an obvious shift in the supply if there are more people offloading their gold scrap. More sales means more supply and generally that would depress prices. The caveat for the last few years has been whether or not that additional supply on the market is enough to offset the growing investment demand or fresh jewelry sales.

In some cases, there are reports that the fresh highs in the gold market do encourage people to dig into their safe places and sell grandma's jewelry. It would seem to be a natural reaction. The official supply and demand picture from the World Gold Council shows the following numbers:


Recycled gold is definitely higher in this chart for 2010 versus 2008. The thing is that for every build in supply it looks like there is another substantial gain in the potential investment or physical demand for gold. In my eyes, that will remain in effect until there is a true and substantial recovery underway for the domestic and international economies.

During the month of August, India is often a focus of attention for gold investors looking for cues for their gold-demand centric festival season. Imports are key, but this season the impression of scrap sales amid high prices was also important. This year, there are hints that people are hanging on to their gold, anticipating that the bull run in gold is far from being over. (1)

Summary

The one thing I keep in mind about any kind of gold sale impact is the motivation behind it. I have already mentioned in previous newsletters that sales by central banks at this time would likely boost prices rather than degrade them over time. That's because the things forcing the sale are not likely to be confidence-boosting. Unlike the rumored sales in the 90s, nowadays banks would probably only sell to raise funds. Those old rumors were based on the idea that gold was a time or space waster, and that interest earning assets were better for reserves. With interest rates being held at low levels in many spots, gold and other perceived havens have a renewed sense of purpose - people and banks are looking to them as asset preservers. They are the precious metal life-raft in really volatile investing seas. When people are moved to sell them it is likely that things are bad or getting to a point where they need to be liquid. Sure, you can say that people will ditch their gold when prices get high enough to suit them, but with all the movement and volatility in prices lately, I would venture a guess that any people are hanging on to what they can for as long as they can, at least until there is a modicum of calm. And that kind of waiting, and agonizing to a certain extent, is likely to be a support for prices rather than a detriment, owing to the continuing macro uncertainty that brings buyers in on dips.

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Disclaimer: The prices of precious metals and physical commodities are unpredictable and volatile. There is a substantial degree of a risk of loss in all trading. Past performance is not indicative of future results.