Recycling of jewellery may help gold price improvement
Ross Louthean — 12 August 2013
Where else should the now concerning course of the gold price be discussed than Australia’s gold capital of Kalgoorlie.
It was an issue raised often during last week’s annual Diggers & Dealers Forum with the most magnetic presentation being by the World Gold Council’s managing director of investment, Marcus Grubb.
The question of where was the gold price heading was asked of a few speakers and Grubb’s blunt response was that because of his position in the industry it was not an issue he could, or would, discuss.
However, his presentation showed there were some good pointers for the price of gold and these indicated that the gold price may not continue a downward spiral.
Journalists asked the same question of OceanaGold Corporation’s chief executive Mick Wilkes and he indicated it was difficult to predict but he felt it was likely to go “sideways” for a couple of years and then perhaps it might recover.
A positive factor for Wilkes was that the Kiwi dollar, for its New Zealand production, was more likely to regress as a generality rather than rise against the American greenback – the currency on which it details its production costs and capital spend.
Marcus Grubb said the bullion market, now in surplus, could set the stage for a price recovery. Supplies of gold from recycling would fall by 300 tonnes in 2013, almost a fifth of last year's 1,600 t. The lower bullion prices have been deterring investors from cashing-in their jewellery.
He told a media conference following his presentation: “Recycling is positively correlated to the gold price. In a bull market recycling rises as the price goes up, on the downside when the price drops - like we saw this year - you see recycling fall because people do not think they will get a good price for their gold.
This drop-off began in the March quarter when recycling fell 4% as prices sagged, and accelerated in April when gold saw its sharpest drop in 30 years.
Strong global economic data has dented gold's safe-haven appeal, physical buying in top consumers India and China remains subdued and traders expect further price falls.
India and China continue to lead the trade in recycled gold where individuals hold 20 000t and 10 000t respectively.
Grubb told the ABC radio programme AM that the decline in recycling combined with less "new" gold output from mines was helping offset the additional 650t estimated to enter the market in 2013 as more holdings by exchange traded funds are unwound.
“What that has done is create a temporary surplus this year," Grubb said. "You need balance to be restored in the gold market in the short term for the longer term drivers of the price to return.
So I think overall we see it more that the market balance between physical demand and supply is being re-established very quickly, probably before the end of this year that will be done.
So, you have very strong demand from Asia, central banks, long-term demand kicking back in with mine production probably likely to fall rather than rise. So because of that, we're pretty bullish on gold in the medium term.
AM reporter Sue Lannin asked: What happens though if the US central bank, the Federal Reserve, does start to withdraw stimulus from the US economy? That will push up the $US and push down the price of gold won't it?
Grubb responded: Certainly a stronger dollar is a headwind for gold. I mean that's a well known fact in the gold market. It's negatively correlated with the trade-weighted $US.
However we feel that scenario is by no means a certainty. And as we were hearing from another speaker at Diggers and Dealers, the outlook for the US economy is not nearly as rosy as some observers would currently claim. We also think that the Federal Reserve may not taper as early as September or even December.
So, asked Sue Lannin, do investors still see gold as a safe haven?
Grubb answered: Undoubtedly they do. And I think the interesting thing though is throughout this cycle with the credit crunch and the recovery and where we are today, you've seen gold move around.
It can be a safe haven and a store of value, so it effectively reacts as a risk-off asset. It can also though act as a risk-on asset. So if people get more bullish, if investors become more positive about equities - provided interest rates don't rise too rapidly, if there is a little bit of inflation - then gold can rally at the same time as equity markets.
It hedges you in both scenarios. Once it is clear, once you're through the uncertainty, and you know which way markets are generally going, gold then still acts as a hedging asset one way or the other and that's one of its great strengths.
Sources: nzresources.com files and abcnews.net.au/am
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