Spotlight on Gold Recycling
Chapter 5 - Drivers Impacting Recycling
- Gold price moves in local currency terms dominate changes in recycling, but the link is unstable due to factors such as expectations.
- The pool of product is also important in determining the scale of recycling in each country.
- Other factors include economic distress, margin structure, investor sentiment and, in some countries, seasonality.
As noted earlier, the chief driver of changes in the volume of recycling is the gold price, but this factor is much more nuanced than might be first thought. In addition, there are several other factors that can significantly impact volumes. These are set out below.
The gold price
This is undoubtedly the most important factor in determining changes in recycling volumes. As shown in the accompanying charts, this is most apparent in emerging markets, especially on a short-term basis. That said, it was for example no coincidence that the run-up in western scrap during 2010-12 occurred in tandem with gold surging to a then all-time high of $1,921.
The link between the price and recycling is, however, volatile. One key factor behind that is price thresholds and their psychological impact. This can prove particularly strong if the price sets a new record (such as last year’s breach of $2,000) and/or this breach of a price threshold is widely reported by the press.
Another factor that can make the response of scrap to the price non-linear is expectations. If, for example, there is a widespread belief that the price will continue to rise, recycling can initially weaken as consumers hold off from selling back. Similarly, if there is a general view that prices could fall substantially in the short to medium-term, there can be a rush to sell into a falling market to secure decent returns before they weaken further. This expectational factor is greatest where knowledge of the gold price is strong, and this is commonly cited across much of the Middle East and South Asia as a driver of unusual responses in scrap to immediate price moves.
It is important to note that local prices are key here – few consumers outside of the US will pay attention to the US$ price of gold and it is the price at which you can sell in your own country that is critical. Gold crossing the Rs 4,000/g threshold in India or €50/g in the Eurozone last April, for example, generated press attention and consumer interest, outside of any moves in the US$ price.
Currency crises can be of particular importance and it is no surprise that, for example, Egyptian scrap shot up from 6t in Q4.15 to 27t in Q2.16 and then remained elevated as the Egyptian pound saw an initial devaluation in March 2016 and then a free float slump in November that year. Similar performances were also seen in Iran (the rial almost halved intra-year in 2020) and more recently in Turkey as the lira has slumped, causing scrap in the fourth quarter of 2021 to almost triple q/q.
Europe: Gold Scrap vs Prices
Source: Metals Focus
A simple link between the price and recycling also presupposes consumer knowledge of the price, but this is often low in the West. Instead, much of the transmission mechanism for this during the peak years was the heavy advertising by scrap collectors, which they could afford thanks to the healthy margins available. This in turn stemmed from a high gold price and limited knowledge of both the gold price and the fine gold content of items a consumer might own.
A final point that can weaken the link between the price and recycling is the issue of exchange in India. It is quite common there to see a higher gold price boost exchange as the lower affordability of the gold jewellery obliges more consumers to fund the purchase of new jewellery through the sale of old items. Any gold traded in this way does not count in these statistics, as that only includes jewellery sold back for cash.
US: Gold Scrap vs Prices
Source: Metals Focus