Everything Old is New Again

High prices in precious metals command a lot more than just investor and media interest. Since prices started trending higher, t seems as though there have been surges in the number of small shops and stores looking to buy gold as well as TV commercials pushing “cash for gold” services through the mail. As the market moves toward fresh price territories, it begs the question – what happens to gold in circles outside of mining and investment?

The World Gold Council (WGC) recently released its gold demand trends issue for 2010. Overall, the annual demand for gold was up about 9 percent. This ten-year high was ascribed to net buying from central banks and demand from Asia, with “strong growth” in jewelry demand tipping the scales. According to the report, jewelry saw a 17 percent year-on-year gain in demand, another 299 tons from 2009 statistics. Much of this demand was in overseas markets, and the report noted that jewelry demand in the US continued to decline, although at a slower pace.

There are essentially three demand flow avenues for gold and other precious metals: Investment, industrial applications, and jewelry. Unlike commodities such as crude oil or wheat, metals are not destroyed in certain avenues of consumption. Gold jewelry can linger on for ages, and the fact that this sector accounts for more than 50 percent of gold demand is significant. In fact, some analysts often refer to that when discussing the potential for a weaker side of gold. There is always an above-ground supply to tap into. And for some, this is indicative of a cyclical, price-driven component to the gold market that could bring selling pressure when prices get high enough. Some jewelry buyers count on their purchases as a hybrid of investment and decoration. This can be noted with the increase of 22 karat gold purchases over 14 karat in some areas.
So, gold prices get higher, people sell their gold, and prices go down, right? Well, it’s likely more complicated than that. Some gold is not really recoverable. Think of it in these terms – there is evidence to suggest that a lot of gold is contained in the world’s oceans, swept there from alluvial deposits, but it is totally cost prohibitive to imagine recovering this gold. Some gold that is applied to other metals in electronic devices might be just as trivial to attempt to recover. There are also forms of gold in places where it would be unseemly to try to recoup them, namely, burial sites.

Of the gold that can be recovered, one would have to assess the probability that the root causes of higher gold prices are not going to act as an inhibitor to gold sales. To put it simply, if gold prices are moving higher because of fears of inflation and/or geopolitical issues, than there is a probability that the same concerns might induce the majority of holders to retain their gold, or even add more. The same fundamentals that apply to investment demand can be used for private demand as well. It is important to note that the WGC report highlights action of this type when they note that “recycling activity in India and the Middle East region, the largest traditional contributors to this element of supply, was below what could have been reasonably expected in the high price environment.”

Another angle is the fact that current demand trends (as explored in the WGC report) suggested that even though there are some profit-takers, there might be an equal or greater number of new investors or new purchases. This was marked by some central banks turning to net buyer status during 2010. Under such conditions it is likely that selling pressure can be absorbed by an increased demand from another sector.

Summary

Jewelry remains a key component of the demand side of gold. Investment and ETFs might snag headlines, but jewelry sales will be important for the bottom line. The sales of old gold or scrap gold will also maintain an interest spotlight, but they are unlikely to bring any real pressure to the precious metals markets. As noted in the annual demand report from the World Gold Council, sales and supply from recycled gold are at historically high levels. Basically, there has already been a bump in second (and third and fourth) hand metals, and it didn’t seem to slow the markets down. For every seller of gold, there appears to be a willing buyer, even at the high price levels seen last year.

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