Record Sales of Gold Scrap a big factor in capping Gold Prices

Posted by Javier Blas - Financial Times,

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Record sales of gold scrap have turned some of the world’s largest importing countries such as Turkey into net exporters and have prompted India, the largest buyer, to stop importing for the first time in 10 years.

The surge in scrap flows has counterbalanced the spike in investors’ buying and contributed to capping bullion prices at $900-$950 a troy ounce, traders say. Gold prices reached a year-high of $1,005.4 an ounce in mid-February.

The same set of factors connected to the economic crisis that prompts western investors to hoard bullion forces some in the Middle East and Asia to sell. Traders noted that although some sales reflected profit taking, others were signs of consumer distress amid rising unemployment and persistently high food prices.

India, the world’s largest gold buyer by a wide margin, did not import at all in February and March and only minimal amounts in January because of large supplies of domestic scrap, according to the Bombay Bullion Association, the industry body.

“For the first time since the [Indian gold] market was liberalised [more than] 10 year ago, we are starting to observe periods of near-zero levels of net imports,” says Gargi Shah, an analyst with GFMS, the precious metals consultancy, in Mumbai.

“The buy-to-sell ratio of jewellery at the retail level has dramatically switched,” she says, explaining that while last year a typical retailer sold about 10kg of jewellery every week and bought back about one kilogram of scrap, the flow is now only 200g of sales and purchases of scrap of about 8kg.

At the same time, Turkey, traditionally the world’s second largest importer, has become an important net exporter in the first quarter, traders say. They add that Vietnam, usually a large buyer, and Thailand are also exporting gold.

“The scrap flows [in Asia] had been quite large,” says a senior gold trader in Hong Kong. He estimates Asian countries exported about 70 tonnes of gold a month in the first quarter of the year, equal to about 40 per cent of the world’s monthly mine supply. Under normal circumstances, Asia is a net importer of gold.

John Reade, a precious metals strategist at UBS in London, says these are indications that global flows of bullion scrap have “exceeded newly mined gold by a considerable margin”. He says the increase in scrap will answer questions posed by gold investors about who is selling gold in the current environment.

Mumbai, traditionally India’s gold centre, has been exporting gold to Dubai and Zurich, reversing the traditional bullion flow, traders say. The surge in scrap has driven local gold prices in Asia to a discount against the London benchmark.

Traders note gold scrap sales have slowed in the last 10 days as gold prices have dipped to less than $930 an ounce and some Asian currencies, in particular India’s rupee, have appreciated against the US dollar. Spot gold on Wednesday traded at $$920 an ounce in London, up 4.9 per cent this year.