Gold Scrap Supply to Drop Up to 25% as Lower Prices Deter Sales

Gold supply from recycled materials may fall by as much as 25 percent this year as lower prices deter holders from selling the metal at a time when physical demand is strengthening, according to the World Gold Council.

Scrap bullion supply may fall by 300 to 400 metric tons in 2013 from about 1,600 tons last year, according to Marcus Grubb, managing director of investment research at the gold council in London. Recycling accounted for 37 percent of total supply last year, according to Barclays Plc, which forecasts recycled sales of the metal to fall by 174 tons this year.

Gold is heading for the first annual drop in 13 years after some investors lost faith in the metal as a store of value, cutting bullion-backed fund holdings to the lowest since May 2010. Prices rebounded 13 percent from an almost three-year low last month as demand for jewelry and coins rose. Many gold holders sold metal when prices were higher and others are probably waiting for a rebound, Grubb said.

“They think it’s a bad time to sell their gold,” Grubb said in an interview two days ago in London.

Gold for immediate delivery fell 20 percent this year to $1,338.95 an ounce, and reached a 34-month low of $1,180.50 on June 28. The Standard & Poor’s GSCI gauge of 24 commodities rose 0.2 percent since January started and the MSCI All-Country World Index of equities gained 11 percent. Treasuries lost 2.4 percent, a Bank of America Corp. index shows.

Federal Reserve

Bullion dropped a record 23 percent in the second quarter as the Federal Reserve indicated it may slow its monthly debt buying if the economy improves. While Fed Chairman Ben S. Bernanke said last week it’s too early to decide whether to begin scaling back bond purchases in September, half the economists in a July 18-22 Bloomberg survey said the central bank will trim the bond buying that month.

Rising demand helped push July futures on the Comex in New York above the August contract this month. Backwardation, when nearby contracts are more expensive than longer-dated futures, can signal concern about near-term supply. One-month gold forward offered rates, which show the interest rate at which dealers will lend gold for dollars, were the most negative since 2008 earlier this month, driving the cost of borrowing the metal to a 4 1/2-year high in London.

Tanaka Kikinzoku Kogyo K.K., Japan’s biggest gold retailer, said July 18 that its sales tripled in the second quarter from the previous three months. Imports by India may climb to more than 900 metric tons in 2013 from 860 tons last year, and China’s purchases may top 1,000 tons, up from 817 tons, the producer-funded council said July 17.

Temporary Rebound

Gold’s favorable conditions are “temporary” and prices will resume declines as U.S. monetary policy becomes “less ample,” ABN Amro Group NV wrote in a report yesterday. It sees gold falling to $1,100 by the end of this year.

Recycling of gold peaked in 2010 when sales reached 1,719 tons, Barclays estimates. Gold prices climbed to a record $1,921.15 an ounce the next year. Scrapping slowed since because many people had already sold their metal, Grubb said.

The second half of the year usually sees gains in physical demand for wedding seasons and religious festivals in Asia, including India and China, the biggest consumers.

Demand Risk

India, last year’s top buyer, poses a risk to demand because it added to restrictions on bullion imports. The nation doubled a tax on inbound shipments to 8 percent this year and curbed financing to trim its trade deficit. It announced new rules this week making it mandatory for importers to set aside 20 percent for re-exports as jewelry.

Investors sold 660.2 tons of gold from exchange-traded products this year, wiping $57 billion from the value of the funds, data compiled by Bloomberg show. They held 1,971.7 tons yesterday, the least since May 2010.

While ETP investors are cutting holdings after increasing them every year since the first product was listed in 2003, central banks continued adding to their gold reserves. Nations bought almost 535 tons last year, the most since 1964, according to the council. Purchases will probably be about 400 tons this year, Grubb said.

“Gold has made the strong gains due to robust physical demand,” Mark O’Byrne, executive director of Dublin-based brokerage GoldCore Ltd., said yesterday in a report. There’s “been significant short covering due to concerns about gold backwardation,” he said, referring to purchases to close out bets on price drops.

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