Used Gold Supply Heads for ’08 Low as Sellers Balk: Commodities

Consumers will sell the least used gold in five years after prices tumbled into a bear market, curbing a source of metal that typically accounts for about one in every three ounces of global supply.

Refiners will handle about 1,550 metric tons of old jewelry and other discarded metal this year, 4 percent less than in 2012 and the least since 2008, Toronto-based TD Securities Inc. estimates. The amount is valued now at $71.4 billion, from $84.5 billion at this year’s peak. Recycling more than doubled in the decade through 2011 as prices rose to a record. A majority of the 38 analysts surveyed by Bloomberg last month said gold’s streak of 12 consecutive annual gains is over.

“April was the worst month in memory,” said Arthur Abramov, the owner of Manhattan Buyers Inc., a cash-for-gold operator in New York that saw volumes drop to 300 ounces a month from 500 ounces. “A lot of people were shocked, and a lot of people were standoffish about selling.”

Gold had its biggest drop in 33 years on April 15 as some investors lost faith in bullion as a store of value, hurting everyone from miners to investors including billionaire John Paulson. While declining supply in commodities usually signals higher costs, the impact in gold may be more muted because most of the 171,300 tons ever mined are still circulating. Societe Generale, Credit Suisse Group AG and Goldman Sachs Group Inc. are among those predicting the price slump has further to go.

Metal Purchased

Futures tumbled 15 percent to $1,427 an ounce this year on the Comex. Prices are now 26 percent below the record $1,923.70 reached in 2011. The Standard & Poor’s GSCI gauge of 24 commodities fell 3 percent since the start of January and the MSCI All-Country World Index of equities rose 11 percent. A Bank of America Corp. index shows Treasuries lost 0.2 percent.

The 30-member Philadelphia Stock Exchange Gold and Silver Index, led by Freeport-McMoRan Copper & Gold Inc., fell 36 percent this year, and more than $39 billion was wiped off the combined value of gold held through exchange-traded products, according to data compiled by Bloomberg.

The prospect of losses has made retailers who buy used gold and the middlemen who sell to refiners unwilling to part with metal purchased at higher costs. Volumes of recycled metal, known as scrap by the industry, dropped 2.6 percent last year as prices retreated from the record in 2011, according to data from the World Gold Council in London.

“Nobody is selling right now, and it’s survival of the fittest,” said Dan Nektal of 46th Street Buyers in New York, which has been in the jewelry business for three decades. “If you bought at $1,700, how can you sell at the moment? Everybody’s presuming it’s going to go back up.”

Record Outflow

Societe Generale is predicting a fourth-quarter average of $1,375, the lowest for the period in three years, and Goldman Sachs expects the metal to trade at $1,390 in 12 months. Investors pulled a record $20.8 billion from bullion funds this year, according to Cambridge, Massachusetts-based EPFR Global, which tracks money flows. Hedge funds’ bets on further declines are about four times the average of the past six years, according to U.S. Commodity Futures Trading Commission data.

Slumping prices spurred demand for physical metal, with the U.S. Mint saying April 23 it ran out of its smallest gold coins. Australia’s Perth Mint said volumes jumped to a five-year high. India’s bullion imports may surge 47 percent to 225 tons in the second quarter to meet consumer buying, according to the All India Gems & Jewellery Trade Federation. Imports by China from Hong Kong more than doubled to an all-time high in March.

Global Benchmark

Prices that rallied 8 percent since reaching a two-year low of $1,321.50 on April 16 may boost the supply of scrap. Gold will “grind higher” on physical demand and buying by central banks for reserves, James Steel, an analyst at HSBC Securities (USA) Inc., said at a conference in New York on April 30.

“Physical demand or the scrap market is not the main indicator for prices as the paper market dwarfs both these markets,” said Stanley Crouch, who helps oversee $2 billion of assets as chief investment officer at New York-based Aegis Capital Corp. “Expectations about physical demand helping prices to rebound will be short-lived as the macro reasons will push prices further down.”

Holdings in exchange traded funds backed by the metal were 2,228 metric tons as of last week and were larger than any except those held by the U.S., Germany, the International Monetary Fund and Italy and France. The amount linked to futures contracts was about 1,371 tons as of May 10.

Volatile Price

While customer traffic already is “a little better” at Manhattan Buyers, it is still down by as much as half from a year ago, according to Abramov. More scrap will become available as prices stabilize, he said. The volatility meant the shop had to reduce its purchase price relative to the global benchmark set daily in London. Sellers were getting about $200 to $300 an ounce less by mid-April than they were at the start of the month.

“That money means something to a lot of people,” Abramov said. “A lot of them are waiting for prices to come back.”

Billionaire John Paulson is standing by the metal even after his Gold Fund saw declines of about 47 percent this year, according to two people familiar with the matter. Paulson & Co. is the biggest investor in the SPDR Gold Trust, the largest bullion ETP. Central-bank stimulus around the world will help prices rally to $1,700 by the end of this year, JPMorgan Cazenove analyst Allan Cooke said in a May 8 report.

Stimulus Measures

Gold gained 61 percent since the end of 2008 as the Federal Reserve was joined by central banks in Europe and Japan in seeking to boost economic growth by buying bonds. The stimulus contributed to an almost doubling of sovereign debt to more than $23 trillion, a Bank of America index shows.

Scrap volumes, mostly from jewelry, reached 47.3 million ounces last year, or 37 percent of the 127.3 million ounces of refined supply, according to New York-based CPM Group.

The U.S. is the largest scrap supplier, followed by Italy and China.

“When the price goes down, no one wants to sell back into the market,” said Dick Poon, the general manager of Heraeus Metals Hong Kong Ltd., a refiner and trader. “Scrap flows were already lower this year compared to previous years, and are not likely to come back for the time being. Scrap may not return until the price goes back above $1,600.”

Bullion Refining

Sumitomo Metal Mining Co., Japan’s biggest gold producer, is processing little scrap and instead mainly using ore and by-products of copper smelting to supply its bullion refining business, said Masashi Takahashi, a spokesman in Tokyo.

“Business is not good,” said Leah David of Leah David Fine Jewelry and Watch Boutique in Manhattan, who has been in the business since 1986. “Since very few people want to sell anything, jewelers like me will have no choice but to sell our own inventory or the new jewelry as scrap. We have done that a few times in the past, and may need to do that again.”

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