|Arabian Post Special| Sale of gold jewellery for cash is emerging as one of the major sources of gold supply and is accounting for almost a third of total supplies to the market this year.
According to the World Gold Council, the high price level of gold in recent times has taken its toll on the jewellery sector and conversely recycling has sparked into life.
Jewellery consumers have faced a tough environment in 2016 so far. Steep price rises have done little to attract demand in the more price sensitive markets.
For instance, Indian consumers in particular are notoriously wary of price instability and this year has proven to be no exception. Similarly, challenging geopolitical and economic conditions continue to hamper the Middle Eastern markets. And China has battled with poor consumer sentiment, a sluggish economic environment and onerous hallmarking regulations. While there have been improvements in a few markets (most notably, the US and Iran), at the global level jewellery has suffered.
This is reflected in the data: the US dollar value of first half global jewellery demand (US$36.3 billion) was the lowest since 2010. In volume terms, demand so far this year has lurked well below its five-year average – by around 20%.
The flip side to lower jewellery demand has been a rise in recycling activity. Recycling – selling gold jewellery for cash – is an important element of supply: in the first half of this year, recycling generated almost a third of the gold supplied to the market. It helps with the smooth functioning of the gold market and is responsive to a number of factors, one of the most important being the gold price.
While this is by no means the only factor affecting recycling, there is a strong correlation between the two: econometric analysis reveals that a 1% rise in the gold price will lead to a 0.6% increase in the annual supply of recycled gold.
Consumer research also backs up this finding. The World Gold Council recently conducted a large-scale survey,7 in which high gold prices were cited as the most important factor influencing the decision to recycle gold jewellery. Among the respondents in India and China who had ever sold gold jewellery, a high gold price was the most common reason cited for doing so (27% and 43% respectively).
And price volatility can further magnify this effect. A sharp rise in prices can result in a jump in recycling in order to take advantage of unexpectedly higher prices. So it is not surprising to see that recycling grew in the first half of 2016, generating 686.7t of supply. This is the highest first half total since 2012, which was a time when distress-selling by Western consumers in the wake of the financial crisis was still high, and near-record gold prices were a strong incentive.
According to World Gold Council, after a troubled first half of the year, the prospects are for jewellery demand to recover as we progress through the second half. India’s key festivals of Dhanteras and Diwali, together with the Q4 holiday season in the west, should inject support. That being said, any optimism needs to be tempered by some of the headwinds that remain in place in a number of markets, such as economic slowdown in China, pressured rural incomes in India and a troubled geopolitical climate in the Middle East.
Recycling will continue to respond to prices – as well as economic growth – and will remain a significant source of gold supply over the remainder of 2016, the council says.