Gold Recycle

Gold is unusual as a commodity in that it has very little true consumption; the vast bulk of what has been mined sits above ground in various forms with the potential to return to the market. Disinvestment is one such avenue, but this article covers the often-larger area of recycling (or scrap). This has been done to assess the importance of recycling to the broader bullion market (which necessitates a tight definition of scrap) and to shine a light on to what can be one of the more opaque areas of the supply/demand balance.

Recycling should have the potential to exert a notable impact on the gold market in that, since 2010, it has accounted for 28% of total gold supply on average. However, analysis points to scrap being very strongly influenced by the gold price and is very much the dependent variable. For scrap to turn the table and actively impact the international gold price, economic distress would have to be severe and global but not trigger a countervailing boom in safe-haven-motivated investment demand.

That said, surging scrap can often push local markets to a discount to the world price, although that typically also requires demand within a country at the same time to be very weak.

A key reason why price is important is that the vast majority (well over 90%) of recycling is from jewellery and of this, around 70% comes from the price sensitive jewellery markets of emerging economies. Within this latter group, India and China generate the most recycling unsurprisingly, but there are another five of historical significance (over 60t in one year) – namely Turkey, Iran, Iraq, Egypt and Thailand. That said, the industrialised world used to be more important, contributing 43% of the total during the period 2010-13, when the cash-for-gold business was at its peak.

A key determinant of each country’s importance is the pool of jewellery, a volume equal to a country’s cumulative jewellery consumption less its scrap (globally, this stock is estimated at around 90,000t). Western countries’ share of this pool is higher than their share of consumption today due to the bloc’s demand being higher relatively in previous decades. However, emerging markets ‘fight back’ in that their dominant low margin, high carat jewellery has a far greater propensity to be scrapped than high margin, gemset and branded items. The pool derived from other areas of fabrication (such as dental) is more theoretical in nature as little is properly available to the bullion market.

There are two main flows for the recycling of gold.
The first concerns high grade – material that is at least 40% gold (often much higher) and overwhelmingly sourced from jewellery. As a relatively simple material to refine, and as finance and security matter, much of this is refined in the country of generation and, if not, the metal is often air freighted. The second concerns low grade – material that might only be 1-2% gold (if not much lower, and is sourced from all areas of fabrication, which means other precious metals may well be present). As security and financing are less of a concern here and the material is much more complex to refine, the recovery of metal from this source occurs in smaller number of countries, many of whom receive their feed as ship-freighted imports.

Statistics on recycling only refer to old scrap, and not process scrap nor the reformatting of bullion bars. Old scrap is dominated by jewellery, with emerging markets accounting for the bulk of these flows. Other areas of recycling are small, and lower than their share of fabrication due to recovery being uneconomical or impractical.

It is important to remember that these recycling statistics cover what is frequently termed old scrap, which is just a portion of what a refinery might recycle. This approach has been adopted as it is only old scrap that has the potential to impact the gold price through its effect on the bullion market. This segment and the two other main categories are explained below.

Old Scrap:
This is material that has been sourced from a previously fabricated product and is returning to the market as bullion. This covers the entirety of gold that has gone into jewellery, electronics, dentistry, decorative applications, miscellaneous industrial and medical uses, and potentially coins. It needs not be a fully fabricated product though; fabrication is typically measured at the point of first transformation from bullion and so a semi-manufactured product that returns to a refiner for conversion back to bullion will get classified as old scrap. For example, if a jewellery manufacturer producing chains went bankrupt with a stock of alloyed wire and this material was returned to a refiner, the flow would be classified as gold scrap.
It may be a surprise that coins feature here. However, this is necessary for two reasons. Firstly, if a coin is fabricated but never sold, there has never been investment and so the metal’s return to bullion cannot be classified as disinvestment. In practice, this almost never occurs, especially for the regular bullion coins. It has occurred for commemorative coins and medals, however, but even then only rarely (although it is a small, regular component of silver recycling). As a reminder, bars (whether minted or cast) can never become part of scrap as by definition they have remained in bullion form and have never become a fabricated product.
A final issue to cover is the sale of old jewellery for cash versus exchange. In the latter, one piece of gold jewellery is handed over to a retailer in return for a new item with the consumer only paying for the markup on the new piece, plus or minus any difference in the fine weight of gold. For our statistics, we do not include the remelt of old jewellery that has been exchanged for new as the net impact on the bullion market is in theory zero.
Estimating the shares of scrap covered by cash and by exchange is obviously difficult but there is at least a high degree of geographical concentration. These distinctions are material in India, important in the Middle East and notable in China, but rarely of consequence elsewhere.

Process scrap:
Process (or production) scrap covers the material that forms part of the circular flows between a refiner and a fabricator. One of the easiest illustrations of this is a sheet of gold destined to become coins. Its next stage in transformation is for the coin blanks to be stamped out. This understandably will leave a considerable volume of gold in the gaps between the round edges of the coins.
This material will return straight back to the refiner for melting down and so never ends up in a fabricated product, nor ends up as an element of the bullion market. It is for this reason that process scrap is never counted in with the old scrap.
The lines between old and process can easily become blurred. For example, gold coming back from a dental practice could readily include a now unwanted filling (which we would classify as old scrap) as well as process scrap in its myriad forms. This blurring also commonly features in low grade scrap – a drum of this could easily include pre-processed electronic scrap at a purity of say 1% (which should get treated as old scrap), the same as jewellery sweeps (the material recovered from such practices as the filing and polishing of gold jewellery, and which should get classified as process scrap). Thankfully, the volumes involved in these blurred areas are comparatively small and so errors are unlikely to greatly distort statistics.

Bullion re-formatting:
This area covers any transformation of existing forms of bullion into new forms of bullion. This therefore includes such activities as: the upgrading of non-good delivery bars into good delivery form or transformation of a bar into a form suitable for delivery onto an exchange, the re-casting or re-minting of so-called grandfathered bullion into bars now more commonly accepted by investors, the re-casting or re-minting of bars whose level of damage and consequential harm to the piece’s value makes the processing economically worthwhile.

A final point to consider is mixed material, a flow frequently seen coming out of Thailand. Outflows from there are often referred to as ‘scrap’ but in fact are a mix of disinvested bars and old jewellery that has been melted down and at times mixed in with bars that were destined to be re-melted. Knowing the split in these, at times, substantial flows is therefore important in assessing the nature of this supply, even if classification does not impact the total scale of supply.