Something unusual is happening in the gold souks of the Middle East. Rather than selling new jewellery, the goldsmiths are instead buying it back from their customers.
The first three months of this year saw a surge in people selling their second-hand jewellery and for the first time in nearly 30 years, the amount of scrap sold has exceeded the amount of new gold bought.
According to GFMS, the leading precious metals analysts, about 500 tonnes of scrap gold was sold in the first quarter compared with about 420 tonnes of jewellery, bullion and coins bought. The Middle East has been the world leader in scrap sales and anecdotal evidence suggests that in countries like Turkey, the goldsmiths have been so inundated with old metal that they have struggled to find sufficient cash to buy it all.
This reversal in the normal flow of commerce has been caused by two things. First, the price of gold has been at historically high levels (it averaged $919 an ounce during the first quarter) and, second, the global economic slowdown means that families suddenly have a need for extra cash. Selling heirlooms or unworn gold jewellery is certainly an easy way to generate a bit of extra income when times get tough.
Given that the first quarter has already produced 500 tonnes of scrap, it seems likely that 2009 will beat the record set last year of 1,218 tonnes of recycled gold. This surge in supply from scrap sales during the first quarter is almost certainly responsible for the recent retreat in gold prices back to about $850 an ounce. But what does the rest of the year hold?
GFMS has suggested that the price could hit $1,100 an ounce this year driven by continued uncertainty in the global economy. This is not an unreasonable proposition given the staggering amounts invested in gold last year, particularly following the collapse of Lehman Brothers in September. Suddenly, people realised that there really were very few safe havens for their wealth as currencies weakened, stockmarkets crashed and banks fell over with alarming regularity.
According to GFMS, the value of gold investments rose by nearly $12 billion last year to almost $26 billion. Net investment demand rose 76 per cent, largely driven by exchange-traded funds (ETFs), which allow investors to buy a share in a real gold bar without the hassle of physically owning the metal. The sale of bullion bars also soared, particularly in the Middle East and Asia, up 62 per cent.
This year looks little better on an economic front, although for different reasons than 2008. The vast economic stimulus packages and quantitative easing that many governments have embarked on will almost certainly lead to inflation towards the end of the year. Big deficits should also keep large currencies such as the dollar, euro, yen and sterling weak. Both these factors make investing in gold as a means of wealth preservation an attractive proposition.
However, the high price of gold due to investment demand is also encouraging sellers into the market as they dispose of their unwanted jewellery – as we have seen in the first quarter. The sheer quantity of metal they are pumping into the market should even up the supply-demand balance and may even push it towards lower prices. That is why many analysts believe that gold will settle at about $700 to $800 an ounce this year with occasional spikes should Iran get belligerent or North Korea fires off another rocket.
As ever with gold, the cloud that hangs over any discussion of future prices is what the world's central banks will do with the metal stored in their vaults. Most of it is a hang over from the gold standard days and there are literally thousands of tonnes held by the Americans, Germans, French and so on. Their sales over the past decade have been governed by the Central Bank Gold Agreement, which allows for only a trickle of disposals every year to prevent supply flooding the market and eroding the value of everybody's metal.
However, the agreement runs out later this year and it is uncertain what will happen next. Will it be a free for all as governments look to raise money by flogging their country's treasure? Or will they sit tight, as most have done over the past 10 years? And what will be the IMF's role? The IMF holds 3,200 tonnes of gold and is likely to start selling it from next year to raise funds to lend to emerging economies.
Until a new central bank agreement is reached (that includes the IMF), predicting the medium and long term gold price is impossible as there is simply too much uncertainty in the supply chain. In the short-term, the balance between scrap sellers and investment buyers should keep the price hovering at about $800 an ounce or above. So, if you are thinking of selling the family jewels, now is probably the time to do it.
- The author is the business correspondent of The Times of London
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