Scrap gold sales fall, but early recovery expected

‘Indian consumers respond quickly to gold price movements’.

Scrap gold sales declined by 50 per cent during the first two months of the current calendar year, as investors held stocks back in anticipation of a price rebound.

In early December, when gold prices were hovering around Rs 18,220 per 10g, Mumbai-based retailers like Jugraj Kantilal were collecting five kg of used jewellery daily. This has reduced to 2.5 kg a day. Jitendra Jain, partner of Jugraj Kantilal, attributes this to a dramatic fall in prices during the past three months.

Gold availability from domestic scrap recycling declined to 17 tonnes in the fourth quarter ending December 2009, from 18 tonnes, 23 tonnes and a staggering 64 tonnes in the third, second and first quarters of the same year, respectively. In the fourth quarter of calendar year 2008, gold availability from domestic refining was 20 tonnes, according to World Gold Council data.

Analysts believe retail consumers in India cashed in on their extra holding of the yellow metal when the price surpassed Rs 18,000 per 10g in the first quarter. Fearing the metal may crash due to the lack of fundamental support, they continued selling additional stocks in the second and third quarters as well.

“Indian consumers respond quickly to the price movement of gold. Scrap recovery intensifies when the price goes up, as investors also cash in on the escalation. But, when the price goes down, investors wait and watch,” said Bhargav Vaidya, an analyst with B N Vaidya & Associates, a Mumbai-based gold trading firm.

However, with fundamentals turning gradually supportive, experts believe the price would rise in the near-term to $1,126 an ounce, and then to $1,150 an ounce in London before moving downwards. The recent major earthquake in Chile, a big gold producer, hit production from several mines in the country, which is likely to impact near-term supply. Currently, the yellow metal is between $1,110 and $1,120 an oz, translating into Rs 16,600 and Rs 16,800 per 10 gm.

According to Ketan Shroff of Pushpak Bullions, a city-based jewellery trader, scrap recovery intensified in the first fortnight of January, when gold rebounded to Rs 17,000 per 10g in Mumbai. With the expected near-term spurt in prices, gold availability from scrap recovery is expected to recover; there is even an expectation of a bounce back to to 25 tonnes for the entire current quarter.

Fluctuations in recycling activity are an integral part of the Indian market, says GFMS, the world’s premier consultancy in precious metals. Jewellery is sold by weight at a low margin, with consumers paying close to the spot price in rupee terms. Further, many Indian families own significant holdings of gold, specifically as jewellery. Consequently, bouts of profit-taking are a relatively logical response to a volatile price, in a market that has low transaction costs and a very low margins.

India topped in consumption among individual countries in the fourth quarter, improving 27 per cent on year-earlier levels, from 108.6 tonnes to 137.8 tonnes. On an annual basis, the country retained its position as the largest consuming country, with total jewellery demand of 405.8 tonnes, although this represented a 19 per cent decline on the full year of 2008.