Dwindling scrap gold supplies may push prices upwards

Gold  |  2011-08-12 06:11:34   |   By

Now that gold prices have crossed $1800 mark, scrap gold supplies have fallen as people with unwanted jewellery have already sold their wares

LONDON (Commodity Online): As gold prices zoomed to record highs above $1800, the scrap gold supplies are witnessing a fall which could further push up prices. In the past few years, several cash-for-gold dealers had set up business to buy unwanted jewellery and some of them had gained the wrath of customers for giving lesser valuations for their used jewellery.

The trend of falling scrap gold supplies was visible from the first quarter of 2011. The World Gold Council data for Q1, 2011 showed gold supply declined by 4% year-on-year to 872.2 tonnes from 912.1 tonnes in the first quarter of 2010. This decline was due to a sharp increase in net purchasing by the official sector and a fall in the supply of recycled gold, which was down 6% on year-earlier levels to 347.5 tonnes from 369.3 tonnes in the first quarter of 2010.

Reuters reported that the massive growth of cash for gold industry in the past few years has led to a situation where fewer people have stock of 'old or unused' jewellery to sell.

'The implications of a dwindling supply of 'scrap' gold, that which isn't mined, may hit the global bullion market even harder than it hits local pawn shops. Worldwide, recycled gold usually meets 40 percent of demand. But that share is now declining just as demand for physical bullion surges anew from investors and central banks. That may be yet another reason to expect gold prices to rise even further,' Reuters report added.

In Indian markets, scrap gold supplies have also fallen while the demand for gold loans have risen. Apart from traditional players such as Muthoot Fincorp Ltd, Manapuram Finance, several banks are now offering gold loans at concessional interest rates especially for agricultural purposes.

It is estimated that the total loans against gold stands at Rs.1,20,000 crore between the banks and NBFCs. SBI alone enjoys a loan portfolio of Rs 300 cr against gold. HDFC Bank plans to increase the number of branches offering gold loans from 150 to 600 in 2011. Andhra Bank also plans to facilitate gold loan disbursal from all of its branches in few months. Currently only 60 branches provide gold loans and each branch will have one valuer for pledged gold appraisal (whose fee is borne by customer). Financial institutions provide 70% to 85% of value of gold pledged as loan. The interest rates vary from 12% to 15.25% for banks whereas NBFCs offer between 12% and 21% depending on the value of the gold pledged. The time period varies from lender to lender, it can range from a couple of months to a year, according to a report, 'Gold Loan Market in India by Research and Markets.