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Liquid gold opportunity: refining stock during COVID-19

Booming precious metal prices, coupled with lower jewellery spending, increased demand for refining services in the first quarter of 2020.

RECENT STATS
PRECIOUS METAL TRENDS

 

$1,700

gold price per ounce in US Dollars, exceeded for the first time in seven years in April 2020
Source: World Gold Council

_________
 

39%

first-quarter decline in global demand for gold jewellery
Source: World Gold Council

_________
 

45%

first-quarter decline in Chinese platinum jewellery manufacturing

Source: World Platinum Investment Council

 _________
 

16%

silver price increase in US Dollars, September 2018 - February 2020
Source: Reuters

No part of the jewellery industry has been immune to the impact of the COVID-19 pandemic, and the refining sector is no exception. During times of economic uncertainty, conventional wisdom dictates that precious metal prices rise; this is attributed to increased demand from investors, who flock to ‘safe haven’ assets which historically hold their value.

This trend has held true during the current global health crisis. "Metal prices had already been trending positively pre-COVID-19. The pandemic has lead to 'binge-buying' of investment bullion which has, in turn, affected metal prices for the jewellery industry," says Chris Botha, operations manager Pallion. 

Peter Beck, managing director of Adelaide-based company Peter W Beck, which refines gold, silver, platinum and palladium, notes, “We have observed that precious metal prices at this point in time are strong. However, we are not sure if this is directly related to the COVID-19 pandemic or the general uncertainty of the world’s economic position [due to other factors]."

One of those factors may be the ongoing trade tensions between the US and China.

“Precious metals have always filled that [safe-haven] role,” says Richard Hayes, CEO The Perth Mint, which is owned by the Government of Western Australia and refines the majority of gold mined onshore, in addition to gold and silver scrap.

At the same time, restrictions on retail trading, rising unemployment, and plummeting consumer confidence have combined to flatten discretionary spending on luxury items, depressing jewellery demand.

The combination of higher prices for metals and lower demand for finished jewellery makes metal refining an attractive option for jewellers.

Darren Sher, director Chemgold, says, “While the impact of COVID-19 has been devastating for us all, the one positive aspect for the jewellery industry is that precious metal stock can be refined, and jewellers can then get the fine metal back, receive payments, or pay their accounts.”

He adds, “With the major increase in the gold price in the last few years, in some cases, there may be minimal loss on the original cost of the metal they purchased years ago.”

The potential is not limited to gold, however – it also applies to other major refining metals, including silver, platinum, and palladium.

Golden opportunity
Darren Sher, Chemgold
Darren Sher, Chemgold
“While the impact of COVID-19 has been devastating for us all, the one positive aspect for the jewellery industry is that precious metal stock can be refined, and jewellers can then get the fine metal back, receive payments, or pay their accounts”
Darren Sher, Chemgold

The gold price reflects myriad factors beyond mere supply and demand, as it is frequently used as a financial “hedge” against currency fluctuations, inflation, and interest rate cuts, as well as geopolitical instability.

Notably, the gold price has been rising for nearly a decade, and in April the metal exceeded $US1,700 per ounce.

Some analysts predict it will rise further throughout 2020 – potentially surpassing its ten-year highs, which it reached in 2011.

Hayes explains that the price of gold has also been “turbo-charged” in Australian Dollar terms, due to the exchange rate with the US Dollar. At the same time, demand for physical gold has been constrained by the pandemic.

“The global gold market has been turned on its head by the novel coronavirus [COVID-19], with demand in China and India collapsing due to lockdowns while in the West investors rushed to buy bullion as a safe asset to weather a period of financial turmoil,” noted a recent Reuters report.

Indeed, the World Gold Council’s Gold Demand Trends Q1 2020 report, published 30 April, revealed that global gold jewellery demand had fallen to a 10-year low, and tumbled 39 per cent compared with the same period in 2019.

“Almost without exception, jewellery markets across the globe recorded year-over-year losses as the impact of the coronavirus compounded the effect of high, and steeply rising, gold prices,” the report explained.

During the same period, platinum jewellery demand fell 26 per cent, according to The World Platinum Investment Council (WPIC)’s most recent Platinum Quarterly report.

China’s platinum jewellery manufacturing alone had declined 45 per cent compared with the same period in 2019.

Meanwhile, silver jewellery fabrication is predicted to decrease by 7 per cent in 2020 – its most significant contraction in four years. Yet Hayes points out that despite reduced demand from the jewellery sector, the silver price has mirrored gold’s upward trajectory.

“Silver has very much followed gold, but in the last couple of weeks silver prices have strengthened more strongly – they have outpaced the gold price increases,” he says.

“Almost without exception, jewellery markets across the globe recorded year-over-year losses as the impact of the coronavirus compounded the effect of high, and steeply rising, gold prices”
World Gold Council, Gold Demand Trends, Q1 2020 report

Adam Van Sambeek, treasury manager at Morris & Watson in Auckland, notes that alongside increased demand from investors, “supply constraints brought on by trade and production restrictions have also pushed gold and silver prices higher”.

These factors – ‘safe-haven’ appeal and reduced supply – assisted gold, silver, platinum and palladium prices to a robust recovery from an initial the coronavirus demand shock, which saw prices plunge in March as the pandemic peaked in the US.

In particular, palladium – a key agent in creating white gold, aside from nickel – fell 43 per cent from its February peak of $US2,754, driven by a dramatic decrease in demand from the Chinese automotive industry.

However, by 31 May, it had recovered to $US2,011. Indeed, palladium has been the best performing commodity for the past two years, according to Forbes, with prices increasing by more than 85 per cent between August 2018 and March 2019.

The pandemic’s impact on platinum is less dramatic, and prices have also stabilised. The WPIC report, published 18 May, noted, “Due to dynamics peculiar to platinum and unrelated to the pandemic, the overall negative effects [of COVID-19] are far less than might be expected.”

The report predicts that demand and supply are likely to remain balanced throughout 2020, with both dropping to five-year lows.

The lower volumes are largely attributed to COVID-19 closures and restrictions in South Africa, the largest producer of the metal; at the time of publication, mines were only permitted to operate at 50 per cent capacity.  South Africa is also also a key producer of gold and, notably, palladium, alongside Russia.

Russian palladium mines have been largely unaffected by the pandemic.

The world’s largest palladium producer, Nornickel, has not changed its 2020 guidance, with operations chief Sergey Dyachenko saying, “We expect saleable metal production volumes to recover during the rest of this year.”

Refined strategy

With precious metal prices remaining high and jewellery demand subdued, jewellers have an opportunity to create liquidity through refining.

“In terms of normal working stock, having stuff just sitting around – especially if you’re paying lease costs on it – is relatively expensive. “So having it refined and turning it into cash, so that you can recycle that cash into additional manufacturing stock, would tend to make a lot of sense at this stage,” says Hayes.

Peter Beck, Peter W Beck
Peter Beck, Peter W Beck
““This period of strong precious metal pricing and difficult trading is an opportunity for jewellers to manage any precious metal stock, in either finished or unfinished form, through refining... It is possible that precious metal value alone will return more than the original purchase price of the product”
Peter Beck, Peter W Beck

At Chemgold, Sher observed that when COVID-19 restrictions came into effect, “The demand for our refining services increased substantially. Jewellery retailers and manufacturers sent in large amounts of scrap and lemel to ensure they could have extra funds if needed.

“We also found an increase in the number of sweeps received. With restrictions easing, we have found the demand is back to its normal level,” he adds.

At Pallion, Botha says, "Our refinery facilities refine next to half of Australia’s precious metals output and have continued to work round the clock to meet marketplace demand since the pandemic. We have seen record-high refining jobs coming through [from] the jewellery industry.

"Many jewellers during these trying times have been conducting spring cleans and sending their lemel scraps for refining to assist them to weather the storm. This was also compounded by the upcoming end of the financial year."

Meanwhile, Van Sambeek observes, “Temporary [store] closures as a result of COVID-19 gave our clients an opportunity to do some long overdue house cleaning.

“The high gold price, in conjunction with economic uncertainty, has seen an increase in refining, with many clearing old or slow-moving stock, surrendered for cash or metal.”

Beck has also noticed a “definite increase” in demand for precious metal refining in recent months. “We believe this is mainly to act as a source of cash flow for both retail and manufacturing jewellers in these difficult times,” he explains.

“This period of strong precious metal pricing and difficult trading is an opportunity for jewellers to manage any precious metal stock, in either finished or unfinished form, through refining.”

Beck recommends jewellers begin by refining old stock that has been in store for more than four to five years.

“Because of the current strong precious metal prices, it is possible that precious metal value alone will return more than the original purchase price of the product,” he adds.

Meanwhile, Sher says jewellers should refine “fairly regularly” as fees are low in proportion to the payments received for precious metals. 

Adam Van Sambeek, Morris & Watson
Adam Van Sambeek, Morris & Watson
“Due to the high gold and palladium prices, high-carat and white metals containing platinum and palladium are the best to refine first"
Adam Van Sambeek, Morris & Watson

“The advice is to, where possible, keep all your metals separate in these categories: silver, yellow gold, white gold and platinum,” he adds.

“This can make refining charges more economical as two-metal refining (gold/silver) is less expensive than four-metal (gold/silver/platinum/palladium) and platinum-only. We provide guidance on how to separate metals to ensure fees are as low as possible.” 

Van Sambeek advises, “Due to the high gold and palladium prices, high-carat and white metals containing platinum and palladium are the best to refine first.”

“But as most metal prices are up, any refining will help release funds quickly during this time,” he adds.

And when choosing a refiner during the uncertainty of COVID-19, Hayes recommends taking a careful approach, pointing to several US refiners who have declared bankruptcy in recent years, leaving their customers’ metal in the general creditors’ pool.

“Avoid taking unwanted credit risks – especially if there are financial liability issues,” he advises.

Botha adds, "There are very few true ‘refiners’ in Australia – many who claim to be refiners are merely aggregators. Make sure you send your refining job to an entity that actually refines; otherwise all you are doing is paying a middleman. We are the only independent London Bullion Market Association (LBMA) and Shanghai Gold Exchange (SGE)-accredited refinery in Australia and you can take a virtual tour of our refining facilities on YouTube."

Indeed, stock management is a critical component of retail even in periods of growth, but the importance of generating cash flow by refining – where appropriate – is vitally important during the current crisis.

As jewellers begin to reopen their doors and consumer spending on discretionary items increases throughout the second half of 2020, a solid refining strategy strengthens a jewellery business’ position – and gives it a better chance to survive and thrive.
 

Key Points


• Precious metal prices have increased 
Economic uncertainty has pushed investors towards ‘safe havens’

• Jewellery demand has declined
Falling consumer confidence and retail restrictions due to COVID-19 have combined to reduce jewellery sales

• Refining can financially benefit jewellers
In the short-term, refining can assist in maintaining liquidity

• Stock management is critical
Post-crisis, refining ensures jewellers have fresh stock and resources

 


ABOUT THE AUTHOR
Arabella Roden • Assistant Editor

Arabella Roden is assistant editor of Jeweller. She has nine years media experience in Australia and the UK as journalist and sub-editor

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