x Abu Dhabi, UAEWednesday 26 July 2017

Jewellers give gold its lustre

Pawnshops, moneylenders, small-time jewellers and other dealers in scrap precious metal have emerged as a crucial linchpin in the global gold trade.

A neon sign flashing "We Buy Gold" is often an indication that you have taken a turn on to the wrong side of the tracks.

But in recent months pawnshops, moneylenders, small-time jewellers and other dealers in scrap precious metal have emerged as a crucial linchpin in the global gold trade.

In fact, it seems that without this vast global network of street corner hawkers, one of the last remaining sources of safe and reliable investment returns since the start of the financial crisis would more than likely collapse.

Since 2008, when our current economic travails began, gold prices have almost doubled from the mid-US$800 range an ounce as more and more investors seek out the yellow metal as a haven. Prices have fluctuated a bit in recent months but at more than $1,600 an ounce gold is still trading at historically high levels.

But as demand has risen so sources of gold have diminished, leading to a shortage on the open market.

We dig out of the ground only about 2,800 tonnes of gold a year. Fist-sized nuggets are no longer found in the Yukon. There are no more mile-long seams of glistening rock unearthed in South Africa.

And it is no wonder. Mankind has coveted gold and measured its value for more than 5,000 years. In all that time we have managed to accumulate about 170,000 tonnes of the precious metal, or about 5.5 billion troy ounces. At today's prices that hefty amount is worth more than $9 trillion (Dh33.05tn).

Perhaps of greater significance to the gold market and the pricing of gold is that if divided up equally among the world's population all that metal is equal to only about three quarters of an ounce per person - not very much at all.

Steve Land, the head of precious metals trading at Franklin Templeton, an American investment management firm with offices in Dubai, is all too aware of just how finely balanced the gold market has become.

"Gold is a very large asset class and we think that that's important to consider because there are a lot of different players that are influencing the price," he says.

About half of all gold in the market is in jewellery form, and, while growth in jewellery sales has slowed a little of late, there is still robust demand for new adornments, particularly in the Indian subcontinent and China.

A further 20 per cent of gold is held in bullion form by central banks "That's down from over 80 per cent in the 1970s," Mr Land says.

"This is very significant as they finally turned around from being net sellers for almost 20 years to being net buyers."

Another 20 per cent is mopped up by the investment market, with exchange-traded funds taking a bigger and bigger share of the market alongside gold bars and coins.

Only about 10 per cent of the gold in circulation is used for industrial processes such as building critical computer circuitry for items such as airbags in cars and autopilot systems in planes.

"While all of these components are growing, supply isn't growing that much, so to balance the market you actually need to pull scrap gold out of the market in quite significant amounts," Mr Land says.

"So our view on what sets the gold price is not just based on what price people are willing to pay to buy it but also what price it takes to motivate them to turn their gold jewellery in and sell it."

And the shortage has become so acute of late that, Mr Land believes, pawnshops and the like have collectively become as important as central banks and giant mining companies.

"Pawn shops and jewellers are the primary supply at the moment because there isn't enough new gold to meet the new demand that's out there," he says.

What is more, as prices have been so high for so long many high street gold buyers have slashed their fees just to attract more custom.

So now might be the perfect time to ransack the jewellery box and take whatever you find down to the nearest "We Buy Gold" shop. You could make a pretty penny, and save the world from yet another financial crisis into the bargain.

jdoran@thenational.ae