Experts analyze the effects
of demand and the dollar on precious metal markets.
By
Si Wakesberg
Si
Wakesberg is a New York City-based consultant to the Institute of Scrap
Recycling Industries.
It
was certainly not coincidental that the price of gold reached a five-year
high on the Commodity Exchange in New York on the very day that industry
experts were in New York City analyzing gold's upsweep at ReMA's Precious
Metals Roundtable. Gold had been moving higher through most of 1987 as the
dollar continued to test new low levels.
On
December 10th, roundtable speakers emphasized the dollar's weakness as a
major spur to gold's rapid rise in the second half of the year. On that
day, gold closed at $492.30 an ounce. Said one speaker, "Gold's
fundamentals, which are markedly different from the traditional
demand/supply factors, have been positive enough to support a price
increase of more than 70 percent since early 1985." Precious metals
traders and merchants in the audience seemed to agree that "the price
of gold is being sharply influenced by the fall of the dollar."
Industry members said that the higher gold prices were "a welcome
change" from the "dreary markets of recent years."
While
the precious metals specialists were more restrained when picturing the
silver market (one speaker indicated that the U.S. domestic data points to
"nothing better than flat demand after a long slide"), silver
prices on the day of the roundtable rose to $6.93 an ounce, and industry
members were cautiously predicting that "a $7.00 an ounce price looks
quite possible for the first quarter of 1988." Here, unlike gold, the
so-called "outstanding stocks" were highlighted as a possible
deterrent to "runaway prices." But silver may have potential for
investors, speakers said, noting that the stock market downtrend may give
rise to greater interest in silver as investment.
While
the platinum-based market was high in 1987, compared with 1986, speakers
foresee a "surplus" of platinum, following two years of
deficits. It seemed that apprehensions about the availability of platinum from South
Africa have eased considerably. On the day of the roundtable, the spot
price of platinum on the New York Mercantile
Exchange was $501.70 per ounce. One of the speakers envisioned platinum
"enjoying underlying speculative support. ... These may be
particularly true, given prices under $500 and possibly even under that of
gold." Catalytic converter recycling has grown; a recycling spokesman
said that "we are reaching 75 to 80 percent of the catalytic
converters hitting the scrap pile."
ReMA's
Precious Metals Roundtable was co-chaired by Martin Durney, Johnson
Matthey, Inc., and Richard Searle, Engelhard Corp. They moderated the
sessions, introduced the speakers, and took questions from the audience.
A
Producers View: Golds Strength, Silvers More Modest Upturn
In
December 1986, the monthly average fix was around $390 for gold and $5.37
for silver; "therefore," said Paul B. Warrington, vice president of
Noranda Sales Corporation, "based on today's prices for gold and
silver, we producers have nothing to complain about." Like other
executives who analyzed the movement of precious metals, Warrington
pointed his finger at "the precipitous decline in the U.S.
dollar," but also noted that the market was influenced by other
factors, including events in the Persian Gulf and South Africa. The lower
dollar makes for "profitability" in Canadian and Australian gold
mining for all mines "above $400 U.S." and for most mines
"above $300 U.S.," Warrington said. He added that in the case of
silver, "the price of U.S. $6.00 is reasonably attractive to North
American mines and even more so for the Mexican and Peruvian mines in the
light of their weaker currencies." While South African gold output in
1987 will probably not reach the original goal of 20.9 million ounces (a
more realistic figure would be 19.3 million ounces, Warrington said), all
statistical indicators point to a higher world supply level in 1988 by
perhaps 2 million ounces.
Consumption
levels for gold, Warrington said, have been "reasonably good,"
particularly for coinage. The Hirohito coin, the American Eagle, the
Australian nugget, and others helped swell the use of gold to an estimated
6.4 million ounces in the past two years. Jewelry demand, on the other
hand, has risen modestly. Turning to silver, Warrington said consumption
is expected to rise about 6 percent to 19.4 million ounces. "In 1987,
secondary supply is up 35 percent and releases from the U.S. stockpile are
expected to double to 20 million ounces." The stockpile releases are
for coinage. There has been a decline in the use of silver in the
photographic industry.
Warrington
spotlighted the role of the "investor/speculator in acquiring gold
and silver." He noted gold's stability in the period following the
stock market crash and said he was convinced of gold's fundamental value.
He urged foreign governments that have large foreign reserves to
"hold some bullion."
Analyst
Sees Higher Gold and Silver Prices in 1988
Gold
prices have been moving up steadily since March 1985, "from a trough
of $285 per ounce to their current $480-$500 range," and it appears
as if this "price appreciation should continue into 1988,"
according to Leanne Baker, director of research, Philipp Brothers, Inc.,
who gave an incisive analysis of gold and silver trends. "The dollar
is the key gold price determinant," Baker said, indicating that
"this relationship is corroborated by statistical analysis."
Other impinging factors include inflation expectations and political and
economic concerns, but, according to Baker, they seem to be less
important. On this basis, she anticipated higher gold prices in 1988,
saying that a recently issued study by Salomon Brothers suggests that
"the dollar could reach a low of 120 Japanese Yen to the dollar
before the trough is reached."
Baker
said that French Giscard bonds will mature January 16 and represent
"a gold equivalent of more that 650 metric tons." She cautioned,
however, that rising gold mine production could dampen price upsweeps.
As
to silver, Baker believes that "during 1988, silver will again
exhibit the greatest potential for positive returns among the precious
metals." And that is because it will return as a favorite of
investors, Baker said. She foresees "gains in industrial and investor
demand, leading to a second consecutive annual decline in world
stocks."
Looking
ahead, Baker viewed a "$500 per ounce level for gold as an important
psychological barrier." Once that barrier is cracked, greater
speculative interest will be aroused, she stated.
A
Longer-Term Look at the Future of Silver
From
a consumer's longer-term view, "it is difficult to conceive of a true
shortage of silver," said Donald A. Corrigan, vice president-research
and development, Handy & Harman. It is difficult, he said, because it
has been established that above-ground worldwide stocks of silver
"are of the order of 10 billion ounces" and, since 1979-80,
there has been "only modest growth in world silver consumption."
In fact, U.S. demand has remained "flat" since 1980. Mine
production has continued to grow--in 1981 it was 272 million ounces, and
in 1986 it reached 333 million ounces. Finally, Corrigan added, secondary
supplies of silver are "huge" relative to annual demand.
Corrigan
stated that peak usage of silver in the Western world occurred in 1965
when total consumption (industrial plus coinage) reached 723 million
ounces. U.S. industrial silver consumption was 195.9 million ounces in
1973, but by 1985 it had declined to 118.6 million ounces. World
consumption (industrial plus coinage) reached 507 million ounces in 1973
and fell to 404 million ounces in 1986.
"The
domestic silver recycling business has not been hurt to the same degree as
end-use consumption markets," said Corrigan, "because the bulk
of recycled silver comes from photographic products and electrical and
electronic products, two of silver's stronger application areas." But
the decline in demand in industrial products where silver is used may be
"irreversible," he said. "The economic fundamentals of the
silver business will always be affected
by the huge above-ground stocks of metal."
The
Shrinking Precious Metals Refining Market
In
1980, 6.9 million ounces of gold and 108.5 million ounces of silver were
refined from secondary sources; in 1986, the figures shrank to 2 million
ounces of gold and 55 million ounces of silver, according to Francis H.
Curren, Jr., chairman of Pease & Curren, who presented a refiner's
viewpoint of the precious metals industry. This shrinkage, he said,
indicates that "opportunities for secondary refiners are limited and
would appear to be that way for some time to come."
Curren
said that gold scrap for refining comes from the jewelry industry,
electronics, and dental offices, while photography (including X-ray),
jewelry, and electronics are big producers of silver scrap. Consumers are
buying .14, .18, and .22 carat jewelry, Curren pointed out, or very light
electroplated costume jewelry. "Sterling silver in jewelry chain and
other forms of jewelry has been very popular in the past year."
The
amount of gold per ton of electronics scrap has been declining, though it
will never be entirely eliminated, Curren stated. The connector business
has slowed, he added, and a great portion of semi-conductors are being
produced offshore. "The precious metals refining business in the
United States is undergoing major changes," Curren noted. One
troubling factor is the environmental problem, which has hit the refiners
in particular very hard, he said. "The whole nonferrous metals
refining industry has been crippled by regulations--some uneconomical and
others impossible to comply with."
Looking
ahead, Curren foresees It a rather flat two years for the refining
business." He said "there is too much gold and silver above
ground and ready to be sold by millions of small holders to expect gold to
reach its 1980 heights."
The
Impact of Industrial Demand on Platinum
If
the U.S. economy slows down in 1988, resulting in a recession of
industrial demand, the outlook for platinum will not be promising, Gail
Levey, precious metals analyst, told the roundtable audience. That's
because, of all the precious metals, platinum is the most vulnerable to
industrial demand swings. The two major users of platinum are the
automobile and jewelry industries, Levey said, accounting for 37 percent
and 30 percent of the total, respectively. "Usage of platinum in the
U.S. auto industry declined sharply this year [1987], by an estimated 20
percent, to just over 500,000 ounces." Europe is where platinum's
future "is clearly the area for growth," Levey noted, for
Europe's "offtake in 1987 was up sharply, perhaps by 30 percent, to
180,000 ounces."
On
the supply side, the analyst saw long-term South African production
increasing "to well over 800,000 ounces--or more than one-third above
current levels." Outside of South Africa, she said, there will be
platinum coming in from Australia, Zimbabwe, Botswana, Brazil, and other
countries. "Thus, 1987 Western world supply is likely to be around 3
million ounces, up 6 percent from 1986." She added that the outlook
for demand is "uncertain."
Levey
indicated that recovery of secondary material from catalytic converters
was about 85,000 ounces in the U.S. and Japan in 1986 and would be higher
in 1987. "Assuming relatively attractive platinum prices, recovery of
platinum from spent catalysts is expected to grow over the years."
Investment
demand, she said, may pick up "as platinum prices under $500 and,
perhaps just as importantly, under the value of gold, could attract
investors back to the market in quantity." (By mid-December 1987, the
platinum price had sunk to $490 for spot on the Mercantile Exchange in New
York and was pretty much on an even ratio with gold.) Levey's "best
guess for platinum prices over the next six months is in the $460-$550 an
ounce range."
A
Scrapman's View of Auto Catalytic Converter Recycling
Describing
the recycling of auto catalytic converters, Raymond Sloan, president,
Catalytic Converter Refining Co., noted that the construction and
materials used are carbon steel for the outer cover and chrome, steel, or
stainless steel for the inside to hold the monolith or pellets. "It
is almost impossible to separate the three steels," Sloan pointed
out, "consequently, a market must be developed for the mixed
product."
Where
are the supply sources? "Automobile dismantlers are the prime
suppliers," according to Sloan. "They represent an excellent
source for used automobile catalytic converters." Shredders, iron
yards, and scrap processors are other good sources, he said, as well as
new auto dealers, auto repair shops, service stations, and muffler shops.
Smaller catalytic converter collectors sell to larger collectors, Sloan
noted.
"The
refineries of the platinum group metals use one of two methods to remove
the precious metals, and some refineries use both. These are
pyrometallurgy and hydrometallurgy." In the first method, catalysts
are melted down in a blast furnace. In the second, the material may be
chemically dissolved. "Refining of the platinum group metals requires
a great deal of technical expertise as well as a large capital
investment," according to Sloan. "The recycler, by contributing
to the recovery of platinum group metals, makes an important contribution
toward safeguarding the raw material supply line."
Recent studies have shown that auto catalysts represent about 30 percent of the total industrial demand for platinum. Sloan indicated that the recycling of auto catalysts is approaching 75 to 80 percent.