The Gold and Silver Supply Chain

The fact is that for hundreds, if not thousands of years, there has been relatively little going on in how precious metals get to customers. From deriving the material, all the way to manufacturing jewelry, this article discusses changes in the precious metals, and especially, the gold supply chain.

In Parts of the World the Gold Supply Chain is Gray

In 2006, Edward Zwick released the now famous movie "Blood Diamond," starring Leonardo DiCaprio. Through this movie the world learned about blood diamonds. These diamonds are mined in war zones generally to to finance further conflict. Not only are warlords profiting from indigenous resources, but thousands are perishing in the process. And what for? So that diamond companies across the world can continue to sell stones at obscene profits.

Leading up to the film's release, jewellery insiders were already predicting decreased demand. Following the release of this film, the jewellery industry was in many ways disrupted.

At a Carleton University conference the following year, a paper evaluating the movie's effects noted the following. "A majority of our respondents were inclined to reconsider purchasing or receiving diamonds if they had previously been considering it, and to discuss this issue with family or friends. Viewers were left with little faith or understanding in the Kimberley Process and the majority did not seek out further information on this issue." Long story short, consumers and sellers alike became quickly concerned with the source of their diamonds.

Over the years, more and more media outlets have highlighted the issues of precious metals sourcing in the industries supply chain. Good or bad reading depending on where you sit, nobody in the industry can ignore trends leading in the same direction. From miners and refiners to bankers, dealers, and investors alike, how can we adapt to a new gold supply chain?

Current Sourcing of Gold and Silver?

More and more there seems to be an emphasis on jewellery manufactures purchasing recycled metal. This trend has grown with such momentum that even companies like Dell are getting involved. Dell is not an off-beat jeweller, by the way, it's the computer company I'm referring to here. They are making jewellery with recycled e-waste. And so what exactly is "recycled" metal? And why is a computer company changing the gold supply chain?

First of all, recycled gold (and other precious metals) tend to be derived from scrap jewellery, as well as industrial or electronic scrap. You can buy it in the form of bars or recycled gold casting grain. The basic idea is that by refining scrap jewellery we know that it comes from an ethical place, or at the very least that no new conflict was involved in taking it out of the ground.

Second, companies like Dell are getting involved because of how much change the gold supply chain has already undergone. In fact, buying recycled gold has now become more expensive than the new stuff. This now choice of feedstock for the jewellery and electronics industry effectively manufacturers from even going near conflict material. The logic being that if the material is not mind, then your gold supply chain can never involve conflict mining.

Ironically, historically mined metal may be mined with more conflict than what we get today.

Still, at least there are no new harms created. As I discuss below, this shift in attitude has led many refiners to not only batch-refine recycled material separate from mining doré, but it has led to tracing and origin programs. Without a chain-of-custody to responsible or recycled sources, many jewellery and other manufacturers would not even want the risk of knowing the exact origin of their metal. This of course protects the said manufacturer from the possible negative news that a supplier was getting metal from somewhere less than above board.

Refiners and the Recycled Gold Supply Chain

Now from a refiners point of view, you can imagine that there are several issues in delivering the consistent feedstock of metal to a manufacturer promptly. In general, some of the largest manufacturers have a consistent demand, and to satisfy for instance 300-500 kg of gold grain orders, a refinery will have to plan forward. Accordingly they may rely on many sources of recycled material. Recycled metal comes from many avenues, however, and to facilitate clients looking for recycled gold, requests a refinery will have to hold some of this material as stock. They then wait for all the recycled feedstock to flow in for refinement to consolidate for shipping.

This means refiners are sitting on metal already been paid for, a major financing cost.

Next, you need to look at the perceived selling points for a manufacturer to consume recycled metal. Recycled metal is more environmentally friendly since it is using material that is already here. The refiner is just refining it and moving it to another form. Recycled metal makes it almost impossible to trace the metal back to its original mine, hence there is no affiliation to any mining entity. From a marketing perspective, there are certainly reasons why a refiner's client would want to use recycled metal. Yet, dig further and you see that the reliance on recycled metal is not sustainable and that finding a way to shift towards mining material may be inevitable for the industry.

The question you need to ask is can that shift back to mining material be done without conflict metals?

With that being said, I am going to move into another throny issue in the gold supply chain. That is, the shift shift into using recycled material for downstream products (jewellery, electronics, industrial and the bullion industry).

Let's start by look at the availability of recycled metal as opposed to the demand for fabricated products. I am just going to use jewellery in terms of fabricated products. The point is that you will see that there isn't enough recycled metal on earth to supply yearly demand for fabricated jewellery. No matter how much gold and silver you recycle, the demand is huge.

Start by looking at the total amount of gold available even including the ocean. According to Thomson Reuters, less than 175,000 tonnes of gold exist on the planet and less than 55,000 tonnes remain to be viably mined at current prices. While what is left to be mined may seem staggering, remember that most gold that exists does not get recycled.

The Gold Supply Chain and Supply

On a yearly basis according to the 2017 Gold Survey, Mined gold ounces severely outweigh refined gold scrap: 103.59 million troy ounces for Mining gold as opposed to 40.77 million ounces of scrap gold. In 2016, the jewellery industry consumed 60.8 million ounces of gold. So based on these numbers alone, recycled metal cannot alone satisfy the yearly demand.

Manufacturers want consistency in pricing and inventory.

What these numbers support is that recycled material should be a lot more costly to purchase than mining feedstock.

Silver vs. Supply

207 million ounces of silver were uses in 2016 for fabrication of jewellery: recycled scrap refined in the same year was 139.7 million ounces and mining silver was 885 million ounces.

The Recycled Gold Supply Chain and That of Other Recycled Precious Metals is Running Out

Manufacturers have to rely on aggregators. In other words, most primary refineries have to rely on secondary refineries in order to fulfill recycled metals requests. Primary refiners are your big brands—private refiners ranging from the Asahi's to Valcambi's of the world and even larger government refiners such as the Royal Canadian Mint—who supply the biggest consumers.

Secondary refineries do not refine metal into a pure state.

What secondary refiners or aggregators do often have are melt and assay abilities. Becuase of the strict requirements in the recycled gold supply chain, a primary refinery must pay close attention to the material being received by secondary and aggregator clients. In fact, this is where a large amount of illegally mined material gets into the precious metals supply chain. If you are not yet familiar, you should read up on the Elemetal Scandal that shut down supposedly recycled refiner Ohio Precious Metals.

To both summarize and dive deeper into the sourcing model of an aggregating client, I will briefly discuss responsibility. There is a bigger ethical and contractual responsibility on secondary refiners than ever. They need to know all their clients and the material those clients are bringing in. Because they are very often getting loose scrap, they are in an easy position to know which clients to pay more attention to.

How so?

Well, if a client is melting their own bars, that means you need to take some extra time for due diligence before initiating business. Fortunately, this is far less demanding than when a secondary refiner brings even larger melted lots to a primary refiner.

To reiterate, a secondary refinery will receive material form many different clients. As they move the material further down the gold supply chain, they will perform melt and assay services. Having combined this material into larger bars, they ship them to a refinery for refinement.

By virtue of recycled gold and silver having the opportunity to pass through many hands before it gets to a primary refinery, the waters of transparency are muddied and a primary refiner needs to be extremely careful with what material can be classified as recycled. This results in a situation where a primary refiner has much less (and much more expensive) chain-of-custody gold and silver that it can guarantee and stand behind.

Where do Secondary Refiners Source from in the Gold Supply Chain

1. A Pawn Shop or Scrap Gold Buyer
2. A Jewellery Manufacturer
3. Or Quote possibly from an illegal mine

Next Question: How does a primary refiner ensure that illegal mining material does not enter the gold supply chain?

Answer: there are three things secondary refiners need to ask about.