With the precious metals market being uncharacteristically unpredictable, Star Refining President Tony Stern discusses market fluctuations, the global economy and when the time is right to sell your scrap.

Precious metals, like most other commodities, are priced according to supply and demand. However, given today’s economic environment, this pricing methodology flies out the window, especially when applied to gold. This is primarily because there’s an estimated 500 Tonnes of gold surplus in vaults around the world. Additionally, the amount of gold being refined and re-entering the marketplace is at an all-time high, not only because the price of gold is soaring but also because financially distressed consumers are selling their broken or unwanted jewelry at an unprecedented rate.

The price of gold has been rising steadily for the past five years and, at press time, it was $1,009.75 per ounce. So why is the price of gold climbing when there is a surplus in the marketplace? In my opinion, the price of gold is artificially elevated by the traditional “safe haven” effect of investors hoarding the bright shiny stuff in times of economic strife. This strategy has been vigorously promoted around the world by gold bullion companies (the TV variety) and investment fund managers to clients who have lost faith in the more traditional investment vehicles.

Historically, fluctuations in the price of gold were mimicked by prices of palladium, platinum and silver. However, this no longer seems to be the case as the growing use of these metals in the automotive, electronics and medical industries makes for a whole new supply-and-demand dynamic that cuts, once and for all, the invisible umbilical cord to gold. This change was exemplified in the fourth quarter of 2008 when the value of platinum and palladium fell in sharp contrast to the rising price of gold.

A Look Ahead

I believe that as traditional investment markets start to recover, the economy gets more robust and the dollar starts gaining respect around the globe, gold will start to lose its shine and a wave of profit taking will destabilize the gold price. Speaking to London market makers on a daily basis gives me an inkling of the sentiment on the street and many of them predict investors will start to re-enter the stock market in meaningful numbers by the first or second quarter of 2010. My fear is that market dumping will take hold and, as with the palladium selloff in August 2001, the price of gold will start to fall significantly on a weekly, if not daily, basis until gold finds its natural level, which many believe to be around $500 to $600 an ounce.

However, one factor that may underpin the gold price for a while longer will be interest rates that are predicted to rise steadily over the next 18 months. This could have a dampening influence on the general economy, slowing its recovery with gold investors releasing some gold funds and placing them elsewhere. Given the challenge of trying to predict the precious metal markets, I think the most successful scrap refining strategy for laboratories, large or small, is the price averaging method in which you sell your scrap every month, quarter or six months rather than just once a year. It’s a play-it-safe strategy that helps you avoid the peaks and valleys in the value cycle of the raw metals.

Some refiners—including Star Refining—offer a service where you can refine your scrap and bank the ounces to sell at a higher future market price. Since the refining process can take up to three weeks, this is a very acceptable option in today’s fluctuating precious metal markets because it allows you to react immediately to market changes that can work in your favor.

The Gold Surplus

During the first quarter of this year, 550 Tonnes of gold entered the world marketplace:

• The biggest demand was from the investment sector with an uptake of 595.9 Tonnes, up 248% from the same period in 2008.

• The demand for gold coins and small investment bars was up 33% to 130.8 Tonnes from the same period in 2008.

• Conversely, there was a 31% drop in the demand for gold in the industrial and dental sectors which was virtually duplicated by the other gold-hungry sectors, including the jewelry and electronic industries.

• The U.S. contributed 25 of those 550 Tonnes, the same amount the U.S. contributed in the first quarter of 2008.