High gold prices will likely benefit global producers of the precious metal, but bottlenecks at refining facilities
The refining of gold could prove to be a "choke-point" for global supply-demand dynamics, said Grant Angwin, president of Angwin Precious Metal Advisory Services. While global gold supply hit an all-time high in 2018 and refining capacity remains steady, much of the world's gold supply is not going to major refineries.
"Precious metals refining is considered the most important component in the supply of gold. This is where the product from the producers or the users is turned into its true value, ultimately money," Angwin said earlier this month in a keynote speech at the Denver Gold Forum. "
Much of new gold supply is coming from locations such as Russia and China, where production is captive to local refiners, or comes from refiners where gold is produced as a byproduct of base metals and is not generally available to commercial refiners. Rising regulatory burdens also make it more difficult for refiners to turn to scrap or artisanal gold markets, Angwin added.
While global refining capacity sits at about 3,000 tons, Angwin estimated that the available market for refiners is closer to 900 tons. The oversupply in capacity has continued to pressure gold refiners, which have seen margins decline by about 55% in the last six years while regulatory pressures increase costs. Refiners have so far absorbed much of those costs rather than passing them on to users, Angwin said.
Additional pressures, including responsible mining principles, supply tracking and other demands from gold producers, will only further squeeze commercial gold refiners.
"We all like the idea of knowing where an ounce of gold came from, who produced it, what chain it went through, which refinery it went through, which jewelry manufacturer it went through, and what popped out on the other side," Angwin said. "But this process is geared towards small-batch processing. Most of these refineries in the world rely on scale: handling 300 to 400 tons of gold if they can, per annum, not handling 200 kilos to put through a batch process."
Refiners may soon face the choice of skipping out on opportunities that require such processes or passing costs on to end users. If refiners follow pressure from environmentally and socially conscious investors to drive away artisanal producers, that could send that market further underground and create more image problems for the broader gold industry, Angwin added. Refiners diversified by adding financing services and other value additions for gold suppliers, but that may entail more risks, he said.
"We need to work together, that is my message here," Angwin said.
