On the Same Track?

Is gold the locomotive of precious metals prices? Or does it run on a separate track from other precious metals? And how does it compare with base metals, such as ferrous scrap?

There is little doubt that the lofty price of gold has affected scrap trading. One of the traditional rules of thumb cited in precious metals trading is the silver-to-gold price ratio. During the last 30 to 60 days of 2012, the silver-to-gold price ratio hovered just above 50:1, meaning it would take approximately 50 ounces of silver to equal the price of one ounce of gold. That ratio reached nearly 53:1 in mid-November.

Taken alone, it is a meaningless metric. In historic context, the silver-to-gold ratio throughout the past decade has been anywhere from a high of 83:1 to a low of 31:1. That would indicate that the ratio as of mid-November is roughly in a middle range.

Some observers scoff at the ratio. They maintain that the whole idea of a silver-to-gold ratio is a dated concept, going back to the days when the U.S. government’s currency was based on gold bullion and the mint issued silver certificates in place of dollar bills.

The absolute price of gold was floating in the range of $1,700 to $1,725 per ounce in mid-November, while the price of silver was in the $32 range. During that same time, platinum was selling at $1,537 per ounce, and palladium was in the neighborhood of $600 per ounce.

While recyclers typically hedge each purchase and do not stockpile metals to speculate on the markets, the question of price ratios is more than academic because many of those selling various metals have an eye on prices. Hoarded supplies from small-time generators and jobbers tend to show up for recycling when prices make headlines. Popular press articles trumpeting record prices for gold or platinum have a way of bringing other metals out of storage and onto the market—even if those other materials are not moving in tandem with the record-setter.

Think Small
Bill Rockett, vice president of M&K Recovery Group, North Andover, Mass., says the high price of gold has had a slight impact on prices for other metals. “But it hasn’t made things jump through the roof,” he adds.

He says people who run across precious metals in small volumes have been more aggressive in their pricing and processing demands. M&K’s regular customers, however, conform to the norm, riding each surge and dip in price as part of the normal cycle. “Our regulars are keeping to their business plans,” Rockett says. As a result, M&K has seen no major increase or decrease in the supply of material being shipped to the company for processing.

The scenario is similar at Universal Scrap Metals Inc. in Chicago, where Jack Whalen says he sees a preponderance of silver come through the company’s precious metals department. He says the flow of silver tends to be steady, coming as it does from busy medical facilities processing X-ray film and publishers who still use film for graphics. They are not speculating, he says, rather converting a resource to cash.

“That supply of silver is drying up since everyone is going to digital,” Whalen adds. That said, silver prices in the $32 range have attracted attention.

“Everything is at historic highs,” says the president of another Great Lakes-area metals firm. “Values are up across the board.”

Whalen says, “Every day is a different day. We have several jobbers who buy from the smaller places and sell to us.” Those customers are price sensitive, he says, but most of the larger generators of silver move their scrap material out the door as it is generated.

Some sources say more than 95 percent of all of the silver ever mined has already been consumed. That silver is gone forever, unrecoverable at any price. As virgin, mined supplies dwindle, there is more pressure to draw silver—and other precious metals—from the recycling stream.

The quality of the material in the recycling stream may not be everything a recycler could want, however. Volumes are up, in particular, in the lower grade materials. It seems that any of the top-grade material that was stockpiled was lured off for recycling long ago. However, as supplies got tighter for the top grades, the high value placed on any precious-metals-bearing recyclables made it worth the time and hassle to extract these metals from almost any source.

“The current prices make it viable to sell now because before it was not worth processing,” Whalen says.
 

Other Metals
Even the more prosaic metals—iron, aluminum and copper—are feeling the price pressure. The entire metals market seems to be buoyed by the high prices of gold and other precious metals.

“Ferrous, nonferrous and other metals have had more fluctuations [in pricing] than precious metals,” Rockett says. He points to the considerable volatility seen in pricing for metals such as copper and aluminum.

Yet, he says strong or weak precious metals markets are not necessarily a factor in the price swings of nonferrous materials. “I would not say they are related,” Rockett adds.

Whalen sees a similar situation. Universal does more business in the basic metals and colored metals than it does in precious metals. He sees those base metals reacting more to the price of a particular related commodity than to the sky-high levels of precious metals such as gold.

“We see a lot of copper, aluminum and brass,” Whalen explains. “When the market goes up, they sell off. If copper, for example, drops 40 or 50 cents a pound, they will sit on it.”

Someone with copper will keep an eye on copper prices—not gold or silver prices.

“After a year, if the market is still trading down from its highs, they will trade it off, if for no other reason than sheer space availability,” Whalen says. Machine shops, for instance, might hold copper or brass until there is an uptick in price. But, they can store only so much material because of space restrictions before they have to send it to market. Copper has been all over the map this year, starting in the $3.30-per-pound area, touching $3.90 in late winter, dropping back to the $3.30-to-$3.40 range in the summer and finishing the year somewhat healthier in the $3.50 range.

The copper run-up in March paralleled a rise in the price of gold, which hit highs near $1,800. The October jump in gold prices, again approaching $1,800, did not seem to have as much of an effect on copper the second time around, though copper did bounce one dime at the same time.

The value of the U.S. dollar can make more of a difference in gold and silver prices than in the prices of other metals. In early November, when the dollar hit lows against the Indian rupee, purchases of gold by Indian buyers jumped. India is the world’s largest consumer of gold.

At the same time, gold prices had fallen from October highs in the $1,800-per-ounce range to the low $1,700s and then into the upper $1,600s. If there ever was a “buy” signal for Indian consumers, the lower price of gold and the higher value of the rupee became a beacon for those looking to purchase gold.

Platinum paralleled silver more closely than gold in 2012, with the same run-up in March that most precious metals experienced. It topped off just below $1,700 per ounce before diving to $1,550 per ounce in May and continuing down to less than $1,400 in early summer. By August, platinum still hovered near $1,400 per ounce (with one spike). But the fall saw prices move to $1,700, again before dropping in November to the $1,550 range.

Palladium started 2012 down from its fall 2011 price range above $650 per ounce, dropping below $575. However, it bounced back to $650 in February and traded between $680 and $720 for most of the spring, with some minor exceptions. The price took a quick dive in May, dropping below $600 per ounce and trading near $575 for much of July and August. In September, the price nudged to $700, took a breather, then came back to $675 in early October before continuing to drop to the $590-to-$620 range as November progressed.

While platinum was setting lows in February, palladium was nearing an annual high. Both experienced declines into the summer months, however, and both showed real life, in terms of pricing, in October.

Gold, silver, platinum and palladium all experienced the late summer run-up, even though their industrial uses vary. (Platinum and palladium are used similarly in automotive catalytic converters.)

However, available supplies of recyclable metals fluctuated very little.

Down the Road
“I don’t foresee any softening in the prices of gold, platinum or palladium,” Rockett asks. His outlook for 2013 is that all of the precious metals will fluctuate in roughly the same price ranges that they moved in late in 2012.

“Will they all lose $100 an ounce?” Rockett says. “I’d say no.” He bases his outlook on supply and demand. “The market for precious metals, fundamentally, is economics driven,” he continues.

Rockett notes that there might be a dozen reasons for the price of gold—or any material—to move up or down. People can point to each or any of those factors and be correct in their analysis.

One of those factors is politics. Whalen notes that all metals will move one way or the other in the postelection climate. “Supply and demand plays a big role,” Whalen says, “but other factors like regulations [and] political outlook affect prices.”

Where the price of gold, silver, platinum and palladium go in 2013 is anyone’s guess. Most industry sources say that if they could pick metals prices with any accuracy and consistency, they would be on a beach somewhere sipping umbrella drinks.

For commercial recycling operations, the tried-and-true approach of being conservative in outlook and working the margin game remains the best approach in 2013. While it is fun to overlay charts of copper price movements on gold prices, or to compare silver price movement with that of palladium, the truth is that the market sets commodity-specific prices every morning and closes in the evening at a level specific to that metal. Trying to play a guessing game based on price movement of other commodities is for the speculator—not for the recycler, who is in business for the long-haul.

The author is a contributing editor to Recycling Today based in Cleveland. He can be contacted at curt@curtharler.com.