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A Closer Look at the Effect of Lower Gold Prices

Gold_Bars 2Earlier this week, I posted a blog on the nearly 30 percent drop in gold prices in 2013. That blog argued that lower gold prices are generally good for two reasons. First, they reduce the total amount of gold mining, which reduces pollution. Second, lower demand for gold as an investment means that more of the gold supply will be used to make jewelry. That increases jewelry consumers’ power to press for a more ethical and eco-friendly gold supply chain.

 

Now I’d like to follow up by asking another question. For socially-conscious consumers, are there any negative consequences to lower gold prices?

 

One issue worth spotlighting is the relationship of gold prices to the recycled gold supply. Greater use of recycled gold is one of the best ways to reduce the pollution caused by gold mining. But what happens when gold prices go down? The evidence suggests that less gold jewelry is turned in for recycling because there’s less incentive for people to part with their old or unused jewelry.

 

Once again, here’s that chart showing how gold prices have risen and fallen in the past 10 years. (Thanks again to the World Gold Council for supplying so much detailed data to the public.)

 

WGC-Gold-price

 

Now here’s a chart showing the percentage of recycled gold in the gold supply during that time. “Recycled” here includes only gold taken from products (like jewelry and electronics) that has been re-refined and made into gold bars. It doesn’t include previously mined gold sold by investors or central banks.

 

Recycled Gold Percentage

 

Note that the percentage of the gold supply consisting of recycled gold went way up at the height of the downturn in 2009 and has come down gradually since then. It doesn’t totally match the rise and fall of gold prices—gold hit its peak of $1900 per ounce in 2011—but there’s a close correspondence.

 

From an environmental perspective, it’s a good thing that there was so much gold recycling during the gold boom. It offset a lot of the pollution that could have resulted. But that raises the question: did all that recycling actually make the gold boom good for the environment? In other words, might there be less need gold mining overall when gold prices are high because people remember to recycle their gold jewelry?

 

Here, the answer is almost certainly no. This next chart shows the total amount of gold supplied by the mining sector from 2004 to 2012. Despite increases in the recycled gold supply, gold mining did what you’d expect when prices skyrocketed: it rose too, although maybe not as much as might have been predicted. Again, an increase in recycled gold supplies probably limited the need for new mining. It also might be true that gold mining companies can’t turn on production like a spigot. It can take time to ramp up gold mining or open new mines. (This may also explain why, at least in 2013 as gold prices sank, mining companies didn’t cut production. They may still be catching up production to past price increases.)

 

Gold supply from mining

 

OK, so it’s pretty clear that lower gold prices are better for the environment, despite the decline in gold recycling. And by the way, the decline in recycling doesn’t have to be as large as it’s been, or permanent. With jewelry resuming its traditional role as the primary use for gold, jewelry consumers now have a great opportunity to carve out a larger role for recycled gold in the gold market.

 

But getting back to the issue of lower gold prices, there’s still one more important question. What about the economic effects of the price drop? Doesn’t a price decline mean less profit for gold mining companies operating in developing countries? And what about artisanal gold miners, the miners who mine for gold independently of the big mining companies and who are often disadvantaged? Won’t they make less money if gold prices go down?

 

This question gets into the larger debate about whether gold mining’s impact is, on balance, positive or negative. Certainly, gold mining contributes positively to the GDP of developing countries. But it’s also necessary to take into account the human and environmental costs of gold mining—whether in terms of landscapes destroyed, rivers and oceans polluted, miners’ health harmed, communities disrupted, civil wars worsened, or children’s rights ignored.  These downsides don’t all apply in every situation. But overall, they take a heavy, heavy toll.

 

On balance, therefore, our position at Brilliant Earth is that gold mining companies and artisanal miners need to adopt more ethical and eco-friendly mining methods. Until they do, the less gold mining, the better—with one exception. There should be a way for artisanal gold miners in developing countries to earn a decent living, assuming they follow basic labor and environmental standards. That is why, besides offering jewelry made of recycled precious metals, we offer gold jewelry certified under the new Fairmined gold standard. The Fairmined gold system encourages responsible mining practices and ensures that artisanal miners are paid fairly.

 

There are clearly all sorts of consequences when gold prices change. Higher gold prices lead to more gold recycling and more profit for some gold mining companies and miners. But lower gold prices mean less gold mining (or less there might have been) and more jewelry consumer influence over the gold mining industry. Taking all this into account, our belief is lower gold prices are a net positive for the planet and its people.

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Comments:

Isaac Says:
January 28th, 2014 at 10:39 am

While I agree there is a relationship of gold prices to the recycled gold supply. You need to understand that in the future this relationship might not continue to hold true.
This is because over the last sever years people learned that there was a way for them to recycle gold, they already recycled the gold that they own. Ask anyone in the cash-for-gold business & they will tell you that it is almost finished. Everybody & their grandmother already sold the gold. Yes if gold spike up a few hundred dollars some more might come out of the woodwork but its pretty much done with already.


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