COMMENTARY – The advancements in China’s gold buy-back market

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Recycled gold is an important source of gold supply.1 In 2018, the volume of recycled gold reached 1,168t, accounting for over 25% of total supply globally. Recycled gold is also an important source of supply in China, amounting to 146t, or 20% of domestic supply in 2018. Recently, China’s recycled gold market has experienced some exciting developments which could improve the efficiency and transparency of the industry.

Traditional methods of retail gold recycling

Individuals usually go to banks, pawn shops (large or small) and jewellers to sell their gold products in China. Gold items sold to these channels are then passed to refineries approved by the Shanghai Gold Exchange for further processing.  

Each of these channels has its advantages and disadvantages. For instance, pawn shops accept almost all gold items, while banks have stricter requirements on product types (gold investment products only), brands, certificates and physical condition. Also, not all branches of banks and jewellers’ offer buy-back services. In most cases, jewellery retailers encourage trade-ins instead of buy-backs.

Costs across the different channels can vary significantly. According to our contacts in the industry, banks usually charge around 4% of the product value when buying back gold bars, while pawn shops take at least 10%. Items of gold jewellery bought by pawn shops are often discounted at an even higher level. 

The disadvantages of recycling gold through these channels – such as high cost and inconvenience –have made it difficult for physical gold investors to liquidate. And this difficulty is, in itself, a potential barrier to physical gold demand among investors for whom a quick and easy sale is a top priority.  

Online gold recycling 

But this barrier is being challenged. The internet has been playing an increasing role in China’s gold recycling market since the launch of the “Internet plus” initiative in 2015.2 In 2018, online platforms started to provide low-cost, transparent and convenient gold buy-back services with virtually no restrictions on forms of gold products. The process of selling gold back on-line is much simpler than through the traditional channels.

Online platforms or mobile apps only charge around 2% (investment bars) to 4% (jewellery) of the total product value, based on Shanghai Gold Exchange Benchmark price. This is significantly lower than traditional channels. Online gold recycling platforms also offer a door-to-door pick up service – sellers do not even need to leave their homes. All of these advantages are key to improving gold market’s liquidity.  

The first automatic gold recycling vending machine in China

Recently, an automatic gold recycling vending machine (or recycled gold ATM), designed by one of the leading gold refineries in China, was launched late May. With the ability to recycle gold products and dispense cash in just a few minutes, it could be an important step in the industry.

The machine carries a more symbolic than practical meaning: for individuals, selling gold has never been easier. And this new invention may grab the attention of the young generation and help them to realise the intrinsic monetary value of the gold jewellery pieces they are wearing. Gold demand in China could also benefit from all these new developments in gold recycling.

The need for regulations

There is no specific regulation concerning online gold recycling business, creating credit risk in the gold recycling process. To gain credibility, online recycling platforms must co-operate with credible banks and certified institutions (e.g. accredited refineries of SGE). Moreover, regulatory guides and requirements for establishing such platforms should be considered by the authorities.  More clearly defined requirements and responsibilities of online gold recycling platforms could be key to the healthy and sustainable development of the industry.     

Nonetheless, recent developments in gold recycling have provided more options to owners of physical gold. The liquidity these new gold recycling options bring could be a key contributor to the growth of overall gold demand in China in the long run.

Ray Jia, the author, is Research Manager with the World Gold Council (WGC). The article appears here courtesy WGC. It first appeared on GoldHub, the WGC blog.

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