A mirror made only of recycled gold
Given its unique market characteristics, gold is an important component to consider in a portfolio. This metal can have defensive properties, it is generally very profitable in times of economic crisis, and it generally responds well to inflation, which can pay off during periods of economic growth. As with all important portfolio components, we must consider its responsible sourcing and environmental, social and governance (ESG) factors.
ESG issues are complex and multidimensional
When it comes to commodities like gold, it’s often difficult to know what ESG factors are relevant. Indeed, the activities of extracting, processing and even storing raw materials can have serious impacts on the environment and local communities. Furthermore, improving environmental standards may come at the cost of social standards (and vice versa). Each investor/consumer may have a slightly different view of ESG factors. In a previous blog post, we talked about the concept of responsible sourcing and the standards set by the London Bullion Metals Association (LBMA). .
Preferring only recycled gold is a false lead
Some market participants promote recycled gold as the ultimate ESG-friendly gold. Indeed, gold is infinitely recyclable and has the highest recycling rate of all metals because most of the gold produced is easily mobilized. Only 2% of all gold mined since its discovery remains unaccounted for  for being dropped or lost track of. Because gold is so expensive to dispose of, its recycling rates are high.
According to the World Gold Council, 205,238 tons of gold have been mined in history through 2021, about two-thirds of which has been since 1950. . Since gold is infinitely recyclable, almost all metal still exists in one form or another. The resulting reserves represent 60 years of current mine production. Knowing that most of this gold (85%)  held by people and central banks and of high quality (private gold held for investment purposes: 45,456 tons, jewelry: 94,494 tons, central banks: 34,592 tons), newly mined gold (3,560.7 tons in 2021 ) can be recycled very easily. ) is just over 2% of these gold reserves that can be easily obtained or recycled “in the short term”.
Not only is nearly all gold already recycled, but the vast majority of gold processed by refineries that meet LBMA Good Delivery standards is recycled. . All gold on the London OTC bullion market (and therefore bullion-backed gold ETPs) meets LBMA Good Delivery standards. As a result, the average LBMA ingot should already have a high recycled content.
The above figures show that it is almost impossible to significantly increase the volume of recycled gold. Therefore, choosing a strategy that only invests in recycled gold to improve the ESG factors of gold bullion may have zero impact on the market and the environment. This is a cheap facade size. At a microeconomic level, bullion emits few greenhouse gases (GHGs) if we consider only mid-chain and downstream emissions, but the entire life cycle of the bullion (ie, including extraction of the source material) emits more. GHG emissions. People who want to change practices in the gold sector should focus their efforts elsewhere.
Ignoring newly mined gold will lower overall ESG standards
Not all gold demand can be met through recycling. Without pressure from consumers and investors and oversight from miners and refiners, newly mined gold is unlikely to improve its ESG performance. In our view, the only way to improve environmental and ethical standards across the gold value chain is to address problems at source and ensure that new gold entering the system meets the highest possible ESG standards (while offsetting remaining negative impacts). We believe that investors can influence newly minted gold. If they simply buy recycled gold and ignore the rest of the market, they lose their influence.
Excessive recycling can increase preservation and provenance risks
Purely recycled gold not only does not have a significant positive impact on the environment, but also encourages excessive gold loss, increasing the risk of gold from dubious sources entering the reserve. intended for recycling. Although the LBMA and the Responsible Jewelery Council (RJC) encourage the use of robust processes that exclude gold from questionable sources, they cannot control all gold. . Traceability can be lost, for example, after several recyclings, and gold from dubious sources can begin to flow into the “legitimate” reserve.
Data from Metals Focus shows that the main source of recycled material is gold scrap (28% of total gold supply over 2010-2021). . Scrap gold is defined as all gold used for jewelry, electronics, dentistry, decorative applications, and various industrial and medical purposes. Bullion (newly minted or cast) cannot be scrap gold by definition because it remains in bullion form and is never converted into a manufactured product. Material that is part of circular flows between waste processing, treatment and producer  , are generally not included in recycling statistics. The line between processed gold and scrap gold is often blurred. According to the Alliance for Responsible Mining, the main standards adopted by the jewelry industry consider scrap production as an eligible material for recycled gold (although we’re not sure if it meets the standard applied by RJC members). The Alliance for Responsible Mining says that some production, particularly in the luxury sector, can produce more than 50% scrap gold, increasing the risk that recently mined gold will only be presented as recycled product. .
In summary, the best way to integrate ESG factors into financial products backed by physical precious metals is to address the problem at source and ensure that the product optimizes and mitigates the negative impacts of procurement/primary mining throughout the value chain. By incentivizing the production chain to minimize and offset negative impacts and greenhouse gas emissions, investors can have a real impact on gold in circulation.