The gold that shops buy never comes back: the money is in smelting

The gold that shops buy never returns to the counter

Where does the gold that gold-buying shops purchase actually go? The question is not rhetorical. One customer visited three shops in his area and not a single one sold a coin or a bar. They only bought. That asymmetry — a counter open to receive but closed to hand over — is the clue that explains the business: the metal never returns to the public, it heads to smelters and wholesale markets.

The most common explanation in the trade is that second-hand gold is melted down and turned into investment pieces that are placed abroad. Most of the recovered gold leaves Spain, according to the version held by those who operate in this market. The business is not in retail resale, but in the differential between what is paid to the individual and what is obtained from the refined metal.

The price you are paid and the price it sells for

The key lies in the margin. One concrete case: a shop offered a Krugerrand at 43 euros per gram when the reference price of gold was around 37 euros per gram. The potential buyer calculated that the piece carried a premium of almost 16%. The same establishment paid 0.20 euros per gram for silver, a figure that bears no relation to the metal's value on the international market.

The Krugerrand, moreover, is not pure 24-karat gold, but 22. Whoever sells one to a gold-buying shop receives scrap price, not the price of an investment coin. The difference between what is paid to the unsuspecting seller and what is obtained afterwards is the heart of the business.

Why don't they sell to the public?

Because the end buyer is not the neighbour. The accumulated gold is sent to refineries and smelters that turn it into bars or investment coins. Those pieces are placed on international markets, where the buyer is an institutional investor or a private individual from another country. The Spanish gold-buying market acts as a collection network for physical metal that is then inserted into the wholesale circuit.

Some argue that this flow responds to an accumulation strategy: someone is withdrawing gold from the retail market to speculate with it when the price rises. The suspicion is unproven, but it fits with the absence of supply in the shops. If the gold were being kept to sell at a higher price later, it would make no sense to put it on sale now.

Gold's role and the gold that doesn't exist

The debate drifts towards the derivatives market. On the COMEX, gold contracts are traded that, according to circulating estimates, far exceed the available physical metal. Most of the gold moving in the markets is paper, promises of future delivery that do not correspond to real bars. Gold-buying shops feed the physical part of that system, the part that gives credibility to the rest.

The question left hanging is how much gold there really is. A documentary cited in the conversation states that 107 central banks hold 30,000 tonnes, a figure that leaves out most of the mined metal. Where are the other 130,000 tonnes? The answer is not on the counters.

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In the end, the gold-buying business is as simple as it is old: buy cheap from those who need money and sell dear to those who want to invest. What is not seen is the journey in between. And while the individual keeps asking why they won't sell him a coin, the metal is already on its way somewhere else.