Gold is mined on all continents except Antarctica, refined in many countries and distributed in bullion and coins everywhere. This geographical diffusion in any shocks can not only meet demand, but also ensure market stability, experts at the World Gold Council (WGC) are sure.
But the scale of the COVID-19 pandemic has led to unprecedented disruption across the chain. “We believe this global gold supply chain has not been spared, however, it has demonstrated its resilience and underscored the key strength of the market,” the WGC said.
DOWN BUT NOT STOP
Gold must flow seamlessly where it is needed and, just as important, in the desired form. The market’s ability to do this was clearly demonstrated in 2013 when a sharp drop in the price of gold triggered a wave of demand in eastern countries. The supply chain has allowed London Good Delivery (LGD) bars to be smelted into kilogram bars in Europe – the preferred size in Asia – and further “travel” to meet this demand.
Unlike 2013, and any other similar event in modern history, the COVID-19 pandemic intervened not only in consumption, but also in mining and production. But the dispersal of industry around the world helped to protect the primary supply of gold from more serious consequences.
Limited sources. In the first quarter of 2020, along with state local measures aimed at preventing the spread of the coronavirus, many projects around the world have scaled back or suspended operations. Production decreased in China, South Africa, Peru, but some of the production was offset by a more stable operation of the industry in other large mining regions.
And while quarterly gold production fell 3% from the same period a year earlier – representing the lowest production since 2015 and the largest drop since the first quarter of 2017 – the decline was relatively modest given the scale of the pandemic.
Quarantine measures continue in some countries, but they are gradually eased and the affected mines are starting to ramp up production.
Recycling, which supplies 25% to 30% of gold to the market, was also hit by the pandemic, declining to 4% year on year in the first quarter, to its lowest level in two years.
Under normal conditions, a 6% increase in the dollar price of gold leads to an increase in the flow of secondary metal to the market. But this “relationship” has been weakened by quarantine measures around the world – the usual physical exchange of gold for cash was practically stopped as the population was instructed to stay at home and jewelry retailers were forced to temporarily shut down.
Currently, quarantine measures are beginning to weaken, and it can be expected that the volume of gold recycling will increase.
Limited downstream. In the first quarter, some refineries were also shut down, such as Valcambi, Argor-Heraeus and PAMP – the three largest processors in the world, due to the coronavirus, have ceased operations since March 23. The subsequent reduction in global refining capacity – by about 1,500 tons of gold per year – meant that the market would not be able to get the bullion and coins in the required quantities and on time.
The Rand Refinery, the only LBMA-accredited facility in Africa, has also shut down its capacity due to quarantine.
Coin makers, including the United States Mint, which in mid-April suspended the minting of Eagle and Buffalo gold coins at its West Point plant, were hit in the aftermath.
At the same time, the Perth Mint, unaffected by the pandemic, increased capacity to meet part of the growing demand. And in early May, Valcambi, Argor-Heraeus and Rand Refinery announced that they had resumed production after easing quarantine measures, further helping ease supply chain tensions.
NIGHTMARES OF LOGISTICS
The Dore gold obtained at the mine must go first to the refinery and then to the final producer. This usually happens by means of special road and air transport. But border closures and a sharp cut in commercial flights have upset this circulation of gold.
The significant reduction in the available cargo space on the aircraft led to intense competition, with medical equipment and basic necessities being a priority. In some cases, it was necessary to fully charter aircraft carrying only cargo. Consequently, the cost of transporting gold has increased significantly, which was the main reason for the widening of the difference between its spot price on the London OTC market and the futures price on COMEX.
DEVIATIONS IN SUPPLIES OF BARS AND COINS
Amid low and negative global interest rates and anemic outlook for economies, the sudden outbreak of COVID-19 has pushed investment uncertainty to new highs.
Investors were looking for safe assets, especially in Western markets such as the US and Europe.
Under normal circumstances, this requirement can be met from a variety of sources. But amid the pandemic, complications have arisen in the supply of London Good Delivery (LGD) bullion, retail bullion and coins.
LGD’s stocks of bullion have confronted supply problems. In the wholesale market, bullion availability and liquidity were relatively independent of supply chain problems. Trading volumes in the London OTC market remained high in March, increasing by 85% year-on-year and exceeding $ 1.5 trillion.
Unlike COMEX futures, where gold is traded in kilogram bars, most gold ETFs build their holdings in LGD bars (approximately 400 troy ounces = 12.4 kg) and have benefited from ample supply.
In the first quarter, gold ETF inflows totaled 298 tonnes, the highest quarterly inflow in four years. During April and May, similar flows continued, which was supported by a large stock of LGD bullion – at the end of January there were a record 8263 tons of gold in London, valued at $ 426 billion.
Less bullion, higher premium. In retail, the situation was significantly different. Significant stocks of small bars (1 kg or less) and coins ended up in eastern markets, where demand was low due to COVID-19 throughout the quarter. Transport problems have limited the flow of this gold to meet the increased demand in Western markets.
Large LGD bars are typically shipped to LBMA-approved vaults using established routes and scheduled flights, while the availability of small gold bars and coins depends on a complex and separate supply chain as they are distributed to retailers and private consumers around the world.
Thus, the demand for coins in the first quarter jumped 36% year on year. In March, the US Mint reported that sales of Eagle coins were 151.5 thousand ounces, the highest monthly figure since July 2015, followed by a further 105 thousand ounces sold in April. The Perth Mint also reported a significant jump in gold bullion and coin sales in March and April.
Logistic supply problems also led to depletion of stocks at some dealerships, leading to long expectations and high premiums. Premiums for the one ounce American Eagle gold coins reportedly jumped to over $ 130 (8% above the spot), their highest level in six years, up from an average of $ 25 per ounce (2% above the spot). ) for the first two and a half months of 2020.
Of course, gold hasn’t been alone in trouble due to the COVID-19 pandemic and the response. But overcoming these challenges has demonstrated the resilience of the gold supply chain.
Today, due to quarantine measures, gold mining and processing have decreased only slightly. And the reserves of LGD bars, as well as the adaptability of market participants, supported the high investment demand for gold.
The relaxation of some of the COVID-19 restrictions has eased the pressure on gold supply slightly recently, and while the gap between the London OTC market and the COMEX remains high, we expect the imbalance due to supply chain problems to narrow or even be eliminated soon. ensuring the continuous, uninterrupted and efficient operation of the entire market.
Gold Miner Bulletin