How COVID-19 Shutdowns Impact the Gold Supply Chain
Chains are only as strong as their weakest link—and recent COVID-19 shutdowns have affected every link in the gold supply chain, from producers to end-users.
Increased investor demand for gold coupled with a constrained supply has led to high prices and a bullish market, which has been operating despite these pressures on the supply chain.
Today’s infographic comes to us from Sprott Physical Bullion Trust and it outlines the gold supply chain and the impacts COVID shutdowns have had on the gold market.
The Ripple Effect: Stalling a Supply Chain
Disruptions to the gold supply chain have rippled all the way from the mine to the investor:
Some gold mines halted production due to the high-risk to COVID-19 exposure, reducing the supply of gold. In many nations, operations had to shut down as a result of COVID-19 based legal restrictions.
Strict travel regulations restricted the shipment of gold and increased the costs of delivery as less air routes were available and medical supplies were prioritized.
Refineries depend on gold production for input. A reduction in incoming gold and the suspension of labor work shortened the supply of refined gold.
- Metal Traders
Towards the other end of the gold supply chain, traders have faced both constrained supply and increased cost of delivery. These increased costs have translated over to end-users.
- The End Users
Higher demand, lower supply, and increased costs have resulted in higher prices for buyers of gold.
Gold: A Safe Haven for Investors
As the virus spread around the world threatening populations and economies, investors turned to safe-haven investments such as gold to hedge against an economic lockdown.
This increase in investor demand affected the four primary financial markets for gold:
- Futures Contracts:
A futures contract is an agreement for the delivery of gold at a fixed price in the future. These contracts are standardized by futures exchanges such as COMEX. During the initial periods of the pandemic, the price of gold futures spiked to reach a high of US$70 above the spot price.
- Exchange-Traded Funds (ETFs):
An ETF is an investment fund traded on stock exchanges. ETFs hold assets such as stocks, bonds, and commodities such as gold. From the beginning of 2020 to June, the amount of gold held by ETFs massively increased, from 83 million oz to 103 million oz. The SPDR Gold Trust is a great example of how the surge in ETF demand for gold has played out—the organization was forced to lease gold from the Bank of England when it couldn’t buy enough from suppliers.
- Physical Gold for Commerce and Finance:
The London Bullion Market Association (LBMA) is a market where gold is physically traded over-the-counter. The LBMA recorded 6,573 transfers of gold amounting to 29.2 million oz ($46.4 billion)—all in March 2020. This was the largest amount of monthly transfers since 1996.
- Coins and Small Bars:
One ounce American Gold Eagle coins serve as a good proxy for the demand for physical gold from retail investors. The COINGEAG Index, which tracks the premium price of 1 oz. Gold Eagles, spiked during the early stages of the lockdown.
Each one of these markets requires access to physical gold. COVID-19 restrictions have disrupted shipping and delivery options, making it harder to access gold. The market for gold has been functioning nonetheless.
So how does gold get to customers during a time of crisis?
Gold’s Journey: From the Ground to the Vault
Gold ore goes through several stages before being ready for the market.
Gold must be released from other minerals to produce a doré bar—a semi-pure alloy of gold that needs further purification to meet investment standards. Doré bars are typically produced at mine sites and transported to refiners.
Refineries are responsible for turning semi-pure gold alloys into refined, pure, gold. In addition to reprocessing doré bars from mines, refiners also recycle gold from scrap materials. Although gold mining is geographically diverse and occurs in all continents except Antarctica, there are only a handful of gold refineries around the world.
Once it’s refined, gold is transported to financial hubs around the world. There are three main ways gold travels the world, each with their own costs and benefits:
- Commercial Flights:
Cheapest of the three options, commercial flights are useful in transporting gold over established passenger routes. However, the volume of gold carried by a commercial flight is typically small and subject to spacing priorities.
- Cargo Planes:
At a relatively moderate cost, cargo planes carry medium to large amounts of gold along established trade routes. The space dedicated to cargo determines the cost, with higher volumes leading to higher shipping prices.
- Chartered Airlines:
Chartered airlines offer a wider range of travel routes with dedicated shipping space and services tailored to customer demand. However, they charge a high price for these conveniences.
- Commercial Flights:
After reaching its destination via air, armored trucks with security personnel move the gold to vaults and customers in financial hubs around the world.
The World’s Biggest Gold Hubs
The U.K.’s bullion banks hold the world’s biggest commercial stockpiles of gold, equal to 10 months of global gold mine output. London is the largest gold hub, with numerous vaults dedicated to gold and other precious metals.
Four of the largest gold refineries in the world are located in Switzerland, making it an important part of the gold supply chain. Hong Kong, Singapore, and Dubai are surprising additions and remain significant traders of gold despite having no mines within their borders.
COVID-19: The Perfect Storm for Gold?
As countries took stringent safety measures such as travel restrictions and border closures, the number of commercial flights dropped exponentially across the world. For the few commercial airlines that still operated, gold was a low-priority cargo as space was dedicated to medical supplies.
This impeded the flow of gold through the supply chain, increasing the cost of delivery and the price of gold. However, thanks to the diverse geography of gold mining, some countries did not halt production—this helped avoid a complete stall in the supply of gold.
The COVID-19 pandemic has created the perfect storm for gold by disrupting the global supply chain while investor demand for gold exploded. Despite heightened delivery risks and disruptions, the gold market has managed to continue operating thus far.
How to Avoid Common Mistakes With Mining Stocks (Part 3: Jurisdiction)
“Location, location, location…”
This famous real estate adage also matters in mining. After all, it’s an industry that is all about the geology—but beyond the physical aspects and the location of a mineral deposit, there are also social and environmental factors that create a mining jurisdiction.
Common Mistakes With Jurisdiction
We’ve partnered with Eclipse Gold Mining on an infographic series to show you how to avoid common mistakes when evaluating and investing in mining exploration stocks.
Part 3 of the series focuses on six signals investors can use to gauge a company’s preparedness for the jurisdictions they operate in.
#1: Geological Potential: Methodical Prospecting or Wild Goose Chase?
It all starts with a great drill result, but even these can be “one-off” anomalies.
Mineral exploration is a methodical process of drawing a subsurface picture with the tip of a drill bit. A mineral discovery is the cumulative effort of years of research and drilling.
The key to reducing this geological risk is to find a setting that has shown previous potential and committing to it. Typically, a region is known to have hosted other great discoveries or shares a geology similar to other mining districts.
Signs of Methodical Prospecting:
- Lots of geological indicators
- Potential for further discovery
- Sound science
#2: Legal Environment: Well-Paved Path or Minotaur’s Maze?
Now that you have identified a region with the prospective geology you think could host a discovery, a company will have to secure the permits to explore and operate any further.
However, a management team that cannot navigate a country’s bureaucracy will face delays and obstacles, costing investors both time and money.
Without clear laws and competent management, a mining company’s best laid plans become lost in a maze with legal monsters around every legal corner.
Signs of a Well-Paved Highway:
- Existing laws encourage mining investment
- Relatively low bureaucracy
- Well-established permitting process
- Legacy of mining contributing to economy
#3: Politics: Professional Politics or Banana Republics?
A good legal framework is often the outcome of politics and stable governance—however so is a difficult legal framework.
The political stability of a nation can turn on one election and so can the prospects for developing a mine. An anti-mining leader can halt a mining project, or a pro-mining leader can usher forward one.
A positive national viewpoint on mining may be enough to lure investment dollars, but local politics may determine the success of a mining company.
Signs of Professional Politics:
- Positive history with mining companies
- Politically stable jurisdiction
- Rule of law respected
- Changes in government have little effect on the mining industry
#4: Infrastructure & Labor: Modern or Medieval
Sometimes it is the discovery of valuable minerals that spurs national development, but this can also happen the other way around, in which development can encourage mineral discovery.
A mining company looking to build a new mine in a country with a tradition of mining will have an easier time. Access or lack thereof to modern machinery and trained employees will determine how much money will be needed.
That said, if a company is looking to develop a mining project in a new mining region, they must be ready to help create the skills and infrastructure it needs to mine.
Signs of a Modern Jurisdiction:
- Developed roads to access and support operations
- Trained labor for staffing and development
- Well-established grid lines and back-up power systems
#5: Community: Fostering Friendship or Sowing Enemies
Mining operations have a significant impact on the local community. Good companies look to make mutually beneficial partnerships of equals with local communities.
Ignoring or failing to respect the local community will jeopardize a mining project at every stage of its mine life. A local community that does not want mining to occur will oppose even the best laid plans.
Signs of a Friendly Relations:
- Operations bring community together
- Local history shows support for mining
- Understanding of local concerns and regional variety
- Company contributes to economic growth and health of the community
#6: Environment: Clean Campsite or One Night Party
There is no way around it: mining impacts the environment and local ecosystems. But, mining operations are a blip on the radar when it comes to Earth’s timeline.
Mine sites can again become productive ecosystems, if a company has the capacity and plan to mitigate mining’s impacts at every stage of the life of a mine—even beyond the life of a mine.
Signs of a Clean Campsite:
- Development plan mitigates environmental damage
- Well-planned closure and remediation
- Understand how communities use their environment
Bringing it together: ESG Investing
These six points outlined above point towards a more complete picture of the impacts of a mining project. Currently, this falls under what is labeled as Environmental, Social and Governance “ESG” standards.
Mining companies are the forefront of a big push to adopt these types of considerations into their business, because they directly affect natural and human environments.
ESG is no longer green wash, especially for the mining industry. Companies that understand and apply these concepts in their business will have better outcomes in the jurisdictions they operate within, hopefully offering investors a more successful venture.
Geology does not change on the human time scale, but bad management can quickly lose a good project and investor’s money if they do not pay attention to the other attributes of a jurisdiction.
Silver Bulls: Visualizing the Price of Silver
Silver has always proved its value throughout history. From ancient coins to jewelry, silver retains its value and goes through tough times.
Silver Bulls: Visualizing the Price of Silver
Silver has always shown its value throughout history. From ancient coins to its use as a global currency during the Age of Discovery, silver has circulated the world to become an important financial asset. Its value continues to shine in the era of the modern finance industry.
Today’s infographic comes to us from New Pacific Metals and it takes a look at the bull markets in silver prices and the future of silver.
Silver Bulls: 1967 to Today
The late 1960s marked the beginning of the end for silver as currency, but also the start of its use in protecting and securing wealth.
In the United States, silver certificates were issued by the Treasury until late 1963, when the $1 Federal Reserve Note was released into circulation. After this, the remaining silver certificates were still redeemable for silver, but this practice ended in 1968.
Since then, silver has had several bull markets in which prices have increased—or as some silver aficionados may argue, the relative value of fiat currency has decreased.
|Percentage Gain||Price Range (USD)*||Duration|
|Silver Bull #1 (1967-68)||49%||$12.50 - $18.58||13 months|
|Silver Bull #2 (1971-74)||274%||$8.45 - $31.59||27 months|
|Silver Bull #3 (1976-80)||544%||$18.40 - $118.50||48 months|
|Silver Bull #4 (1986-87)||40%||$12.47 - $17.48||12 months|
|Silver Bull #5 (1993-95)||39%||$6.47 - $9.00||27 months|
|Silver Bull #6 (2001-11)||827%||$6.01 - $55.69||113 months|
|Silver Bull #7 (2015-Present?)||90%||$15.04 - $28.53||56 months|
*Inflation-adjusted data using CPI from BLS, LBMA Monthly prices
That said, not all silver bull markets are the same, nor do they necessarily coincide with bull markets in the price of gold.
Performance: Gold vs. Silver
Despite being often referred to as “poor man’s gold”, silver has actually outperformed gold in five of the six previous bull markets for gold and silver.
There are two ways to look at how silver prices performed during these timeframes:
- We can compare silver price performance to corresponding peaks and troughs of the gold price
- We can also look at silver prices based on its own peaks and troughs, irrespective of gold
Often, gold prices move first with silver prices quickly following—but then, silver can outperform gold on its own timeline.
|Gold Performance||Silver Performance||Silver Performance|
|Based on gold's peaks and troughs||Based on silver's peaks and troughs|
|Silver Bull #1||40%||-17%||100%|
|Silver Bull #2||455%||144%||432%|
|Silver Bull #3||715%||912%||977%|
|Silver Bull #4||78%||27%||94%|
|Silver Bull #5||28%||63%||75%|
|Silver Bull #6:||636%||904%||45%|
Source: CPM Group (Nominal data)
More recently, prices of silver have been on an upward trend since 2015 and some would say we are in a new bull market for the precious metal. For however longer, it is anyone’s guess.
The Future of Silver?
While the future price direction of silver is difficult to predict, this doesn’t diminish the increasing importance of silver’s role as a metal in an electrified future.
As you can see in the demand breakdown below, silver is not only precious—it is useful:
|Silver Demand (2019)||Millions of Ounces|
|...of which Photovoltaics||98.7|
|Net Physical Investment||186.1|
Source: Silver Institute
While silver’s uses and applications continue to grow, silver remains a safe haven investment from political uncertainty and economic distress—all while being a cheaper and better alternative to gold.
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