The Impact of COVID-19 Shutdowns on the Gold Supply Chain - Visual Capitalist
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The Impact of COVID-19 Shutdowns on the Gold Supply Chain

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Gold Supply Chain Covid-19

Sprott

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:

  1. Production
    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.
  2. Delivery
    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.
  3. Refinery
    Refineries depend on gold production for input. A reduction in incoming gold and the suspension of labor work shortened the supply of refined gold.
  4. 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.
  5. 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:

  1. 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.
  2. 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.
  3. 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.
  4. 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.

  1. Processing:
    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.
  2. Refining:
    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.
  3. Transportation:
    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.

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.

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Energy

Visualizing China’s Dominance in Clean Energy Metals

Despite being the world’s biggest carbon emitter, China is also a key producer of most of the critical minerals for the green revolution.

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Visualizing China’s Dominance in Clean Energy Metals

This was originally posted on Elements. Sign up to the free mailing list to get beautiful visualizations on natural resource megatrends in your email every week.

Renewable sources of energy are expected to replace fossil fuels over the coming decades, and this large-scale transition will have a downstream effect on the demand of raw materials. More green energy means more wind turbines, solar panels, and batteries needed, and more clean energy metals necessary to build these technologies.

This visualization, based on data from the International Energy Agency (IEA), illustrates where the extraction and processing of key metals for the green revolution take place.

It shows that despite being the world’s biggest carbon polluter, China is also the largest producer of most of the world’s critical minerals for the green revolution.

Where Clean Energy Metals are Produced

China produces 60% of all rare earth elements used as components in high technology devices, including smartphones and computers.

The country also has a 13% share of the lithium production market, which is still dominated by Australia (52%) and Chile (22%). The highly reactive element is key to producing rechargeable batteries for mobile phones, laptops, and electric vehicles.

China's ShareExtractionProcessing
Copper 8%40%
Nickel 5%35%
Cobalt 1.5%65%
Rare Earths 60%87%
Lithium13%58%

But even more than extraction, China is the dominant economy when it comes to processing operations. The country’s share of refining is around 35% for nickel, 58% for lithium, 65% for cobalt, and 87% for rare earth elements.

Despite being the largest economy in the world, the U.S. does not appear among the largest producers of any of the metals listed. To shorten the gap, the Biden administration recently launched an executive order to review the American strategy for critical and strategic materials.

It’s also worth noting that Russia also does not appear among the top producers when it comes to clean energy metals, despite being one of the world’s leading producers of minerals like copper, iron, and palladium.

Low Regulation in the Clean Metal Supply Chain

While China leads all countries in terms of cobalt processing, the metal itself is primarily extracted in the Democratic Republic of Congo (DRC). Still, Chinese interests own 15 of the 17 industrial cobalt operations in the DRC, according to a data analysis by The New York Times and Benchmark Mineral Intelligence.

Unfortunately, the DRC’s cobalt production has been criticized due to reports of corruption and lack of regulation.

Part of the Congolese cobalt comes from artisanal mines with low regulation. Of the 255,000 Congolese artisanal miners, an estimated 40,000 are children, some as young as six years old.

The Rise of Clean Energy Metals

The necessary shift from fossil fuels to renewable energy opens up interesting questions about how geopolitics, and these supply chains, will be affected.

In the race to secure raw materials needed for the green revolution, new world powers could emerge as demand for clean energy metals grows.

For now, China has the lead.

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Energy

The Periodic Table of Commodity Returns (2012-2021)

Energy fuels led the way as commodity prices surged in 2021, with only precious metals providing negative returns.

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commodity returns 2021 preview

The Periodic Table of Commodity Returns (2022 Edition)

For investors, 2021 was a year in which nearly every asset class finished in the green, with commodities providing some of the best returns.

The S&P Goldman Sachs Commodity Index (GSCI) was the third best-performing asset class in 2021, returning 37.1% and beating out real estate and all major equity indices.

This graphic from U.S. Global Investors tracks individual commodity returns over the past decade, ranking them based on their individual performance each year.

Commodity Prices Surge in 2021

After a strong performance from commodities (metals especially) in the year prior, 2021 was all about energy commodities.

The top three performers for 2021 were energy fuels, with coal providing the single best annual return of any commodity over the past 10 years at 160.6%. According to U.S. Global Investors, coal was also the least volatile commodity of 2021, meaning investors had a smooth ride as the fossil fuel surged in price.

Commodity2021 Returns
Coal160.61%
Crude Oil55.01%
Gas46.91%
Aluminum42.18%
Zinc31.53%
Nickel26.14%
Copper25.70%
Corn22.57%
Wheat20.34%
Lead18.32%
Gold-3.64%
Platinum-9.64%
Silver-11.72%
Palladium-22.21%

Source: U.S. Global Investors

The only commodities in the red this year were precious metals, which failed to stay positive despite rising inflation across goods and asset prices. Gold and silver had returns of -3.6% and -11.7% respectively, with platinum returning -9.6% and palladium, the worst performing commodity of 2021, at -22.2%.

Aside from the precious metals, every other commodity managed double-digit positive returns, with four commodities (crude oil, coal, aluminum, and wheat) having their best single-year performances of the past decade.

Energy Commodities Outperform as the World Reopens

The partial resumption of travel and the reopening of businesses in 2021 were both powerful catalysts that fueled the price rise of energy commodities.

After crude oil’s dip into negative prices in April 2020, black gold had a strong comeback in 2021 as it returned 55.01% while being the most volatile commodity of the year.

Natural gas prices also rose significantly (46.91%), with the UK and Europe’s natural gas prices rising even more as supply constraints came up against the winter demand surge.

Energy commodity returns 2021

Despite being the second worst performer of 2020 with the clean energy transition on the horizon, coal was 2021’s best commodity.

High electricity demand saw coal return in style, especially in China which accounts for one-third of global coal consumption.

Base Metals Beat out Precious Metals

2021 was a tale of two metals, as precious metals and base metals had opposing returns.

Copper, nickel, zinc, aluminum, and lead, all essential for the clean energy transition, kept up last year’s positive returns as the EV batteries and renewable energy technologies caught investors’ attention.

Demand for these energy metals looks set to continue in 2022, with Tesla having already signed a $1.5 billion deal for 75,000 tonnes of nickel with Talon Metals.

Metals price performance 2021

On the other end of the spectrum, precious metals simply sunk like a rock last year.

Investors turned to equities, real estate, and even cryptocurrencies to preserve and grow their investments, rather than the traditionally favorable gold (-3.64%) and silver (-11.72%). Platinum and palladium also lagged behind other commodities, only returning -9.64% and -22.21% respectively.

Grains Bring Steady Gains

In a year of over and underperformers, grains kept up their steady track record and notched their fifth year in a row of positive returns.

Both corn and wheat provided double-digit returns, with corn reaching eight-year highs and wheat reaching prices not seen in over nine years. Overall, these two grains followed 2021’s trend of increasing food prices, as the UN Food and Agriculture Organization’s food price index reached a 10-year high, rising by 17.8% over the course of the year.

Grains price performance 2021

As inflation across commodities, assets, and consumer goods surged in 2021, investors will now be keeping a sharp eye for a pullback in 2022. We’ll have to wait and see whether or not the Fed’s plans to increase rates and taper asset purchases will manage to provide price stability in commodities.

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