Gold’s Global Supply Chain a Plus During Pandemic
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Gold’s Global Supply Chain a Plus During Pandemic

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By MBN Staff | MBN staff - Thu, 05/28/2020 - 16:49

The World Gold Council (WGC) has published a report arguing that the global gold supply chain has the ability to repel COVID-19’ unprecedented shocks. The report explores the following three key areas: “first, how the different components across the supply chain have been affected; second, the impact on the flow of gold through the supply chain; third, how the disruption has affected investment demand.”

The gold supply chain is diversified across multiple components, located in different countries in the world. WGC explains that the process begins with mining or recycling, followed by processing and, lastly, by refining into either London Good Delivery (LGD) bars or smaller bars. The first kind of bars go into the vaults of the London Bullion Market Association and of central banks. The smaller bars are sold to commercial banks, wholesalers, retailers and consumers.

COVID-19 has hit miners across the world, including those located in major producing countries like China, South Africa, Peru and Mexico. Mines were shut down for several weeks in an effort to minimize the spread of the virus. However, WGC points out that continued production in other major regions partly offset the supply halt. “While total gold production fell 3 percent year-on-year in 1Q20 – representing the lowest level of production since 2015 and the largest year-on-year fall since 1Q17 – this decline was relatively modest given the scale of the pandemic.” With respect to recycling, which normally accounts for roughly a quarter of gold production, “it was also affected in 1Q20, falling 4 percent year-on-year to its lowest level in two years.” Moreover, WGC explains that regarding downstream capacity, refineries that remained in operation ramped up their activities, partly compensating those that had to temporarily shut down. 

WGC goes on to explain that the pandemic not only disrupted the operations of producers and refiners. “Stringent travel restrictions imposed by governments globally to combat the spread of COVID-19 impeded the flow of gold along the chain.” The report elaborates, saying that “doré produced at a mine site must be transported to refiners who then ship refined gold to markets that need it. This involves a sophisticated and highly secure transportation network, typically moving gold by road and air.” Less space for transporting gold in airplanes and other vehicles pushed logistics prices up, partly accounting for several market distortions. Nevertheless, WGC notes that liquidity issues have been mostly localized. “Overall liquidity in the gold market remains robust.”

It remains to be seen how logistics disruptions will affect Mexico’s gold producers. As reported by CAMIMEX, Mexico’s foremost mining association, approximately 75 percent of mining production in Mexico is obtained via doré, while the rest is mainly contained in lead and zinc concentrates. Installed local refining capacity has proven to be insufficient in recent years, meaning that miners with assets in Mexico must ship a hefty amount of their production elsewhere for processing.

Finally, WGC looks at how pandemic-related disruptions have affected investment demand. Paper currencies have become less appealing due to the trillions that governments in rich countries have doled out in stimulus. Also, the Fed’s interest rate is scraping zero and the global growth outlook is grim. These circumstances have made investors rush to gold as a safe-haven asset. The problem, as WGC notes, is that “in the current environment a divergence in the supply of LGD and retail bars and coins emerged.” However, the strong “stock of LGD bars countered supply issues: in the wholesale market, the availability and liquidity of LGD bars was relatively unaffected by supply chain issues.”

WGC goes on to explain that at the retail level the situation was very different. Shortage of coins and small bars has become a problem for small buyers. An article published in Bloomberg says that “surging demand and disruptions from the coronavirus pandemic have created a shortage of the small gold bars most popular with consumers. Those who do manage to get their hands on metal have to pay up well above the per-ounce prices being quoted on financial markets in London and New York.” Nonetheless, WGC expects that “such elevated premiums should narrow substantially, as issues in the gold supply chain begin to ease: anecdotal evidence seems to confirm this.”

In conclusion, WGC remarks that, “while gold’s supply chain has not escaped unscathed, it has demonstrated resilience in the face of these challenges, highlighting a key strength of the market.” Gold is produced, refined, sold and bought in every corner of the world. In times of COVID-19 that has proven to be one of its main strengths.

Photo by:   Pxfuel

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