Like many other sectors, the mining industry was affected by the COVID-19 pandemic — which, in turn, influenced precious metal asset availability and prices, says Kevin DeMeritt, founder and chairman of Lear Capital.
Although lower energy prices and currency reductions in some countries meant mining companies’ margins could have increased, operations were impeded by factors such as supply shortages, which raised certain costs, and mine access challenges — government-instituted closures occurred, for instance, in Argentina, Canada, Mexico, Peru, and South Africa, according to McKinsey & Company research.
Those dilemmas, McKinsey says, metered much of the positive effect energy savings and currency depreciation might have ultimately had on companies’ margins.
Travel-related changes also caused issues for the industry. With fewer commercial flights — one of the main methods typically used to transport gold — and available cargo space on planes being used for personal protective equipment and medical devices, the cost of delivering gold increased, according to data from global asset manager Sprott.
The London Bullion Market Association reported global gold production declined by 4% in 2020. In 2021, despite a 2% year-over-year increase in mine production, recycling dropped off sharply, so the total supply of gold decreased, according to the World Gold Council’s tally.
Global Supply Issues’ Impact on Gold’s Value
The reduced availability of gold during the pandemic resulted in a greater demand for the metal, as well as higher prices, which was no surprise to Kevin DeMeritt.
“If you add an increase in demand onto that physical supply that’s fairly limited, usually, what you’re going to find is prices go up,” he says. “It’s economics 101.”
Between Jan. 1 and Aug. 14, 2020 — a time period that included the initial months of the pandemic — gold prices increased 28%, McKinsey & Company says.
According to Sprott, the COINGEAG Index, which measures the price premium on 1-ounce Gold Eagle coins, spiked during the early stages of the pandemic lockdown — a potential indication, the asset management organization says, of greater retail investor-related demand for physical gold.
In recent years, central banks’ interest in obtaining gold has placed additional pressure on the in-circulation supply.
As Lear Capital reported, a number of countries were intent on snatching up gold in 2022. By the end of that year, central bank-related demand for the precious metal had reached a record level, and was up 152% from the previous year.
Spot gold prices, too, rose to a momentous level — their highest in more than a year — surpassing $2,000 in the spring of 2022, according to U.S. News & World Report.
“Central banks entered the market in 2022,” Kevin DeMeritt says. “They purchased a quarter of all the mining supply, which is a huge jump from [their previous activity]. Russia has sold off U.S. Treasurys. They’ve been replacing it with gold; same thing with China. They get to hold gold, and that’s going to offset some of the inflation pressure on paper debt they hold.”
Gold that’s bought by central banks can have a particular impact on the available supply, DeMeritt says, because it likely won’t be put back into circulation quickly.
“Central banks hold that metal for 10, 15, 20 years at a time,” he says. “That metal is gone — and you’re not talking about small amounts.”
Other Assets Underwent Supply-Related Rises
In addition to gold, silver and platinum have also been in high demand in recent years, and faced supply challenges.
When elements like elevated labor and electricity costs caused mining difficulties in 2018 in South Africa, for instance, the production of platinum metals declined by 4%.
Platinum production also declined in 2020, falling by 20 metric tons. Prices for the precious metal rose fairly steadily, though, after the onset of the pandemic from spring through the end of the year, according to Lear Capital data.
The worldwide demand for silver caused consecutive shortages of the metal in 2021 and 2022. Last year’s 18% increase in demand, coupled with an essentially flat supply of the precious metal — the byproduct of a small bump in recycling activity being offset by reduced mining production — resulted in a pronounced silver deficit, according to a Silver Institute report.
“Silver has become a highly in-demand asset, yet the available supply hasn’t vastly increased,” Kevin DeMeritt says. “Numerous investors view silver as a hedge against inflation because it has tended to increase in price during periods of high inflation; silver is also needed for industrial and clean energy processes.”
In the future, we may experience additional gold and other precious metal supply constraints. As Kevin DeMeritt points out, even in the best conditions, mining is subject to some physical limitations.
“You can only pull so much gold out of the ground,” the Lear Capital founder says. “Even with new technology, we’re having to go deeper and deeper inside the Earth to go get it. That technology is just [adjusting for not] having the gold closer to the surface.”
Further shortages, Kevin DeMeritt says, could possibly push prices higher for physical precious metal assets such as coins — a trend we saw during the pandemic.
“If you go to the U.S. Mint as a dealer and purchase a silver American 1-ounce Eagle [coin], usually you would pay $2.50 over the spot [silver] price for that coin,” DeMeritt says. “During the pandemic, you saw incredible demand for gold and silver; and they couldn’t run the mint as much as they wanted to. That $2.50 premium skyrocketed to $14 and $15. If certain types of coins have limited mintages and an increase in demand, you not only get the price of silver moving up — you can get the premium on that coin moving up because there’s just not enough of them out there.”