The gold price is up 8 percent since January, pushed higher by safe haven demand, but getting the metal where it needs to be has proved challenging.
The gold price is up 8 percent since the beginning of the year, having been pushed higher by its safe haven nature during the global COVID-19 pandemic.
Even so, the yellow metal has faced numerous coronavirus-related challenges, including supply chain bottlenecks and disruptions from New York to Cape Town.
Mined on every continent — except Antarctica — gold is usually insulated from supply chain difficulties. However, the sector’s globalized nature was no match for widespread coronavirus containment efforts.
Attempts to stop the spread of the novel respiratory virus led to mine and project curtailments in some of the largest gold-producing countries around the world.
COVID-19 squeezes gold mines and refineries
In its latest market update, released on Thursday (May 28), the World Gold Council notes that global gold production fell 3 percent year-over-year during Q1. Mine output totaled 795.8 tonnes, its lowest level since 2015. The shortfall was also the largest year-over-year slip since 2017.
COVID-19 closures also shuttered three refineries in Switzerland, where much gold is processed.
“The consequent reduction in global refining capacity — approximately 1,500 tonnes of gold annually — meant that bars and coins could not be produced in the necessary forms as quickly as needed.”
The impact of the Swiss lockdowns was further heightened when the Rand refinery, South Africa’s only refinery accredited by the London Bullion Market Association, halted its smelters and reduced capacity.
All have since restarted operations.
In addition to processing problems, moving the physical currency metal also proved difficult during the height of COVID-19 restrictions. International travel bans and very limited cargo space in the few flights that were able to leave the ground created logistical confusion.
“(Flight restriction) has led to intense competition for that space, with essential goods, such as medical equipment, often being prioritized,” states the World Gold Council report. “Consequently, the cost of transporting gold between various hubs has substantially increased and left the supply chain looking for alternative means of transportation.”
Logistical woes also led to a dislocation between the London over-the-counter market and the futures price on the COMEX, and made purchasing physical gold difficult as well.
That said, the gold collective did emphasize in its report, “It is, however, important to draw a distinction between the supply chain issues caused by logistical challenges and the liquidity in the gold market.”
It continues, “While the logistical issues have caused disruption to the free movement of gold, and thus resulted in some localized liquidity issues, overall liquidity in the gold market remains robust.”
Coin sales leap, premiums soar
As producers and mints faced issues with deliveries and stocks, demand for the yellow metal soared, exacerbating strained supply chains.
Calls for coins jumped 80 percent year-over year as the US Mint sold its most American Eagle coins since July 2015 at 151,500 troy ounces. Sales in April were also elevated, coming it at 105,000 troy ounces.
Increased demand and supply troubles led to long wait times and high premiums.
According to World Gold Council data, premiums for American Eagle 1 ounce gold coins climbed as high as US$130 per ounce, an 8 percent increase above the spot price and the highest value since 2014.
However, as mines ramp up capacity and restrictions are eased, the group expects premiums to cool and the market to return to the “smooth and efficient functioning” it exhibited prior to the COVID-19 pandemic — despite continued dislocation between London and COMEX prices.
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Securities Disclosure: I, Georgia Williams, hold no direct investment interest in any company mentioned in this article.