How did the COVID-19 Pandemic Impact Precious Metals?

Supply Challenges and Soaring Values Explained

Many industries faced unforeseen challenges due to the COVID-19 pandemic. Mining was no different – and that had ripple effects through the precious metals markets. The challenges mainly had impacts on the availability and prices of precious metals.

Let's unravel the complex web of factors that disrupted precious metal production and elevated their values.

Mining Access Disruptions

While lower energy prices and currency depreciation in certain countries seemed promising for mining companies’ profit margins, numerous obstacles hindered operations. Supply shortages increased costs, and government-mandated closures in countries like Argentina, Canada, Mexico, Peru, and South Africa disrupted mine access, as reported by McKinsey & Company.

These challenges significantly offset any positive effects that lower energy costs and currency depreciation might have had on companies’ margins.

Transportation and Travel Disruptions

Additionally, changes in travel patterns had a substantial impact on the precious metals industry. With fewer commercial flights, a primary means of transporting gold, and cargo space prioritized for personal protective equipment and medical devices, the cost of delivering gold surged, as indicated by global asset manager Sprott.

Global Gold Production Decline

The London Bullion Market Association reported a 4% decline in global gold production in 2020. Although mine production increased by 2% in 2021, recycling sharply dropped off, resulting in a decrease in the total supply of gold, according to the World Gold Council. The reduced availability of gold coupled with the social and economic upheaval during the pandemic led to a surge in demand for the precious metal, consequently driving prices to new heights.

Lear Capital Founder Kevin DeMeritt was not at all surprised by this. "If you add an increase in demand onto a physical supply that's fairly limited, usually, what you're going to find is prices go up," he says. "It's economics 101."

During the initial months of the pandemic, gold prices soared by 28%. The COINGEAG Index measures the price premium on 1-ounce Gold Eagle coins, which also spiked during the early stages of the pandemic. This double whammy of spot price increases and price premiums indicated greater retail investor-related demand for physical gold.

The Central Bank Factor

For decades, Central banks worldwide have been buying up massive quantities of gold. That also accelerated during the pandemic, further impacting the circulating supply. Central bank-related demand for the precious metal reached a record level by the end of 2022, surging by 152% from the previous year, as reported by the World Gold Council. Spot gold prices also reached significant highs, exceeding $2,000 in the spring of 2022, according to U.S. News & World Report.

Kevin DeMeritt emphasizes that central banks play a crucial role in available supply, as they tend to take vast quantities of gold off the table for long periods of time.

"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 Precious Metals

Gold is not the only precious metal facing supply-related issues. Silver and platinum have also experienced high demand and supply constraints. For example, when elevated labor and electricity costs affected mining in South Africa in 2018, platinum production declined by 4%. In 2020, platinum production saw a 20 metric ton drop, leading to steady price increases.

Silver, on the other hand, faced consecutive shortages in 2021 and 2022 due to increased demand and essentially flat supply, creating a pronounced silver deficit. Silver’s role as a hedge against inflation and its importance in industrial and clean energy processes contributed to its heightened demand.

“Silver has become a highly in-demand asset, yet the available supply hasn’t vastly increased,” 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.”

The Road Ahead

The precious metals industry may encounter additional supply constraints in the future. Mining, even with technological advancements, has physical limitations. This limitation could potentially push up prices for physical precious metal assets such as coins, as seen during the pandemic.

In conclusion, the COVID-19 pandemic has cast a spotlight on the intricate relationship between global events, supply challenges, and precious metal values. The road ahead remains uncertain, but the resilience and enduring value of precious metals continue to make them a critical asset class for investors seeking stability in an ever-changing world.