The COVID-19 pandemic disrupted the gold supply chain unlike any other event in modern history, with the impact affecting all elements of the chain from mining operations to final products, according to a new report from the World Gold Council.
The recently released market update says that “the gold market was by no means alone in suffering significant supply-chain disruption due to the COVID-19 pandemic and the measures taken in response. But the temporary suspension of some mining and refining activities, along with strict travel restrictions, created unprecedented challenges to the movement of gold within the market.
“While this has led to some distortions within parts of the market, it has also allowed the supply chain to demonstrate its resilience. And this resilience brings stability,” the report states.
The World Gold Council says that several projects were halted in the first quarter of this year because of government restrictions aimed at countering the coronavirus outbreak, including in China, South Africa and Peru, that were somewhat offset by more consistent production levels in other mining regions that didn’t experience shutdowns.
Nevada gold mines took added precautions to continue operating.
Along with mine shutdowns, operations at a small number of refineries were halted in the first quarter, which impacted global refinery capacity, but other refineries elsewhere in the world increased production capacity to meet some of the demand, according to the report.
Closed refineries began restoring operations in early May, the World Gold Council wrote.
Travel restrictions because of the pandemic also had an impact on the supply chain. Dore produced at mines must be transported to the refiners, which then ship the refined gold to the markets. The transportation system “involves a sophisticated and highly secure” network that involves moving gold by road and by air, the report states.
Drastic reductions in flights meant a significant drop in available cargo space that led to intense competition for that space, with essential golds, such as medical equipment, prioritized, so the cost of gold transportation increased and “left the supply chain looking for alternative means of transportation, including chartering cargo-only aircraft,” the World Gold Council wrote.
As a result, gold struggled to get to where it was needed, leading to distortions in several markets, and logistical issues were one of the primary causes of the widening differential between the spot price in the London over-the-counter market and the futures price on COMEX, the report states.
“While the dislocation between the London OTC market and the COMEX remains elevated, we expect some of the dislocations that have risen due to the supply chain issues should be reduced or even eliminated, ensuring the continued smooth and efficient functioning of the entire gold market,” the report concludes.
The gold futures asking price on Friday was $1,731.50 per ounce and the spot price on the New York Mercantile Exchange was $1,730.90, while the London p.m. fixing price on May 28 was $1,717.35 per ounce, according to Kitco charts.
Still, the council wrote that it is important to draw a distinction between the logistical challenges and liquidity in the gold market, which “remains robust.”
The report notes that while total gold production worldwide fell 3% in the first quarter, the lowest level since 2015, the decline was “relatively modest given the scale of the pandemic” and restrictions are gradually easing in the second quarter.
Gold investor demand rose in the quarter, but there were supply issues for small gold bars and coins, while coin demand jumped, the report says.
Recycling that generates 25% to 30% of the gold supply also fell in the first quarter by 4%.
Lockdown measures virtually suspended the normal exchange of gold for cash and jewelry retailers were temporarily forced to close, but the World Gold Council said it expects gold recycling levels to rise as consumers look to manage the economic impact of COVID-19.
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