31 March 2020
By Dean Arif, MY Bullion Trade:
There have been recent discussions in the gold market about the availability of physical gold. Some social media personalities and news agencies have claimed that there is a shortage of physical gold in the market. However, it is not so much about the shortage of gold, but rather, a sudden demand for gold in places where it cannot be quickly supplied in the desired form.
These availability problems are largely due to what I call, real-world problems. Logistics and production processes play a vital role in the journey of gold, from the mine or warehouse to the end-user.
After the gold has been mined, the rough gold material is often transported to gold refiners for further processing. Another option is that the gold moves from warehouses around the world in various shapes and sizes to the refineries. In this case, gold is often delivered in the form of roughly 12.4-kg bars (400 Troy ounces) or as recycling material.
Roughly, a typical gold production supply chain goes like this:
Gold Mine or Other Warehouse – Logistics Company – Refinery – Logistics Company – Mint – Logistics Company – Bullion Dealer – Individual
As you can see from the chain, logistics companies play an important role in the flow of gold. Gold moves mostly with air cargo, and as recent news has shown, international air traffic has fallen significantly. This has caused problems in moving gold from one country to another.
The Covid-19 has also posed many challenges, for instance to Swiss refineries. Some refineries have been forced to cut production as governments have imposed bans on people’s gatherings and encourage people to work from home. These restrictions of movements and gatherings affect all businesses in the area. Therefore, some Swiss gold refineries are closed, just like other Swiss industrial companies. The location and the nature of the operations determine whether or not the company is allowed to carry on production.
When refineries are unable to produce their products, delivery times to the consumer are further extended. The situation in Switzerland has also been aggravated by the fact that a significant part of their workforce, at the refineries in southern Switzerland (our supplier PAMP S.A. included), comes from Italy, which is one of the major sufferers of the Covid-19.
London is the center of the world’s gold trade and most of the world’s gold is traded in the 400 oz bars. However, many savers prefer to buy small gold items such as coins, bars, and wafers. In addition, many bullion dealers favour sales of these products, as small coins and bars have better profit margins.
These products are made either from mining concentrates or, for example, from larger gold bars like the 400 oz bars. Often mine concentrates or larger bars have to be delivered to the refinery from another country.
The challenges brought up by the Covid-19 related to the availability of gold are mainly due to the real-world problems such as logistics and production processes of gold. In other words, there is gold, but as long as the Covid-19 causes problems with logistics and production, the availability of small gold bullion coins and bars will be greatly affected.
Gold has not run out, and gold is not running out of the world, as some claim. These individuals have probably never been involved with the larger international gold market. So, it is understandable that they do not understand the life cycle of gold and the challenges of the logistics supply chain.
It is good to remember one undeniable fact: new gold mined increases the total supply of gold by only 1% annually. The remaining 99% already exist, in large warehouses, jewellery, and people’s homes around the world. The laws of supply and demand also move this 99%. If gold is “not available”, the current owners believe that the price of gold is too low or the people simply do not want to exchange their gold for the weakening Ringgit or Dollar.
It is reasonable to assume that once the worst peak of the panic caused by the Covid-19 subsides, factories open, air traffic normalises, and the gold market will return to normal.