In order to understand the precious metal market, it is important for investors to recognize the effects of supply and demand. Supply and Demand are the factors that determine the market price of precious metals. An increase in supply will shift the supply curve to intersect with the demand curve at a lower price and a higher quantity demanded. An increase in demand will shift the demand curve to intersect at a higher price and a higher quantity demanded. The opposite effect will happen with a decrease in supply or demand.
Gold has been smelted down since at least 3600 B.C. To this day we are continuing to mine gold around the world. Mining gold accounts for 75% of the new supply, while the remaining 25% comes from recycled material. Gold is a limited supply and cannot be created, meaning what we have on the planet will be the total amount of gold. Every year, around 120 million troy ounces (3,700 metric tons) of gold are added to the world’s gold supply. The best estimates suggest that about 205,000 metric tons of gold have been mined throughout history, with 50,000 metric tons discovered, but not yet extracted from underground reserves.
Gold is virtually indestructible. Pure gold cannot corrode, rust, or be destroyed by fire. Some of the gold in circulation today could have been mined thousands of years ago. A good example of gold’s reusability is Perth Mint’s public gold pour. Ever since 1993, they have held a public gold pour into a cast multiple times a day. This gold bar has been melted and recast over 65,000 times, without any destruction of the gold.
Gold is produced in countries around the world. China is the largest producer, accounting for 9% of output. Output is followed by Russia, Australia, Canada, and the United States. South Africa once accounted for a majority of the gold production, but their output has declined recently.
Like gold, silver has also been mined for thousands of years and continues to be mined today. Estimations predict that over 1.5 million metric tons of silver have been mined throughout history. Today, more than 30,000 metric tons of silver are mined each year.
One major difference between the supply of gold and silver is that approximately 90% of the silver supply that has been used was discarded without being recycled. This, along with an increase in industrial uses, has led the world’s above-ground silver stock to fall since World War II.
The mining costs of silver compared to its price also make silver a less profitable mining business than other precious metals. There are very few silver-only mines, with most silver being mined as a byproduct in other mines (70%). This leads to the silver mining supply being vulnerable, as it must rely on the mining of other metals. The weakening supply trends have also led to a drop in global reserves of about 4%. Silver production, however, did grow 5.3% in 2021 due to the recovery in output from the Covid-19 pandemic. Silver mining was led by Mexico, followed by China, Peru, Australia, and Poland.
The demand for gold plays a significant factor in determining its price. Gold is the most demanded investment commodity. Central banks, investment funds, and individual investors all have a large amount of gold in their reserves. Gold has emotional, cultural, industrial, and investment value, leading it to be demanded all over the world.
Other than being an investment asset, gold is used in jewelry and manufacturing. Jewelry, although decreasing, is the largest sector of the demand for gold, accounting for 46% of the total gold demanded. Gold coins and bars demand the next most amount of gold, approximately 22% of the supply. Individual investors are demanding more as a result of high inflation and economic concerns. Central bank reserves have about 17% of the total amount of gold. Emerging market central banks are increasing their reserves, and European banks have stopped selling gold, creating a significant source of demand. Technology, electronics, and other uses make up the remaining 15% demand for gold. All of these sectors help to increase its value as a precious metal.
In 2021, Silver demand strengthened to 1.05 Billion oz of silver. This leap is an impressive gain of 19% from 2020. The demand increase mostly reflected the resumption of manufacturing after the closures from the Covid-19 pandemic. Like gold, silver has many functions that lead to its demand worldwide.
Silver demand is increasing faster than its supply, which is creating a supply deficit. Its increasing demand is mainly due to its industrial need for green technologies. For example, silver inputs for solar panel production (photovoltaics) grew 13% in 2021. Green energy initiatives are growing and will continue to grow as more countries adopt green energy. The Russia-Ukraine conflict is also pushing countries to adopt a green, self-sufficient economy to promote energy security. This trend will drive the demand for silver further.
As of 2021, Industrial demand accounts for about half of the annual silver demand. Silver is also used in electric vehicles, and it is forecasted to surpass photovoltaics in the future. Silver’s industrial demand has led it to have a strong correlation with the Energy Transition Index, an index comprised of energy transition ETFs (solar, renewables, carbon, wind, etc).
Other than industry demand, Silver has demand in photography, jewelry and silverware, and silver coins and bars. Silver demand in photography, jewelry, and silverware all increased slightly with the suspension of worldwide lockdowns during the pandemic. Silver coins and bars showed the most volatility, with a 36% increase in demand in 2021, representing a quarter of the quantity demanded of silver for the year. Silver supply trends will have difficulty keeping up with the increasing demand for silver, as can be seen by the physical deficit since 2019.
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