Market Update
Gold supply chain shows resilience amid
disruption
May 2020
The gold supply chain is truly global. Gold is
mined on every continent except Antarctica,
refined into bars and coins in numerous
countries, and distributed far and wide. This
geographical dispersion not only brings
stability to the gold market, it is also
necessary to satisfy demand.
But the onset and scale of the COVID-19
pandemic has caused unprecedented
disruption to various parts of the gold supply
chain. In this report, we explore:
• how the different components across the
supply chain have been affected
• the impact on the flow of gold through the
supply chain
• how the disruption has affected
investment demand.
We find that while gold’s supply chain has
not escaped unscathed, it has demonstrated
resilience in the face of these challenges,
highlighting a key strength of the market.
1 www.gold.org/download/file/9547/market_update_Q2_2013.pdf
www.gold.org
Supply: down but not out
The gold supply chain, with all its components, enables the
smooth functioning of the gold market; it allows gold to
flow to where it is needed and, importantly, in the desired
form. This was clearly exemplified in 2013 when a sharp fall
in the gold price sparked a wave of demand in Eastern
markets. The gold supply chain allowed London Good
Delivery (LGD) bars in western markets to be refined into
kilobars – the preferred bar size in Asia – and journey
onwards to meet this demand. 1,2
But the COVID-19 pandemic has disrupted the gold supply
chain unlike any other event in modern history. From
mining operations to consumption, all elements of the
chain have been affected. 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.
Constrained sources of supply. Gold mining is
geographically diverse, occurring on all continents except
Antarctica, so the industry was unlikely to escape the
impact of the pandemic entirely. But this dispersion has
also helped to shield the primary supply of gold from more
severe outcomes.
Following national and local government measures aimed
at countering the outbreak, several projects worldwide
reduced or halted operations in Q1. Key mining nations,
such as China, South Africa and Peru, all saw mining
activities curtailed due to lockdown restrictions. These
declines in production were somewhat offset by more
consistent production levels in other major mining regions
that had experienced little or no disruption to normal
operations.
2 www.lbma.org.uk/good-delivery
01
And while total gold production fell 3% y-o-y in Q1 –
representing the lowest level of production since 2015 and
the largest y-o-y fall since Q1 2017 – this decline was
relatively modest given the scale of the pandemic. 3
Although lockdown measures in several mining countries
have extended into Q2, they are gradually easing, with
some affected mining operations beginning to ramp up
production.
Recycling activity – which typically generates 25% to 30%
of gold supply – was also affected in Q1, falling 4% y-o-y to
its lowest level for two years (Chart 1).
Given the price-sensitive nature of gold recycling, under
normal conditions the 6% rise in the US dollar gold price —
higher in some other key currencies – during Q1 would
have drawn out near-market supply. But this relationship
was weakened by the lockdown measures worldwide. The
normal physical exchange of gold for cash was virtually
suspended as consumers were instructed to take refuge in
their homes and jewellery retailers were temporarily forced
to close. This reduced the amount of gold that may
otherwise have come onto the market. As lockdown
measures begin to ease, gold recycling levels are likely to
rise as consumers look to manage the economic impact of
COVID-19.
Chart 1: Lockdown hit gold mine production and
recycling in Q1
Year-on-year % change in supply by source*
Y-o-y % chg
20
15
10
5
0
-5
-10
-15
-20
-25
Q1'17 Q3'17 Q1'18 Q3'18 Q1'19 Q3'19 Q1'20
Mine production Recycled gold
*As of 30 March 2020.
Source: Metals Focus, World Gold Council
3 www.gold.org/goldhub/research/gold-demand-trends/gold-demand-trends-
q1-2020/supply
4 www.reuters.com/article/precious-refining-argor-idUSL8N2BG3ZJ
5 www.kitco.com/news/2020-04-20/United-States-Mint-to-resume-operations-
at-West-Point.html
Market Update | Gold supply chain shows resilience amid disruption
Downstream capacity was also reduced. Operations at a
small number of refineries were halted during Q1. On 23
March, Valcambi, Argor-Heraeus and PAMP – three of the
world’s largest refiners – suspended operations due to the
spread of the virus. The consequent reduction in global
refining capacity – approximately 1,500t of gold annually –
meant that bars and coins could not be produced in the
necessary forms as quickly as needed. 4 The Rand Refinery,
Africa’s only LBMA-accredited refiner, opted to temporarily
close its smelting plant and reduce capacity in response to
the lockdown. Fabricators were also affected with the US
Mint, for example, opting to temporarily suspend
production of gold Eagle and Buffalo coins at its West Point
facility in mid-April. 5
In contrast to this squeeze on the supply chain, unaffected
refineries elsewhere in the world, such as the Perth Mint,
increased production capacity in order to meet some of the
excess demand, especially for non-LGD gold bars. And in
early May, Valcambi, Argor-Heraeus and Rand Refinery
announced they were restoring operations after lockdown
measures were eased, further helping to alleviate pressure
on the supply chain. 6,7
Logistical nightmares
Supply chain disruption has not been focused solely on the
sourcing and refining of gold. Stringent travel restrictions
imposed by governments globally to combat the spread of
COVID-19 impeded the flow of gold along the chain.
Doré produced at a mine site must be transported to
refiners who then ship refined gold to markets that need it.
This involves a sophisticated and highly secure
transportation network, typically moving gold by road and
air. But border closures and the drastic reduction in
commercial flights have stymied this regular movement of
gold (Chart 2). As travel restrictions have taken hold fewer
flights have meant a significant drop in available cargo
space. This has led to intense competition for that space,
with essential goods, such as medical equipment, often
being prioritised. Consequently, the cost of transporting
gold between various hubs has substantially increased and
left the supply chain looking for alternative means of
transportation, including chartering cargo-only aircraft. 8
6 uk.reuters.com/article/uk-gold-refining-switzerland/swiss-gold-refineries-
reopen-as-virus-lockdown-eases-idUKKBN22G2G7
7 www.miningweekly.com/article/rand-refinery-restarts-smelter-after-covid-19-
lockdown-2020-05-06
8 www.bloomberg.com/news/articles/2020-05-03/gold-bars-fight-covid-kits-
for-space-on-the-plane?sref=3W4oJZsn
02
Chart 2: Decline in commercial flights restricted gold Focus 1: Dislocation between London
flow
OTC market and COMEX futures
No. of flights
120,000
The price differential between the London OTC spot
and COMEX active futures markets is known
100,000 colloquially as the EFP or ‘exchange for physical’. The
EFP is also a traded instrument that allows traders to
80,000
swap their gold positions between the physical OTC
60,000 market (London) and the COMEX futures market
(New York), offering transaction efficiency between
40,000
the two.
20,000
Historically, the EFP has traded in a relatively tight and
0 predictable range, most recently about US$2/oz,
11-Feb 25-Feb 10-Mar 24-Mar 07-Apr 21-Apr 05-May which is governed by the physical arbitrage costs. If
Number of flights 7-day moving average the COMEX premium to London exceeded US$2/oz a
trader could enter the market and close the arbitrage
Source: Flightradar24, World Gold Council by selling the COMEX future and buying OTC London
spot. In the event that the EFP remained stubbornly
As a result, gold struggled to get to where it was needed, elevated the position could be settled by shipping
leading to distortions in several markets. For example, in LGD bars to a LBMA-approved refiner and recasting
March, reduced imports into India due to the supply-side them to COMEX delivery requirements (100oz or 1kg
disruptions widened the local discount sharply to around bars) before shipping to COMEX vaults in the US,
US$70/oz, and it has remained above US$25/oz in April and although in practice this was rarely necessary.
May. 9 Logistical issues were also one of the primary Large EFP positions primarily exist because of the
causes of the widening differential between the spot price way bullion banks hedge gold futures with OTC
in the London over-the-counter (OTC) market and the positions. Typically, an investor would buy gold
futures price on COMEX (Chart 3, Focus 1). COMEX futures through banks and the banks would,
It is, however, important to draw a distinction between the most commonly, hedge their corresponding short
supply chain issues caused by logistical challenges and the position by purchasing gold OTC.
liquidity in the gold market. While the logistical issues have Towards the end of March, as the Swiss refineries
caused disruption to the free movement of gold, and thus took some operations offline and the network of
resulted in some localised liquidity issues, overall liquidity in commercial flights around the globe decreased, the
the gold market remains robust. EFP jumped to as much as US$75/oz as the two
markets became dislocated.
Chart 3: Price differential between London and New
York spiked due to logistical issues A perceived shortage of COMEX-deliverable
US$/oz investment gold bars located in COMEX vaults and
60 logistical limitations across the globe impeded the
50 potential to physically close this arbitrage, causing
40 prices to diverge widely.
30
The EFP has narrowed in recent weeks as the market
20 gradually returns to normal, although trading volumes
10 on COMEX remain lower than historical levels. We
0 believe this is due to a combination of banks
-10 rebalancing their trading books and limiting their
-20 exposure to EFP positions in the face of reduced risk
-30 appetite.
01-Jan 22-Jan 12-Feb 04-Mar 25-Mar 15-Apr 06-May
COMEX/London OTC price differential

Note: Chart shows difference between the COMEX active futures price and the
London OTC spot price.
Source: Bloomberg, World Gold Council

9 www.gold.org/goldhub/gold-focus/2020/04/supply-chain-disruptions-impact-
indian-gold-market

Market Update | Gold supply chain shows resilience amid disruption 03

Divergence in supply of
bars and coins
Against the existing global backdrop of low and negative
interest rates, as well as an anaemic growth outlook, the
sudden COVID-19 outbreak took investor uncertainty to
new highs. This fuelled a surge in gold investment demand
in Q1 as investors sought safe-haven assets, especially in
Western markets such as the US and Europe. Under
normal circumstances this demand could be met through a
variety of sources. But in the current environment a
divergence in the supply of LGD and retail bars and coins
emerged.
Stock of LGD bars countered supply issues. In the
wholesale market the availability and liquidity of LGD bars
was relatively unaffected by the supply chain issues.
Trading volumes in the London OTC market remained
strong in March, up 85% y-o-y, at over US$1.5tn (Chart
4). 10 While volumes have fallen back since mid-March, they
remained healthy even as the dislocation between London
and COMEX began to widen.
In contrast to gold futures on COMEX, which are linked to
1kg bars, most gold-backed ETFs (gold ETFs) are linked to
LGD gold bars and these have benefited from the ample
supply. In Q1, inflows into gold ETFs totalled 298t, the
highest level of quarterly inflows for four years. And the
strong flows have continued through April and May. 11
Chart 4: London OTC trading volumes remain healthy
Mn oz
60
50
40
30
20
10
0 But as issues in the gold supply chain begin to ease such
Jan-20 Feb-20 Mar-20 Apr-20 May-20
Data as of 7 May 2020. Bars represent five-day moving averages based on
LBMA-i reporting.
Source: Nasdaq, World Gold Council
10 www.bullionvault.com/gold-news/gold-bullion-bars-040720201
11 www.gold.org/goldhub/data/global-gold-backed-etf-holdings-and-flows
12 www.lbma.org.uk/_blog/lbma_media_centre/post/clearing-statistics-most-
recent-figures/
13 www.usmint.gov/about/production-sales-figures/bullion-sales
Market Update | Gold supply chain shows resilience amid disruption
This was supported by the large stock of LGD bars: at the
end of January a record 8,263t of gold was held in London,
valued at a record US$426bn. 12 The stock of LGD bars
enabled gold ETFs to source the gold required to back the
large volume of newly created shares.
As gold volatility increased in Q1 the standardisation and
deep stock of LGD bars helped maintain liquidity in the
wholesale gold market, benefiting individual and
institutional investors alike.
Fewer small bars and coins pushed premiums higher.
At the retail level, where there is market fragmentation, the
story was markedly different. Significant stocks of small
bars (1kg or less) and coins were stranded in Eastern
markets where demand was subdued throughout the
quarter due to COVID-19. Difficulties in transporting this
gold easily and quickly to meet heightened demand in
western markets caused supply issues.
Additionally, the availability of small gold bars and coins
was further stretched due to their more complex supply
chain. Small bars and coins need to be distributed
throughout the globe to retailers and consumers. By
contrast, LGD bars are, typically, sent to LBMA-approved
vaults in London using established routes and frequent
flights.
Coin demand, in particular, jumped 36% y-o-y, with several
mints reporting robust sales. In March the US Mint
reported Eagle coin sales of 151,500 troy ounces, the
highest monthly total since July 2015, followed by a further
105,000 troy ounces in April. The Perth Mint also reported a
sizable jump in gold bar and coin sales in both March and
April. 13,14
The supply and logistical issues caused depletion of some
dealer inventories and left many investors facing long wait
times and high premiums. It was reported that premiums
for American Eagle 1oz gold coins jumped to over
US$130/oz (8% above spot), the highest level for six years,
compared to an average of US$25/oz (2% above spot) over
the first two and a half months of 2020. 15
elevated premiums should narrow substantially, and
anecdotal evidence seems to confirm this.
14 www.perthmintbullion.com/blog/blog/20-05-01/Monthly_Sales_-
_April_2020.aspx
15 www.bloomberg.com/news/articles/2020-04-27/gold-buyers-are-forking-
over-lofty-135-premiums-for-u-s-coins?sref=3W4oJZsn
04
Conclusion
The gold market was by no means alone in suffering In recent weeks the easing of certain COVID-19 restrictions
significant supply-chain disruption due to the COVID-19 has alleviated some pressure on the supply of gold. While
pandemic and the measures taken in response. But the the dislocation between the London OTC market and
temporary suspension of some mining and refining COMEX remains elevated, we expect that some of the
activities, along with strict travel restrictions, created dislocations that have arisen due to supply chain issues
unprecedented challenges to the movement of gold within should be reduced or even eliminated, ensuring the
the market. continued smooth and efficient functioning of the entire
gold market.
But amidst these challenges the resilience of the gold
supply chain shone through. To date, mine production and
gold recycling have declined only modestly because of
lockdowns. And the depth of the stock of LGD bars, as well
as the adaptability of market participants, has supported
high gold investment demand.

Market Update | Gold supply chain shows resilience amid disruption 05

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Market Update | Gold supply chain shows resilience amid disruption 06