While numerous factors can chip away at the available amount of gold, silver, and other precious metals that are in circulation at a given time, certain mining industry challenges can also impact the supply, according to Lear Capital’s president and founder, Kevin DeMeritt.
“You can only pull so much gold out of the ground,” Kevin DeMeritt says. “Even with new technology, we’re having to go deeper and deeper inside the Earth to go get it; that technology is just [adjusting for not] having the gold closer to the surface.”
External influences — such as the COVID-19 pandemic — have been known to significantly alter precious metal production capabilities. During the pandemic, supply shortages, the effect of COVID-related government restrictions, and transportation issues, such as specialist personnel’s reduced mobility, along with workforce reductions due to illness, increased costs and slowed operations at some mining locations.
Although global mine production had grown extensively in prior decades — escalating 55% between 1995 and 2018 as gold prices rose and developing nations increasingly welcomed foreign investment — in 2020, what the London Bullion Market Association has called “a challenging year for gold miners,” global gold production declined by 4%.
Availability constraints, coupled with factors such as increased delivery costs, due to the reduced amount of commercial flights — one of the typical ways gold had been transported — translated into higher prices for the precious metal.
By mid-August 2020, gold prices had risen 28%, according to McKinsey & Company.
“If you add an increase in demand onto that physical supply that’s fairly limited, usually, what you’re going to find is prices go up,” Kevin DeMeritt says. “It’s economics 101.”
Extraction Industry Complications
Mining efforts have faced other challenges over the years, in addition to the pandemic.
More than a decade ago, Lear Capital reported that the industry was confronting expanding labor and power costs, taxes, machinery expenses, and other concerns.
With a growing amount of industrial, clean energy and other applications, silver demand has been rising, and silver mining had been increasing, climbing nearly 6% in 2021 — the largest rise in silver mining activity in several years. However, due to the robust demand for the precious metal, the market experienced a deficit for the first time in six years, according to the Silver Institute.
In 2022, lower overall output from China and mine suspensions and social unrest in Peru contributed to a decline in global mine production, which caused the silver deficit to reach a record high of 253 million ounces.
“Silver has become a highly in-demand asset,” Kevin DeMeritt says. “Yet the available supply hasn’t vastly increased.”
Physical silver investment activity received a push from the continued interest and reduced accessibility to the precious metal, ultimately rising for the fifth consecutive year to hit a new high point of more than 332 million ounces in 2022.
Much of the world’s platinum comes from a few countries — particularly South Africa and Russia, which have both faced mining challenges in the past year.
The ongoing conflict between Russia and Ukraine, including factors such as restrictions the U.S. placed on metal imports from the country due to the war, undoubtedly had an effect on its platinum production — which had already declined from 2019 to 2022 — and precious metal prices.
Exports of gold and other metals fell more than 35% in the first few months following the invasion, and mining product markets were still affected months later, according to an S&P Global Market Intelligence report.
After Russia — which in 2021, was responsible for 40% of the global palladium mine-related production and 10% of all mined platinum production — invaded Ukraine in 2022, palladium prices rose, according to mining.com.
Mining operations in South Africa have also experienced obstacles, ranging from transport concerns to weather issues. An Economist Intelligence Unit report indicates total mine output in the country ultimately declined by 7% in 2022.
Because of the widespread supply constraints and increased industrial and other uses for the metals, gold and platinum-group metal prices, according to the EIU, are expected to remain high, despite hefty energy costs and other concerns.
Platinum is a fairly versatile metal with numerous industrial applications, notably in catalytic converters that are used to reduce emissions in automobiles, and Kevin DeMeritt expects the demand for the metal to continue.
“I don’t think we’re going to have enough electric cars to take that away for the next 10 or 15 years,” the Lear Capital founder says. “We have some supply issues because we’re limited to those two countries, South Africa and Russia, for the majority of the platinum production. So we’re starting to see the demand for platinum increasing. That could be an interesting play for long-term investors moving forward.”
The Current Metals Landscape
This year, Peru — a major global silver supplier — has continued to experience unrest-related difficulties; political protests affected silver mining production in the country, according to the nonpartisan Council on Foreign Relations.
Some uncertainty also surrounds the status of mining-related regulatory changes that Reuters reported the senate introduced in Mexico, the largest silver producer on a global scale, earlier this year.
Government policies and practices such as intervention and incentivization are becoming an important influence in the mining business, which could result in heightened competition and other outcomes, according to a PwC report.
Some precious metals may also face specific production challenges. While mineral and metal exploration spending is up overall, for instance, the highest exploration expenditures were for gold.
With only finite reserves of metals such as gold and silver available around the globe, mining operations will likely need to address further operational issues in the future.
Excavation efforts, however, aren’t the only aspect that will determine the supply of precious metals in the future, Lear Capital’s Kevin DeMeritt says.
“The gold and silver mining supply, especially on the gold side, has been very consistent on a yearly basis,” he says. “The biggest impact right now is the demand side. Central banks entered the market in 2022. They purchased a quarter of all the mining supply, which is a huge jump from where they were purchasing — and they’ve continued their record buying throughout 2023.”
