Gold production and pricing in the wake of Covid-19

A Look at Production

On 6 August 2020, gold reached an all-time high of $2,067.15. That’s due, of course, to its status as a safe haven investment in troubled times. So, it’s no surprise that this record was reached as the global COVID-19 pandemic accelerated. But could it also be because the pandemic limited gold production?

Falling down

One of the main reasons why gold holds its value is its status as a tangible investment is  that there’s only so much of it to go around. That’s crucial when you remember that actual things made of gold – jewellery, for example – have traditionally had a high value. And gold production certainly fell during the pandemic, so less was available.

In the first quarter, reports the World Gold Council, total gold supply fell four per cent year-on-year to 1,066t – the lowest level of quarterly gold supply since Q2 2013. Its report points out: “Falls in mine production and recycled gold contributed to the overall decline, as both were impacted by the response to the virus outbreak.”

In Q2, as the pandemic went global, some countries saw huge falls in production, the Council reports. In Mexico, gold mine production fell year-on-year by 62 per cent – mining was suspended for 60 days during the quarter, although some operations were granted exemptions.

Challenging times

Sean Boyd, CEO of Agnio Eagle, which has mines in Canada, Finland and Mexico, commented: “The second quarter was challenging given the global COVID-19 pandemic and its impact on our operations. While our business returned to normal production levels ahead of schedule in June, we did have seven of our eight mines on Care and Maintenance at one point during the quarter.”

In South Africa, product fell 59 per cent year-on-year, as underground mining stopped and didn’t resume full production until June 1. And Peru, in lockdown from mid-March, saw a 45 per cent drop year-on-year.

Mines are, of course, starting up again, and Boyd is optimistic that production levels will go back to normal. “With the ramp-up of operations now complete and with July production expected to exceed 160,000 ounces of gold, the Company is well positioned to have a strong second-half with gold production expected to average 480,000 to 500,000 ounces per quarter with declining unit costs.”

New normal

But there are no gold production certainties in the post-Covid landscape. As SRK Consulting director and principal consultant Andrew van Zyl told Mining News, South Africa’s mine closures during lockdown are only part of the story. The new normal of infection, detection, testing and isolation is likely to affect production further – and other countries are likely to face the same issues.

“Steady-state production is clearly much more efficient than intermittent activity – resulting from mines’ response to infections being detected and addressed – which will inevitably characterise production in the short term,” he said.

However, he also points out that mines have now had a chance to put infection control processes in place to avoid further shutdowns. “On the upside, it is foreseeable that the infection rate will become less of an issue at gold mines over the next couple of months, with employees largely being kept in separate groups while working underground. Further, with regular cleaning and sanitisation, there will gradually be more confidence that infections will not spread within the workplace.”

Supply and demand

But the old law of supply and demand might not be sufficient to explain what gold prices might do in the future. In fact, limited supply might have had less effect than you’d expect –because of the unique economic conditions produced by the pandemic.

That’s when the different kinds of demand for gold come into play. In fact, during the pandemic, consumer demand for gold used in jewellery (particularly India and China) and for electronics dropped drastically. Demand for jewellery fell an incredible 46 per cent year-on-year as cautious consumers in Asia held off purchasing due to economic uncertainty around the pandemic. Yet the price of gold still soared.

Record flows

So, what kind of demand is driving the gold price up? The answer, unsurprisingly: record flows of investment into gold-backed exchange trading funds – funds that invest in gold-backed assets, rather than the yellow stuff itself. During the pandemic, investors added 734 tonnes of gold-backed ETFs worth $39.5bn to their portfolios, points out the Financial Times.

Steve Dunn, head of ETFs at Aberdeen Standard Investments, told Economic Times: ““The demand for gold in 2020 has been almost exclusively supported by investment demand. Flows are charging ahead at an unprecedented pace.” 

Whether investors will continue to pile into EFTs is – like so many aspects of the pandemic – an unknown. But that pent-up consumer demand is likely to start coming through at some point. So, in whatever form your investment takes, gold remains, as always, one of the safest investment bets.

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Important disclaimer: this document is not an official research report and the views expressed in it are those of the authors. The authors are not registered research analysts and there is no assurance the trends mentioned will continue or that the forecasts discussed will be realised. Gold as a commodity is not a specified investment for the purpose of giving advice under the Financial Services and Markets Act 2000, therefore, this does not give rise to rights to claim compensation under the Financial Services Compensation Scheme.