Shortages in the available amount of gold and silver, along with economic and other factors, can help heighten the demand for the metals — subsequently raising their price.
A number of mining challenges ranging from political unrest to energy needs, for instance, can result in precious metals supply constraints.
In 2022, the South African mining industry faced transport and other issues, according to Minerals Council South Africa, an employer-based mining industry organization that estimated in February of this year that the production totals for 2022 would ultimately show a roughly 6% decline from 2021.
In March 2023, the nonpartisan Council on Foreign Relations reported that political protests had affected silver mining production in Peru, a major supplier of the metal on a global scale. Regulatory changes introduced by the government of Mexico may also impact mining efforts in the country, which is the world’s largest producer of silver according to Reuters.
The mining industry is also dealing with the fact that much of the easy-to-remove gold has been found and extracted, according to U.S. Money Reserve President Philip N. Diehl, whose 30-year experience in the industry includes serving as the 35th Director of the United States Mint.
“The most significant source of new gold supply is from mining,” Diehl says. “The easily accessible, high-quality veins have been found, and that gold is largely out of the ground. Moreover, gold is now coming from parts of the world that are often politically and economically unstable. These factors make gold harder to find and more expensive to mine.”
Other Market Influences
Various economic factors can also affect the overall demand for gold and silver, such as further interest rate increases from the Federal Reserve’s Federal Open Market Committee.
According to Diehl, the central bank’s escalation of the target range for the federal funds rate in 2022 and 2023 contributed to the U.S. dollar’s increase in value.
“Gold is sold all around the world in dollars,” he says. “A very strong dollar like we’ve had recently makes gold expensive for buyers trading in other currencies, and that creates downward pressure on global gold demand and prices. The recent rally in prices illustrates what happens when the dollar weakens, removing this downward pressure. I think this rally will continue as the Fed lowers interest rates and the dollar continues to weaken.”
Similarly, rising private interest in gold or silver as an investment can drive demand to exceed available supply, especially if buyers take large volumes of gold and hold it indefinitely rather than trading it, as central banks have been doing since the global financial crisis.
Central bank activity has been considerable in recent years; in 2022, central banks bought 152% more gold than in 2021, according to the World Gold Council, marking the highest level of central bank gold purchasing since 1950. This level of central bank buying has continues through Q3 2023.
A survey of central banks the Council conducted in 2022 found that the banks valued gold’s performance during crisis periods and its status as a long-term store of value.
The demand for precious metals can also increase because of significant growth in certain sectors. The growing move toward clean energy, for instance, has helped boost interest in silver and platinum.
Silver is used in solar photovoltaic power production, converting sunlight into energy. The United States tripled its solar photovoltaic capacity between 2017 and 2022; another 63 gigawatts is expected to be added by the end of 2024, according to a Deloitte report on the topic.
Solar power use could be positioned to expand substantially in response to initiatives such as the United Nations’ Sustainable Development Goals, which include a provision to substantially increase the amount of renewable energy that’s produced on a global scale, and the European Union’s Solar Energy Strategy goals, which aim to generate more than 320 gigawatts of solar photovoltaic power by 2025.
Platinum is used in the production of hydrogen, a critical part of initiatives like the European Union’s plan to reduce its carbon and fossil fuel use. In Germany’s Wunsiedel Energy Park, up to 1,350 tons of green hydrogen can be generated each year using an electrolyzer that relies on platinum, according to Mining Weekly.
Platinum is also utilized in catalytic converters, which help reduce automobile emissions. Catalytic converter production is the top use category for platinum-group metals in the United States, according to U.S. Geological Survey data.
One forecast suggests that the global catalytic converter market could grow by more than $5 billion between now and 2027.
The Effect of Diminished Supplies
When the available supply of gold or silver is strained, prices can rise.
Political and economic instability in countries where gold is mined, for example, can contribute to higher production costs and prices, Diehl says.
“The higher, and rising, cost of mining and processing gold is driving a long-term increase in prices to recover these costs. Gold buyers, today, will benefit from those price increases,” he says. “These cost increases will be reinforced by higher risk premiums to compensate investors for the higher risk of operating in unstable locations. Today’s gold buyers can benefit from that dynamic, too.”
Diehl continues, “That means new gold coming into the marketplace must draw a higher price to justify the mining and processing of it. That is creating a long-term increase in gold prices. There’s that higher risk premium because of the political instability under which miners operate.”
In the coming year, Diehl says economic factors such as lower interest rates and concerns about a recession are likely to play a dominant role in driving gold prices.
“If the Fed’s tight money policy has clearly had an effect on inflation, and speculation has now turned to when, not if, the Fed will begin lowering rates,” he says. “Any kind of change in economic conditions that markets think will lead the Federal Reserve to cut interest rates are likely to have a big impact on the market, increasing foreign demand for gold and thereby increasing prices. And if conditions begin to signal that the U.S. is headed for a recession, we could see the Fed quickly move to reduce interest rates to stimulate the economy.”
