Gold supply side effect
Gold and silver analysis typically focuses specifically on demand drivers, such as monetary and fiscal policy as well as the relationship with the U.S. dollar. For example, in the last 12 months, it is widely accepted that the expansion of the balance sheet with the Federal Reserve (Fed) and other central banks has contributed to the rise in gold and silver prices (Figure 1 ). Figure 1: QE may have contributed to the rise in gold and silver prices although demand factors are undoubtedly important, one should not overlook supply as a driver of precious metals prices. Gold and silver mining production has been declining since 2016. In 2020, the pandemic caused several mines that reduced gold and silver ore production. Given the historical link between mining production and prices of precious metals, the recent decline in mining production, which has been particularly sharp for money, may have contributed to the rise in their prices. Gold and silver mining supply has changed over time (Figures 2 and 3). Mining supply for each metal fell or fell in the 1970s, a period of high prices. Gold mining supply more than doubled between 1980 and 1998, a time when prices for both metals fell sharply. Silver mining supply rose during this period but not to the same extent. In this 18-year period, gold prices fell from $ 835 per ounce to as low as $ 280. Silver prices suffered an even greater percentage decline, falling from $ 50 per ounce to as low as $ 4. Figure 2 : Gold mining supply has been declining since 2016 Figure 3: Silver mining supply has been declining sharply since 2016 Gold mining supply began to fall in 1998 and did not hit a coin until 2009. Between 1999 and 2011 gold prices rose, rising 650%. In comparison, silver mining production rose from 1998 to 2009, rising from 500 million ounces through to nearly 700 million annually. However, despite an increase in mining output, silver prices rose even more than gold prices, rising 930% from 1999 to 2011. Gold mining supply rose in 2009, fell slightly in 2010 and 2011, and then climbed more than 20% between 2011 and 2016. Silver mining production rose sharply during this period, with prices of both metals falling sharply, with silver falling as much as 72% and gold up 45% from the highs in 2011. Since 2016, gold and silver mining supply has fallen, with silver output falling sharply. Gold prices began to rise in early 2016. Silver prices did not hit a low until early 2020, when they fell in the early stages of the pandemic, but subsequently went up 150% between March and the end of July, when gold prices rose nearly 40%. Economists cannot perform controlled experiments and, as such, it is difficult to separate the impact of supply on precious metal prices from macroeconomic impact. Did a fall in supply in the 1970s cause the rally in gold and silver prices? Given the high level of consumer price inflation following the collapse of Bretton Woods’ s fixed exchange rate regime, it is difficult to say that mining supply was the main driver of higher prices, especially as prices for energy, industrial metals and agricultural products also rose in the 1970s. Similarly, an increase in mining supply in the 1980s and 1990s coincided with a tight monetary policy and very high interest rates. Gold production fell between 1998 and 2009 in the wake of the tech wreck and the global financial crisis where interest rates fell to zero and the onset of quantitative easing (QE). The 2010s, however, are coming close to resembling a controlled trial. From 2010 to 2016, mining output for both metals rose while monetary policy remained stable, with rates fluctuating at zero in the US, Europe and Japan. The Fed cut QE but didn’t really start moving rates higher until the end of 2016. In 2017 and 2018, the Fed raised rates and began to shrink its balance sheet. Normally, this may have been bearish for gold prices, but gold was moving higher in that period. This suggests that the positive impact of a lower price of mining supply could outweigh the negative impact of tighter U.S. monetary policy (eight rates + balance sheet reduction). In 2019, the Fed began to rebound again and the other central banks eased monetary policy during the pandemic, to which gold and silver prices responded by rising. How Silver and Gold Bind Together Although gold and silver are both classified as precious metals, the two metals are usually highly interlinked in their daily price movements (Figure 4), there are big differences in both price and end. practice. Figure 4: There is a strong correlation between gold and silver despite an unstable gold to silver ratio to begin with, gold is much more expensive than silver. Since 1985, one ounce of gold, on average, was worth about 70 ounces of silver (Figure 5), with the gold-silver ratio ranging from 30 at the lower end to over 120 at the upper end. This means that while silver mining yield measured in ounces is about 7-8x larger than gold mining yield, when measured in dollars gold mining yield is usually around 9 -10x as valuable as a silver mining product. This makes gold the largest member of the silver-gold nexus. Furthermore, it helps to explain why silver prices rose from 1999 to 2009 as gold mining production fell and even as silver mining production continued to rise, especially when viewed you on how the two metals are connected through their use. Figure 5: The ratio of gold to silver has been a wild ship in the last decade of the two metals, gold is used more in jewelry than silver. Of the 95 million ounces of gold mined in 2020, only about 14 million ounces were used in electronics or other industrial applications. Approximately one million ounces was used in dentistry. The other 80 million ounces were made into jewelry or stored as gold bars in cellars (Figure 6). In comparison, only about 40% of silver is used to make jewelry. The rest is used in electronics, batteries, photography, solar panels and other industrial applications (Figure 7). Figure 6: Gold is mainly used for jewelery and investment Figure 7: Silver is also used for jewelery but uses are broader than gold economically, gold and silver are linked through the jewelery and investment markets. Because gold is more expensive and, overall, the value of gold production dwarfs is due to the production of silver, gold works something like a planet and silver like a moon. Together, they have a common center of gravity, but gold is the largest member of the system. When gold prices rise sharply, as they did between 1999 and 2011, that puts gold jewelery out of reach for many consumers. However, even if silver prices rise by, say, 9 or 10x, silver is still an affordable option for many buyers at around 1 / 70th the price of gold. Therefore, it is perhaps not surprising that jewelry demand for silver shows little response to changes in silver prices compared to the true sensitivity of jewelry demand to changes in gold prices (Figure 8). Figure 8: Consumption of silver jewelery is much less price sensitive than gold jewelery in addition to the different sensitivities of gold and silver jewelery demand to changes in their prices, another interesting feature is secondary supply. Secondary supply – gold and recycled silver – does not appear to be driving price. The market already knows the existence of these gold and silver stocks and seems to have been taken into consideration when determining the price. Instead, rising precious metal prices will encourage more recycling of existing stocks. However, the recycling process does not appear to be putting downward pressure on prices. Refraction analysis allows us to see more clearly how changes in mining output from one year to the next affected gold and silver prices. Measured over a period of 45 years from the mid-1970s to the present, the changes in the mining yield of one metal appear to affect the price of both metals. On average, a 1% increase in gold mining output pushed gold prices 2.2% lower (statistics: -5.9) and silver prices 3.1% lower (statistics: -5.6). A 1% increase in silver mining output averaged 1.8% lower gold prices (statistics: -2.5), and 1.7% lower silver prices (statistics: -1.5) (Figure 9). All but the last of the statistics pass the 95% confidence interval test for meaning. Figure 9: Both metals show negative sensitivity to each other while the others in mining supply baseline mining are an important factor for changes in gold and silver prices Gold mining production appears to have a significant impact on the prices of gold and silver The impact of silver mining seems to have a slightly weaker effect on the prices of gold and silver when the prices of precious metals rise, jewelery buyers get a price out of gold but often they can still earn money and money is economically linked through the higher value jewelry and investment markets gold is the largest member of the gold currency system Secondary supply / production is price-dependent rather than drive it to learn more about futures and options, go to Benzinga futures and options education resource. See more from BenzingaClick here for options trading from BenzingaStocks, Bonds Move in TandemBitcoin-Ether Conversion © 2021 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.