Written by Bron Suchecki, Vice President, Operations Monetary Metals LLC and Company Secretary, Gold Industry Group

When looking at any commodity, mine supply is an important factor into the overall supply/demand balance. The cost involved in getting a mine into operation can mean that they will continue to operate and produce their commodity at a consistent rate as long as the market price is above cash costs. The time involved in finding and building a mine can mean that increases in price do not result in new supply immediately coming into the market – often that occurs years later.

These basic economics of mining apply to gold. The chart at right shows a long term view of the supply of gold from mines, by the major producing countries.

Note that total mine output actually declined during the 1970s bull market and it is only after gold peaked in 1980 that mine supply started to increase. During the 2000s bull market mine supply initially fell.

The chart also shows a diversification in supply, away from South Africa and Russia, who declined in both aggregate tonnage and percentage share dominance, to a more balanced mix. Production from China, United States, Australia, Peru and Canada expanded.

However, in the case of gold mine supply is not the total story. In our last article we noted how gold is never thrown away. When we look at where gold comes from, it should therefore not be surprising that the World Gold Council reports that recycled gold averages around one third of total global gold supply.

In addition to recycled gold, gold is also “supplied” by investors who sell gold from their hoards. The chart at right shows quarterly supply of gold in tonnes versus the gold price (figures derived from World Gold Council/GFMS).

The first thing to note is how the observable supply has not changed much when compared to the gold price. Prior to the global financial crisis in 2008, quarterly supply was running at 1,000 tonnes and afterward could be said to have increased to an average of 1,200 tonnes – all while the price had a much more dramatic surge and fall.

Mine supply shows some increase post 2008 but appears to have stabilised in recent years. Recycled gold is much more responsive to price, increasing as the price surged to its peak and then contracting as it falls.

The green bars show sales by central banks and it is clear that they reassessed their views on gold after the financial crisis – they were consistent sellers prior to 2008 but now we only see sporadic liquidations.

The final category in blue are private investors. There is also a category called “Balancing Supply” – this is a figure which balances supply and demand (for every buyer there has to be a seller) and represents unreported sales. It is generally assumed any such balancing item must be from investor hoards, hence I’ve put it in light blue.

Combined together, the blue bars show that net investor selling was limited as the gold price was rising with only a limited increase in liquidations from 2013 onwards as the price fell.

There is one important caveat when looking at the above supply (and demand, in our next article) figures. For commodities, analysis of supply and demand can give insights into the “fundamentals”. In general, analysts can determine with relative accuracy the various flows, as the market is composed mainly of professionals and traded on public exchanges. For example, it is unlikely retail investors are storing barrels of oil in their backyard.

In contrast, gold has a large number of investors hoarding gold, both retail and professional. Such stocks, and the buying and selling from them, is not as easily determined by research firms. One should therefore always be aware that supply and demand figures for gold understate the true volumes being traded.