What Investors Should Know About Precious Metal Asset Supply and Demand, According to Gainesville Coins

While recycling practices can add some precious metal resources back into circulation, mining companies are generally only able to unearth a certain amount of new assets each year.

An increased interest in a particular precious metal can chip away at the available supply, further heightening demand — a scenario that occurred in the wake of the COVID-19 pandemic, says Everett Millman, who is a precious metals specialist at Gainesville Coins.

“Particularly after the pandemic, when we had a lot of supply chain destruction, at the same time we had these constraints on the supply,” Millman says. “People were rushing to buy gold and silver. That bottleneck did create this backlog. Although it has improved over the past two years, there still is a relative lack of availability of gold and silver.”

Current Factors Influencing the Demand for Gold and Silver

Last year, central banks stepped up their gold purchasing practices, ultimately buying 1,136 tons in 2022 — a 152% increase from 2021, according to the World Gold Council — which marked the highest level of central bank gold buying activity since 1950.

A survey of central banks conducted by the organization found gold’s performance during crisis periods, in tandem with its status as a long-term store of value, contributed to the banks’ interest in the asset.

“Central banks have been accumulating gold at an increasing pace over the past three or four years,” Millman states. “That’s why we haven’t seen prices fall back. You have a lot of international interest in central banks protecting themselves against currency devaluation. (Gold) tends to hold its value, relative to inflation, over time in a way the cash in your pocket doesn’t.”

The Gainesville Coins specialist says a sizable stockpile of gold exists in vaults, which could come to market if needed, although on-hand silver resources aren’t quite as robust.

With silver playing a key role in numerous industrial uses, the demand for the precious metal has risen in the past two years, according to Silver Institute data. Annual production grew by 5% in 2021 — the largest annual silver supply increase since 2013, the institute said. However, production decreased last year, and the silver market ultimately experienced the most severe deficit in its history in 2022.

This year, silver mining operations have been met with several challenges, including governmentally introduced regulatory changes in Mexico, which is the largest silver producer globally, Reuters reported in April. Political protests have slowed production in Peru, another major silver supplier, according to the nonpartisan Council on Foreign Relations.

If other events significantly reduce the amount of new silver that’s put into circulation in the coming months, prices for the precious metal could rise in response.

“At least half of the demand for silver, if not more, comes from industrial uses,” Millman explains. “So much silver gets consumed each year that there is relatively less available for investment purposes. We’ve seen, periodically, backlogs and difficulties procuring supply of silver — at least in the volumes that people are demanding it.”