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Although they finished this week with a sharp pullback, gold prices remain at historically high levels. There is a saying among commodity traders that “the cure for high prices is high prices.” The idea is that high prices will encourage producers to increase output, which in turn will lead to an increase in supply that will ultimately result in lower prices. The gold market could be an exception.
The World Gold Council (WGC) released their Gold Demand Update for 2022 earlier this week, and in it they reported that overall gold demand reached an 11-year high. A large portion of that surge came from central banks, whose purchases of 1,136 tonnes reached a 55-year high. Official gold coin demand increased by 13% as well. This helped offset a 2% decline in gold jewelry demand and a 7% decline in gold technology demand.
Unlike many commodities, a portion of metals demand can be met by recycling. Over the past decade, gold recycling has accounted for 23% to 28% of the WGC’s estimated supply. The 2022 recycling total came in at 1,144.1 tonnes, which was 7.9 tonnes above 2021. However, this was 148.9 tonnes below 2020 and 482.2 tonnes below 2011, which was when gold demand reached a record high.
The largest share of gold supply comes from mine production. The WGC forecast 2022 gold mine production at 3,611.9 tonnes, up from 3,568.9 in 2021. This is far above mine output during the record high demand year of 2011 (2,876.9 tonnes), but it is 43.4 tonnes below the record production from 2018. Since seeing a 48% increase from 2008 to 2016, annual mine production has held within a relatively tight range.
While gold prices reached a record high during the first quarter of 2022, average All-In Sustaining Costs (AISC) for gold mining reached a record $1,289 during the third quarter. Of the world’s largest gold producing nations, China is still vulnerable to fresh outbreaks of COVID. Imports of Russian gold have been banned by several nations. Thus, it could be difficult for global gold mine production to increase by any significant amount over the next few years.
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Originally Published February 3, 2023
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