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Lear Capital Clarifies How Recycling Practices Can Impact the Supply of Gold and Silver Assets — and Their Price

Precious metals’ rarity is one of the central factors that contribute to their value — with a finite supply in existence, the principles of supply and demand apply, says Kevin DeMeritt, founder and chairman of portfolio diversification service provider Lear Capital.

Posted: 16th November 2023 by Finance Monthly
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“You can only pull so much gold out of the ground,” Kevin DeMeritt says. “Even with new technology, we’re having to go deeper and deeper inside the Earth to go get it; that technology is just [adjusting for not] having the gold closer to the surface.”

Adding further pressure, in recent years, mounting interest in physical precious metal assets from both investors and the industrial sector has placed more stress on the current supply.

Central banks, for instance, snatched up gold at an unprecedented rate in 2022 — a year when they truly “entered the market,” Kevin DeMeritt says.

While more precious metal resources can’t physically be created, recycling is one way the amount of available assets can be augmented.

In the recycling process, refineries meltdown items, such as jewellery or coins, or chemically separate them from their alloys.

Efforts to repurpose precious metal assets are ongoing — silver recycling activity, for instance, increased for the third year in a row in 2022, growing 3% during the year, according to the Silver Institute.

Recycling, though, doesn’t appear to be on the verge of drastically increasing silver and other metal reserves. Even with the overall increase last year, certain types of silver recycling only experienced moderate gains, such as jewellery and silverware recycling. 

According to one report, approximately $10 billion worth of gold, platinum, and other precious metals are thrown away every year.

More could likely be done to recycle silver and other precious metal assets. As a result, the demand for gold, silver, and other assets — along with their prices — may remain considerable.

“Put an increased demand on a fixed supply, the price typically goes up,” Kevin DeMeritt says. “It's Economics 101. So I think you're going to continue to see, over the next five or six years, that demand will continue to increase for precious metals.”

Numerous Nations Are Gravitating Toward Gold

Previously, several countries had heartily invested in U.S. Treasurys and other securities; as Lear Capital mentioned in an October 2022 update, though, some have begun stockpiling gold. 

Amid Federal Reserve-driven rate cuts in the U.S. that have affected costs for external investors, S&P Global reported in February that the amount of Treasury securities owned by Japan — reportedly the largest foreign U.S. Treasury securities holder — had dropped 18.5% between November 2021 and November 2022.

U.S. debt holdings in China, another top Treasury securities holder, fell below $1 trillion for the first time in more than a decade in 2022. China’s gold purchasing, however, was so robust that, along with Turkey, it helped drive a 152% increase in central bank-related demand for gold last year, according to the World Gold Council.

“China sold off U.S. Treasurys,” Kevin DeMeritt says. “They’ve been replacing it with gold. Russia has eliminated all of their reserves of U.S. Treasurys — and what did they replace it with? Gold.”

Central banks, in 2022, ultimately purchased a quarter of all the mining supply, DeMeritt says.

“[That] is a huge jump from [their previous activity],” he says. “We have not seen this kind of buying from central banks for 50 years.”

In addition, the gold they snapped up isn’t likely to make its way back to the market soon, according to DeMeritt — who says central banks tend to hold on to what they obtain for 10 to 20 years at a time.

“They’re not speculators; they’re not day traders,” the Lear Capital founder says. “That metal is gone, and you’re not talking about small amounts here. If this continues, as we start to see more financial instabilities happen around the country, and probably the world, that demand from central banks is going to intensify — along with demand from institutional and individual investors.”

With a hearty interest from central banks, gold prices reached notable levels in 2022. In March, U.S. News & World Report reported that gold prices topped $2,000, their highest level in more than a year. Gold prices also exceeded $2,000 per troy ounce during the first week in May, at one point trading just about 25 cents below the all-time high, according to Markets Insider.

Enhancing Available Asset Reserves Can Be Difficult

In 2022, several scenarios impacted production capabilities in countries that supply significant amounts of precious metal resources.

In South Africa — which, with Russia, proves a large portion of the world’s platinum — the mining industry experienced transport issues and adverse weather that threatened production, according to an Economist Intelligence Unit report. Total mine output declined by 7%.

Metals are Russia’s second biggest export, according to a University of Florida analysis. However, following Russia’s invasion of Ukraine, the U.S. placed restrictions on metal imports from Russia, and mine-related platinum production in the country declined in 2022. The mining output of the precious metal had also declined for three years prior.

“Russia [has] a fairly decently sized mining supply of precious metals,” Kevin DeMeritt says. “There’s an impact from the supply.”

Coveted by investors, due to its perception as a hedge against inflation, and performing a key role in industrial and clean energy processes, silver has seen considerable interest in recent years.

However, despite a nearly 6% rise in silver mining in 2021, in 2022, production of the precious metal declined, affected by issues in some of the top-producing countries, including decreased overall output in China and mine suspensions and social unrest in Peru.

“Silver has become a highly in-demand asset,” Kevin DeMeritt says. “Yet the available supply hasn’t vastly increased.” 

Consecutive shortages occurred in 2021 and 2022, according to mining.com — which suggested last year’s deficit may ultimately prove to be the most significant on record. The consistent demand for silver is also expected to result in additional supply shortfalls within the next five years.

When precious metals are hard to obtain, their value can increase. With high demand and lower production, silver prices, for instance, ended higher in 2022 than at the start, according to Lear Capital data.

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