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Fundamentals of Precious Metals – Gold, Silver, Platinum

Gold

The process of gold extraction is expensive and time-consuming. It typically requires large mines and blasting rock to mine gold; the ore is then transported to a plant that crushes it to get to the gold. Investors get confused on what is an ounce of gold because there are two types: 1) avoirdupois ounce, which is used for jewelry, and 2) troy ounce, the one for investors, which is about 10 percent larger than the avoirdupois ounce.

The main demand sources for gold are for jewelry, for investment, and for industrial use. In terms of suppliers, South Africa was once the dominant global producer of gold. Please keep in mind that approximately 20 percent of the world’s supply of gold is not put onto the market, as this amount is actually held by central banks. Gold mines are the largest part of the global supply; another important source is from scrap, which is the process of converting jewelry into gold bars or coins, the recycled gold.

Because of controls on currencies and investments, it had been difficult for retail Chinese investors to purchase gold, however, since 2010, the Chinese government allowed a mutual fund that allows Chinese investors to participate in foreign gold ETFs, indicating a growing demand among retail investors.

Silver

Among precious metals, silver has the highest conductivity of any element, even copper; silver is also strong yet malleable. The two main grades of silver are pure silver, and sterling silver or standard silver, which is an alloy of 92.5 percent silver and 7.5 percent copper. Copper helps to increase the durability of silver.

The demand sources for silver are for industrial use, for jewelry and silverware, for investment, and for photography. The largest demand comes from industrial applications, including batteries, computer components, medical devices, and surgical instruments. Beyond that, silver is a replacement for some applications of lead, since it has “green” qualities. Another reason for the growth of silver is the growth in digital cameras, although there have been some offsetting factors such as the rising demand for traditional film in some emerging markets. On the supply side, largest silver producers include Peru, China, Mexico, Chile, Australia, and the U.S. Because silver is a by-product of mining for other metals, the supply is highly impacted by changes in the economy, i.e., if there is a falloff in economic growth, miners will usually cut back on the extraction of key commodities, and therefore a lower silver production. In addition to demand/supply balance, the factors that influence the price of silver are the silver standard, the government silver holdings, and the gold-silver ratio.

Platinum

Platinum is quite versatile since it has a high resistance to corrosion. It is the main part of the so-called platinum group – palladium, rhodium, ruthenium, iridium, and osmium. Platinum is fairly scarce, with an annual amount of about 6 million ounces. To produce 1 ounce, it takes amine to crush about 10 tons of ore, and the process can easily take six months.

Similar to gold, demand sources for platinum are for jewelry, for industrial use, and for investment. The world’s largest supplier of platinum is South Africa, with Russia being the second largest. North America is also a significant producer of platinum.

The value of gold and silver goes beyond supply and demand. Investors look at them as safe havens and even alternatives to currencies, and therefore the valuations can be quite volatile, and depend on the global situation.

Reference:

All About Commodities, by Tom Taulli 2011

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