Although not as important in terms of volume produced and traded, precious metals are important for their durability and value, which makes them ideal for passing down from one generation to the next as a store of wealth. They are, however, equally important for the many industrial applications they have, so it will be interesting to explore their demand and supply fundamentals. In this chapter, we will look at four metals: gold, silver, platinum and palladium. The latter two, together with rhodium (Rh), ruthenium (Ru), iridium (Ir) and osmium (Os) are known collectively as PGMs (platinum group metals). Let's start though with the king of precious (and all) metals: gold.

Gold

Herodotus mentions that "Lydia does not have anything particularly remarkable to describe other than the gold nuggets (!) which flow down from Tmolos" (Μount Tmolus in modern Turkey), and that Lydians were the first to use gold (and silver) coins and were also the first retailers. Clearly, he was not easily impressed...

"Θώματα δὲ γῆ ‹ἡ› Λυδίη ἐς συγγραφὴν οὐ μάλα ἔχει, οἷά τε καὶ ἄλλη χώρη, πάρεξ τοῦ ἐκ τοῦ Τμώλου καταφερομένου ψήγματος." [Ι.93.1] Λυδοί πρῶτοι δὲ ἀνθρώπων τῶν ἡμεῖς ἴδμεν νόμισμα χρυσοῦ καὶ ἀργύρου κοψάμενοι ἐχρήσαντο, πρῶτοι δὲ καὶ κάπηλοι ἐγένοντο." [Ι.94.1] 

Herodotus, Histories

Six millennia later, gold continues to fascinate us all and is still used for jewellery and as a store of wealth to be amassed in one's lifetime and bequeathed to the next generation. It is as much a commodity, as it is quasi-money, and hence an asset to be held in investment portfolios alongside equities, bonds and other assets. Let's have a look at its physical characteristics first.

Physical characteristics

Because gold has a bright, attractive colour, does not tarnish or corrode, is workable and virtually indestructible, it attracted human attention very early on, as we saw above. It is used on its own, or in alloys with other metals, such as silver[2], copper, platinum and palladium, especially for jewellery and coinage. The latter use is what sets gold apart as the one material that is universally accepted in exchange for goods and services. 

"In the form of coins or bullion, gold has occasionally played a major role as a high-denomination currency, although silver was generally the standard medium of payments in the world’s trading systems."[3]

Gold is also a very dense metal (19.32 g/cm3), which means it can be stored in its pure form in relatively small spaces, which makes it ideal for wealth storage. It is estimated[4] that all the gold ever mined in the world would form a cube with a 22m edge.

Supply determinants

Gold is one of the few elements to occur in a natural state. It is found in veins and alluvial (riverbed) deposits, usually in the form of very fine particles like dust, small nodules or, if lucky, larger nuggets. In low concentrations, it is widespread in igneous rocks, the same type of solidified molten magma that also contains copper and lead. It is estimated that the earth's crust contains 0.005 ppm of gold, which makes it appropriately scarce to be as valuable as it is. Gold supply comes from several sources: freshly mined gold, recycled gold scrap and official sales by central banks.

Mining supply

Gold is found in every continent, including Antarctica[5], although it is highly improbable it will ever be economically or politically feasible to recover it. Exhibit 1 shows a map of operating gold mines around the world, although not all mines are exclusively gold mines; some of them may well be primarily copper mines. USA and Canada have numerous mines dotted on the Pacific Coast and reserves spread further south in Mexico and several more S. American countries, such as Peru and Chile. On the east side of the Americas, there are numerous mines in Brazil, Argentina and Canada. In Africa, mines are concentrated in the west - in what was historically known as the Gold Coast - and also in the centre and south. In Europe, there are several mines spanning from the northwest to the southeast. There are numerous mines scattered around Russia, as well as other CIS countries, notably Uzbekistan and Kazakhstan. In Asia, mines span from Turkey in the west to Papua New Guinea in the east, while Australia has mines both in the southwest and the southeast. On a country basis, China is the biggest producer but, as a continent, it is Africa which takes the lead, with Ghana the top African producer.

A look at Exhibit 3 indicates that closely behind China comes Russia, as the world's second largest producer, followed then by Australlia and Canada. 

Exhibit 4 shows the development of mine production by region. The reader can notice the consistent increase of mining output since 2010, with the notable exception of 2020, when all mining output was affected by the Covid pandemic.

Note that in Exhibit 3, N. America includes only USA and Canada, with Mexico coming under L. America, as grouped by Refinitiv. In Exhibit 4, Mexico is part of N. America, as grouped by the World Gold Council.

Mine production does not respond quickly to gold prices. The project development timeline and mine lifecycle is long – it often takes decades to move from discovery to production. Once production has started, it is rather inflexible and it will not vary as much as the price of the metal itself. A mine may shut down if the reserves are depleted or become uneconomical to extract, but the output will remain relatively stable. This is unsurprisingly similar to the mining supply characteristics of other metals and minerals we have already seen in earlier chapters. What is more, gold may frequently be a by-product of another metal production, quite frequently copper or lead. This is yet another reason for the supply elasticity of gold to be quite low.

The World Gold Council (2023b) defines five phases in the life of a mine:

1. Gold mine exploration (1 - 10 years): as we have seen in our discussion of mining supply economics earlier, gold mine exploration requires significant time, large capital expenditure and expertise in areas such as geography, geology, chemistry and engineering. The likelihood of a discovery leading to a mine being developed is very low. Less than 0.1% of prospected sites will lead to a productive mine, and only 10% of global gold deposits contain sufficient gold to justify further development.

2. Gold mine development (1 - 5 years): This involves the planning and construction of the mine and associated infrastructure, if this is not in place already. Permitting and licensing are essential before construction can begin. This will generally take several years, although this varies greatly depending on the jurisdictional complexities. The mine itself is only one piece of the production puzzle, which will typically include processing facilities, local infrastructure and amenities to support both logistical and operational needs, as well as employee and community welfare.

3. Gold mining operation (10 - 30 years): This is the productive life of a gold mine, with ore being extracted and processed into gold. Processing gold involves transforming rock and ore into a metallic alloy of substantial purity, known as doré and typically containing between 60-90% gold. During the mine's life, a number of factors, such as the price of gold or input costs, will affect which areas of an ore body are deemed profitable (economic) to mine. In times of higher prices, mining low-grade ore will become profitable as the higher price offsets the increased cost of extracting and milling greater volumes. When the price is lower or costs rise, it might only prove profitable to extract and process higher-grade ores. Mine plans are regularly re-assessed as market conditions change, new technical information comes to light, and process and technological enhancements are considered.

4. Gold mine closure and decommissioning (1 - 5 years): After a mine has ceased operations, possibly because the ore body is exhausted or the remaining deposit becomes unprofitable (uneconomic) to mine, work then focuses on its decommissioning, dismantling and rehabilitation of the land in which it was situated.

5. Gold mine reclamation and post-closure: The mining company is also responsible for the management of a site long after a mine has closed and been dismantled – typically for a period of five to ten years or more. Over this time, the land will be rehabilitated – cleansed and revegetated – and the company will work to ensure the success of this phase.

What was described above refers to one method of recovering gold: hard rock mining. We have seen already that gold can be recovered during the mining of other metals, such as copper. This is also known as by-product mining.

Mining gold does not only involve large companies though. In many countries, especially in Africa, there are small artisanal mines, not very dissimilar to the ones we encountered earlier for cobalt production. This is more akin to a third production method, placer mining, which is now known as artisanal small-scale mining (ASM). This is used by amateur gold hunters; it essentially involves using gravity and water to separate dense gold from other materials around it. As Verbrugge & Geenen (2020, pp. 1-2) note: 

"The history of mining is often presented as a linear evolution from pre-modern and traditional forms of mining, towards capital-intensive industrial mining undertaken by large (multinational) mining companies. ... Yet in many new gold mining destinations, the expansion of industrial gold mining is accompanied by an equally dramatic increase of what is widely referred to as artisanal and small-scale gold mining (ASGM). Across the globe, up to thirty million people may now be involved in small-scale, low-tech, labor-intensive gold mining, producing up to one-fifth of the global gold supply"

Producer hedging

The volume of gold that is supplied to the market each year can also be marginally affected by producer hedging. This is when miners sell forward their production in order to lock in a specific price. This is typically done to manage project costs or debt servicing. This hedging agreements may affect the amount of gold that enters the market and used to have a substantial impact on supply levels. More recently though, they have less of an impact and tend to be shorter term only.

Processing and refining

The gold-bearing ore goes through initial processing, which involves crushing and grinding into small pieces and then separating the gold from the other minerals. Gold is then refined to remove impurities and made into bars or other products. There are several methods used for gold processing including gravity separation, flotation, cyanide leaching, and amalgamation. Cyanide leaching, also known as cyanidation or the MacArthur-Forrest process, is a hydrometallurgical method which was developed in 1887 and is still used to extract gold which exists in concentrations as little as 0.5g/t. The process can be controversial because of the toxicity of cyanide, but it is still used for gold - and also silver - recovery.

Amalgmation relies on the fact that elemental gold (and silver as well) is soluble in mercury, so that when particles of the metal are brought into contact with a fresh mercury surface, they are wetted and dissolved, forming an alloy called amalgam. This process involves passing a slurry of ore over copper plates coated with mercury, or milling the ore to free the gold from the mineral matrix and then adding mercury to the mill and continuing grinding until the gold has dissolved in the mercury. The amalgam recovered by either of these methods is heated to distill off the mercury and recycle it.

Whether extracted by amalgamation or cyanidation, gold contains a variety of impurities, including zinc, copper, silver, and iron. Two methods are commonly employed for purification: the Miller process and the Wohlwill process. 

"The Miller process is based on the fact that virtually all the impurities present in gold combine with gaseous chlorine more readily than gold does at temperatures equal to or greater than the melting point of gold. The impure gold is therefore melted and gaseous chlorine is blown into the resulting liquid. The impurities form chloride compounds that separate into a layer on the surface of the molten gold. The Miller process is rapid and simple, but it produces gold of only about 99.5 percent purity. The Wohlwill process increases purity to about 99.99 percent by electrolysis. In this process, a casting of impure gold is lowered into an electrolyte solution of hydrochloric acid and gold chloride. Under the influence of an electric current, the casting functions as a positively charged electrode, or anode. The anode dissolves, and the impurities either pass into solution or report to the bottom of the electrorefining tank as an insoluble slime. The gold migrates under the influence of the electric field to a negatively charged electrode called the cathode, where it is restored to a highly pure metallic state." [5]

Official sector sales

The term "official sector" refers to central banks, which can be quite active in either buying or selling gold. In recent years, especially in the aftermath of the global financial crisis in 2008, many banks have bought gold in order to strengthen their currency reserves. This activity contributes to demand for gold, so we will examine it in more detail in the next section. Historically, central banks have sold gold, especially in the 1970s, 1990s and the first half of the 2000s. Such activity generates additional supply of gold and may exacerbate any downward pressure on its price. This section closes with Exhibit 7, which shows the structure and flows in the global gold market. It offers a snapshot of both supply and demand for the metal and is a useful link to the next section.

Jewellery

From ancient civilisations like Egypt, Greece, and Rome to the opulent dynasties of Asia, gold jewellery has adorned monarchs, nobles, and religious figures. Throughout history, gold jewellery has symbolised status, prosperity and spiritual connection, becoming an integral part of cultural and social customs. Gold jewellery holds immense cultural and emotional significance in various societies around the world. It is often associated with tradition, heritage, and celebration. In many cultures, gold jewellery is a central focus of important rituals, ceremonies, and milestones, such as weddings, religious festivals, and birth celebrations. The emotional attachment and sentimental value associated with gold jewellery contribute significantly to its demand, which accounts ca. 50% of the total demand for gold.

Gold jewellery possesses a unique versatility that enables it to be crafted into a wide range of designs and styles. From intricate traditional motifs to contemporary and minimalist designs, gold jewellery caters to diverse tastes and preferences. Its ability to effortlessly blend with various gemstones, pearls, and other precious metals further enhances its appeal. Moreover, gold jewellery is known for its durability, allowing it to withstand the test of time and retain its elegance, making it a cherished heirloom. The latter confirms that gold jewellery serves as a tangible and portable form of investment and has historically been considered a safe-haven asset, especially useful in times of economic uncertainty.

Because gold represents such a significant personal investment for individuals and families, jewellery demand is affected by disposable income and the state of the economy. Exhibit 9 shows the development of jewellery demand since 2010 and the annual GDP growth rate over the same period. Although the correlation may not hold every year, notice how a reduction in GDP growth coincides with a decline in jewellery demand, with the most eye-catching year being 2020.

The other important aspect of jewellery demand is the geographical source. The two most important countries are China and India, the former rising in prominence since in mid 2000s. Exhibit 10 shows quarterly data for jewellery demand in India, China, the M. East, Americas and the rest of the world. Of note is its fluctuation from one quarter to the next, with Q3 and Q4 being the highest points in practically every year. A combination of large festivals, the new year approaching and an increase in weddings can be used to explain these peaks. 

Technology

The technology sector includes primarily electronics, with smaller amounts being used in dentistry. In electronics, solid state devices use very low voltages and currents which are easily interrupted by corrosion at the contact points. Gold's inert nature makes it a highly efficient conductor that can carry these tiny currents consistently, without any losses due to corrosion. Electronic components made with gold are highly reliable. Gold is used in connectors, switch and relay contacts, soldered joints, connecting wires, connection strips, and connectors for mounting processor and memory microchips.

In an example of other industrial uses, an estimated 48 grams of gold was used to coat the mirror of the James Webb telescope. The coat is a mere 100 nanometres, or 600 atoms, thick. 

Over the last decade, the average quantity of gold for industrial uses was ca. 350 metric tons, with 275 tons of that (~80%) going to electronics. The reader may note, in Exhibit 11, that industrial demand is a lot less volatile than that for jewellery and has remained stable since 2015.

Bars, coins and medals

Although jewellery is often considered as an investment, it may not be as easy to liquidate readily and it may also have sentimental significance which complicates matters. It is, therefore, quite common to invest in gold in the form of bars and coins. Since 2010, gold demand for bars, coins and medals has fluctuated between 1100-1700 metric tons every year, accounting for an average 27% of total demand, the second largest source of demand after jewellery. Exhibit 12 shows the development of this demand, where the reader can see that the majority, ca. two thirds, is accounted for by bars.

Investing in bars, also known as "bar hoarding", if a very popular means of holding gold in its most liquid form, bullion. It can be kept in private safes, or in bank vaults and because its quality is formally assayed and guaranteed, it can be as easily exchanged as any strong currency. This is why bars are favoured by investors, whether small or large. The Middle East rose to prominence in bar investment during the petrodollar-rich 1970s and 1980s, as gold was bought not just just for its beauty and glamour, but also for the safety it represents as a pure asset. During the 1990s, South East Asia followed suit and the 1997 regional financial crisis exemplified the astuteness of holding gold, not just currencies. Since the 2000s, China has emerged as a key consumer of gold, not only because of its industrial use, but also because bar hoarding became the investment of choice for many small investors, who use their hard-earned saving to buy bars every time gold becomes temporarily more affordable, with a view to accumulating wealth for the benefit of future generations.

Exhibit 13 shows demand for bars, coins and medals since 2010, but this time by major countries and regions. The reader can see the importance of both China and India, as expected, but also the attractiveness of gold investment for Europeans, especially since the Covid pandemic.

In contrast to coins and bars, medals have rather limited amounts of gold. A gold medal is typically made in silver, whis then gold-plated. Coins may also make sound investments, as their worth depends on several factors. In addition to its "melt" value, the value of its gold content at current spot prices, a coin may have even more value contingent on its condition, age and collectability.

Investment off-take

In contrast to China, India, M. East and other emerging markets, European and North American investors have been realising their gold investments through exchange-traded funds (ETFs). Since the 2008-9 financial crisis started a flight from equity markets and a rush to the safe-haven that gold offers, many investors took refuge in gold through buying shares in such funds. A gold ETF invests in gold bullion and futures contracts in order to track the price of gold. It then sells shares to investors who wish to have a share of the action, without the need to hold physical bars.

Exhibit 14 shows the annual demand for ETFs since 2010; notice how they have been mostly buying, but also the offload in 2013 after sustained drops in the price of gold from 2012 onwards. Exhibit 15 shows ETF gold holdings by region, where Europe and N. America are clearly ahead of everyone else. Funds such as SPDR (State Street) and iShares (Blackrock) have made investing in gold shares extremely popular - see Exhibit 16.

Official sector purchases

A bit of history first

Gold was always important for states and their rulers, whether kings and queens or governments. Initially it was accumulated to meet the costs of waging war and this gold reserve was often referred to as the "treasure". In England, it was the foundation of the Exchequer in the 12th c. which centralised the collection and disbursement of this treasure, mostly in the form of coins, which at the time were mostly silver with small amounts of gold. In 1694, the Bank of England was founded, becoming the second oldest central bank after Sveriges Riksbank in Sweden. From the early days, central banks, were given rights to issue money, whether coins or notes. Although coins have their intrinsic value based on their metallic content, paper notes do not. Notes are issued on the promise of paying their depositors in gold, hence the need to hold gold reserves. As most other commercial banks were not licensed to issue money and, therefore, did not need to hold gold, holding reserves became the prerogative of central banks. From the early 18th c. to the early 19th c. countries such as the UK and the USA had adopted a bi-metallic standard, using both gold and silver and establishing an official parity between the two. In 1821, the UK became the first country to officially adopt the Gold Standard, followed by Germany in 1871 and by the majority of developed nations by the turn of the 20th c. As Green (1999, p. 3) notes:

"Prior to 1850 gold was not just a precious metal but a genuinely rare one. World gold production from 1800-1850 totalled around 1,200 metric tons; from 1851-1900, propelled by the discovery in the United States, Australia and, later, South Africa, it was almost 10,400 mt – virtually a ten-fold increase. Indeed, in those last 50 years of the nineteenth century about twice as much gold was mined as in previous history. ... This growth coincided with an era of rapid expansion in industry, trade and international banking, which gold helped to finance. The relative abundance of gold also made possible the development of the international gold standard in all major nations save China, with gold coin forming a significant part of the monetary circulation in many countries, not just England."

The International Gold Standard was at its pinnacle until 1914, while the shadow of the looming war compelled many European countries to increase their reserves, as they were preparing their war chests. During World War I, while the gold standard was not suspended, it was drastically weakened. After the end of the war, the lack of confidence in gold directed countries to hold more British sterling pounds and US dollars as global reserve currencies. After the 1929 stock market crash, interest rates rose to convince depositors to keep their money in banks and gold was devalued against the two major currencies, the pound and the dollar. In 1931 the UK effectively abandoned the gold standard and the US followed suit in 1934.

After the end of World War II, the western allies came together to remedy the fallout from the war, help weaker nations flourish and avoid the perils of another large-scale war any time in the future. The Bretton Woods Agreement established a tripod on which the world economy could find stability:

Although the gold standard was not in force any longer, its fixed parity to the US dollar supported the stability of the international financial system. In 1961, the London Gold Pool was set up, by eight US Federal Reserve Banks and seven European countries[6], to pool gold reserves and cooperate in maintaining the Bretton Woods system. This was partly in response to a long-lasting post-war drop in US gold reserves, coupled with inflationary pressures, increased government debt to pay for social programmes and to finance the Vietnam War.

As global investors started losing their faith in the US dollar as the international reserve currency, in 1968 the London Gold Pool stopped its intervention and allowed the market to freely determine the price of gold. This led to a surge in the price of gold, further undermining confidence in the US dollar and the Bretton Woods system. In August 1971, US President Richard Nixon suspended the convertibility of the US dollar into gold, effectively ending the gold standard and marking the beginning of the end for the Bretton Woods system.

The collapse of the London Gold Pool gave Switzerland the opportunity to step in and create the Zürich Gold Pool, with an informal agreement by the then three main banks: UBS, Swiss Bank Corp, and Credit Suisse (of which only the first survives). In doing so, the Zürich Pool enabled South African miners to sell their gold and become the most important clients of the Swiss banks. All three banks also established refineries to collect the gold, turn it into bars and then offload it in the newly-formed gold pool, thus making Zürich temporarily the world's most important gold bullion market at the time.

And now?

Central banks still play an important role in the gold market, as they hold just over the a sixth of all the gold ever mined, or just over 35.5k metric tons, as can be seen in Exhibit 17. The USA is the leading reserve holding nation, followed by Germany, Italy and France, which together with other Euro-area countries and the ECB collectively hold another 30% of global reserves. Other notable reserve holders are Russia, China, Switzerland and, unsurprisingly, the IMF.

Central banks buy gold for a number of reasons:

• to balance the risk of holding foreign exchange reserves and to promote stability during economic turmoil;

• to hedge against fiat currencies, e.g. the US dollar, whose purchasing power may erode because of inflation;

• to diversify the portfolio of currencies central banks hold, especially the US dollar, which frequently has an inverse correlation with gold.

Earlier in this chapter we saw that in the 2000s central banks were mostly sellers. The peak of this strategy was the sell-off by HM Treasury of UK gold reserves between 1999-2002, when gold prices were at their lowest for 20 years. This event was named "Brown's Bottom", named after the then Chancellor of the Exchequer Gordon Brown. The wisdom of this decision has been questioned, but has also been supported.

Following the 2008-9 financial crisis, central banks have been buying on a net basis. Exhibit 18 shows this buying activity since 2010, together the average annual price of gold over this period. Some of the largest buyers have been China, Russia, India, Kazakhstan, Uzbekistan,  S. Arabia and Turkey.

Although official sector gold purchases tend to be pre-announced and quite orderly, they may still have a considerable effect on the price of the metal. A gold analyst needs to keep an eye on central banks, as well as jewellers and bullion traders (bar hoarders and ETFs) to evaluate the current and future path of the gold price.

Trade and Pricing

Gold can be traded in the form of concentrate, dust and nuggets, doré bars, coins or in its purest form, gold bars of 999.9‰ purity. The latter is known as bullion and there are several bullion trading centres around the world. 

London remains by far the largest bullion market in the world. In addition to trading spot (S) gold, LBMA offers forward (F) and options (O) contracts. There are six banks which are market making LBMA members for all three products: Citibank N A, Goldman Sachs International, HSBC, JP Morgan Chase Bank, UBS AG, and Morgan Stanley & Co International Plc. There are also five LBMA market makers who provide two-way pricing for one or two of the above products: BNP Paribas SA (F), ICBC Standard Bank (S), Merrill Lynch International (S,O), Standard Chartered Bank (S,O), and Toronto-Dominion Bank (F). Clearing of these contracts is done via the London Precious Metals Clearing Ltd (LPMCL).

It is worth mentioning her that ICE, the Intercontinental Exchange, also offers its own gold futures contract. It is a physically settled daily futures contract for gold delivered loco London in unallocated vault accounts. The contract size is for 100 tr. oz. and it is traded electronically. The LME also launched a gold contract, but it was not as successful and ceased trading in July 2022.

Switzerland

In Europe, gold is also traded in other financial centres, especially so in the Zürich (or Swiss) pool, which rose to prominence from 1968 onwards, as we saw earlier. The only remaining market maker in this pool is UBS, after its acquisition of Credit Suisse in March 2023. UBS is also a member of the LBMA and is active as a market maker for spot, forward, option, swap and other contracts in the Swiss market. There are nine more LBMA members from Switzerland, including Zürcher Kantonalbank (a cantonal bank), Bank Julius Baer (a private bank), several refiners and even a transporter. The large Swiss gold refineries have dedicated precious metals trading desks which quote spot and forward metal prices to clients and that can trade gold and other precious metals for either allocated or unallocated (metal account) settlement. What exactly is meant by allocated and unallocated accounts? According to the LBMA:

"Probably in excess of 90% of all precious metals traded on the interbank/wholesale/OTC market clear over unallocated loco London accounts. Ultimately, this reflects a debit or credit over an account, and the account holder has a contractual claim against the clearer – rather than a specific bar. Therefore, a credit balance on an account means that the owner of the metal has credit exposure to the institution where the account is held. In this respect, it is analogous to a current/checking account held with a bank for a currency. The advantage of settling precious metals over unallocated accounts is that it is quick, simple and a specific quantity of metal can be bought (or sold). For example, if an investor wishes to purchase $1,000,000 worth of gold then this number could simply be divided by the spot price and the relevant amount of metal, calculated to three decimal places, could be credited to the unallocated account on the spot date with the US dollars also being paid on that day."

"Unlike unallocated accounts, an allocated account is backed by a specific bar of the precious metal. So that the investor would not see a simple credit on their account but instead a weight list of bars, plates or ingots showing the unique bar, plate or ingot number, gross weight, the assay or fineness of each bar, plate and ingot – and in the case of gold, its fine weight. Credits or debits to the holding will be effected by physical movements of bars, plates or ingots to or from the client’s physical holding. An allocated account cannot, by definition, be overdrawn. In this instance, the investor does not have a credit exposure to the institution where the account is maintained and, in the event that the account operator is declared in default, then theoretically the creditor could simply drive to the vault and remove their bars physically – in practice this would be rather more complicated given that these facilities are very high security environments that do not welcome visitors. In this respect, it is analogous to a safe deposit box with the account operator simply acting as custodian."

Germany

Although London and Zürich are the most internationally established bullion trading centres, gold is traded through banks and other financial institutions in Europe. In Germany, gold is traded through a network of Landesbanken (state-owned regional banks), Sparkassen (savings banks), Reiffeisenbanken (co-operative banks), and commercial and investment banks, such as Commerzbank and Deutsche Bank. Of these, Bayerische LB is an LBMA member, alongside other banks, precious metals traders (e.g. Degussa) and refiners (e.g. Heraeus). Landesbanken typically act as wholesalers, supplying gold to other savings and co-operative banks in their regions, while commercial, investment and private banks can facilitate gold transactions for their clients. Refiners provide gold to banks, national wholesalers and retailers, including industrial users and including jewellers. Finally, specialist precious metals traders operate wholesale and retail outlets, both online and through physical branches.

Russia

As the world's fourth largest producer, gold mining plays an important role in Russia's economy and is heavily influenced by government regulations and policy. The Central Bank of Russia is the world's sixth largest reserve holder, with over 2,300 metric tons. Most of these official purchases are done in the domestic market from Russian miners.

The Gokhran of Russia (Гохран России) is a state institution reporting directly to the Ministry of Finance and is responsible for the State Fund of precious metals and precious stones of the coiuntry. It is responsible for the purchase, storage, sale, and use of precious metals, precious stones, jewellery, rocks, and minerals by the State Fund. It technically has first refusal of buying gold and other precious metals and stones, but it often leaves this to domestic commercial banks, such as Sberbank, VTB Bank and Gazprombank.

Finally, gold can also be traded on the Moscow Exchange (MOEX) on a spot basis, alongside silver. Trade is done in bullion bars on an unallocated account basis.

Two French banks used to participate in the old LBMA pricing mechanism: Société Generale (SocGen) and BNP Paribas. Only the latter remains a market-maker member and takes part in the current auction system, but SocGen is still a full member. Both banks, together with Credit Agricole and Natixis are the market makers for the gold market in France.

Italy has the second largest official reserves in Europe and the third largest globally. Until the 1990s, Italy was one of the largest jewellery fabricators and several of the Swiss refineries were located near the Italian border, in the canton of Ticino, in order to be close to their jewellery clients. Since the 200os, however, a lot of the jewellery business has moved to more competitive fabricators, notably China, India, Turkey and the US.

It is worth mentioning that the gold basis or cost of carry, the difference between cash and forward prices, is mostly explained by the cost of money, typically the interest rate. The higher interest rates are, the bigger the basis and the steeper the forward curve is.

In addition to the headline futures contracts, COMEX also lists traded options contracts written on the underlying futures contract. As with all traded derivatives products, COMEX maintains data on trading activity, including volume, open interest and prices and regulates all aspects of the gold and all other commodity contracts. The Commodity Futures Trading Commission (CFTC) is the regulatory authority which supervises the gold and all other commodity futures markets.

Asia

London and New York are dominant players in trading gold, whether OTC or on an exchange. Exhibit 21 shows the relevant significance of the main markets globally and elaborates on Exhibit 6. In Asia, the traditional physical markets for gold were India because of its jewellery fabrication, Singapore and Hong Kong because of their industrial use, and the M. East because of its attractiveness as an investment.

China

Since 2000, China has risen to prominence in most aspects of the gold economy. It is the world largest producer of gold, it has overtaken India as the largest user of gold for jewellery and it has the highest demand for bars and coins.

Gold and silver have been traded in China since the beginning of the 20th c., mostly around its largest financial centre, Shanghai. China came close to being part of the Bretton Woods system in 1945, but the ascent of the Chinese Communist Party put on hold the process. The People's Bank of China (the current central bank) exercised control over the gold and silver bullion market in the economy and continued to do so until 2001 when it announced an end to its monopoly of managing this market. In 2002, the Shanghai Gold Exchange (SGE) started operating, in 2004 private citizens were allowed to possess and transact in gold bullion and by 2008 the first gold contract was launched on the Shanghai Futures Exchange (SHFE). 

The SGE is an electronic market, which offers spot and deferred trading, as well as forwards, options and leasing. It also runs the central market clearing process for all of the above products, and the delivery, transfer, and vaulting services for the gold flowing into, out of, and held in its vaults. There are several contracts traded by SGE, but the 5 most important ones are:

• Au99.5 12.5 kgs ingot, fineness 995*

• Au99.95 3 kgs ingot, fineness 9995

• Au 99.99 1 kg ingot, fineness 9999*

• Au 100g 100g bar, fineness 9999*

• Au 50g 50g bar, fineness 9999

In 2014, SGE launched SGE International (SGEI) which enables foreign institutions and individuals to access China's precious metals market through Renminbi trading of gold and access to certified precious metals vaults located in the Shanghai Free Trade Zone.

Critical to the operations of the gold market are also China's four large banks: Industrial and Commercial Bank of China (ICBC), Bank of China (BoC), China Construction Bank (CCB) and Agricultural Bank of China (ABC). They have all gone from being state-owned banks, to state-controlled joint-stock companies, with dual listing in Shanghai and Hong Kong. In addition to the four large banks, many more Chinese banks have membership of SGE, as well as the SGEI. Several foreign entities are also members of SGEI, including banks (e.g. JP Morgan Chase, BNP Paribas, VTB Bank, Bank Julius Baer, ANZ Bank), traders (e.g. Gerald Metals, Hudson River, MKS) and refiners (e.g. Heraeus, Metalor).

Put together, SGE and SHFE dominate gold trading in Asia, both bullion and paper. SGE has also linked with COMEX to list the Shanghai Gold futures contract. This contract, which follows the Shanghai Gold Benchmark PM, is for 32.15 tr. oz., equivalent to the 1 kg contract traded on SGE. The price on COMEX is quoted in US dollars and cents using the official USD/CNH rate taken from CME's own EBS FX system. In a similar outreach, seven Chinese banks are LBMA members, one of them being CCB, mentioned above, as well as one Chinese refiner. This latter refiner is Great Wall Precious Metals Co., one of several Chinese refiners which have been approved by SGE and SHFE, alongside several international refiners.

Hong Kong

Until China's emergence as a leading global gold market, Hong Kong played a central role in pricing gold and trading bullion in Asia and was considered a global gold price setter after London and New York. The Hong Kong market is over 100 years old and revolves around the Chinese Gold and Silver Exchange (CGSE) which was founded in 1910 as a society to serve the interests of bullion traders. It lists several contracts in gold as well as silver. The contracts are denominated in USD, RMB and HKD, with sizes including 10 oz., 100 oz., 1 kg, as well as Tael, traditional Chinese unit of gold equal to 37.429 grams or 1.2 tr. oz. Gold purities vary between 99 and 9999. Although contracts are traded on CGSE, delivery of the bars is undertaken by its members, with some of them, the "Bullion Group", being permitted to manufacture small bars for the local market.

In 2015, SGE and CGSE launched Shanghai-Hong Kong Connect, and made CGSE a special international member of SGEI. This initiative aims to integrate the Chinese "onshore" and "offshore" gold markets, as well as to boost Renminbi gold pricing power on the SGE while furthering China’s strategy of internationalising its currency. Just imagine the potential of pricing crude oil imports from Russia to China in RMB, which can then be converted to gold and from there to many more currencies...

India

We have already seen how important India is for jewellery fabrication. The country also has a love affair with gold acquisition; it is estimated that Indian households hoard ca. 25,000 metric tons of gold in the form of jewellery, coins and bars.

As India doesn't have any noteworthy gold mining, its gold is either recycled from the local market or imported from abroad. The provenance of these imports is mainly from Switzerland and the UAE, with other origins like S. Africa, Guinea and Peru accounting for the rest. They may be in the form of refined gold or lower-purity doré bars and the importing entities have to be authorised by the Reserve Bank of India (RBI - the central bank) and the Directorate General of Foreign Trade (DGFT - part of the Ministry of Commerce and Industry). The list of authorised importers includes banks (nominated by RBI) and other non-financial entities (approved by DGFT). From the latter, the biggest one is state-owned Metals and Minerals Trading Corporation of India (MMTC), which we encountered in the iron ore chapter. MMTC is India’s largest importer of gold, and is a large supplier and distributor of gold within India to bullion dealers, jewellers and to gold exporters. MMTC also operates its own nationwide gold jewellery retail network. Together with the large Swiss refinery PAMP (which is owned by the MKS group), MMTC operates an Indian precious metals refinery on a joint venture basis, called MMTC-PAMP. The other significant refinery is Valcambi; this is originally Swiss, but is now owned by Rajesh Exports.

In addition to the retail and wholesale bullion markets, gold can also be traded on the country's commodity exchanges. The Multi Commodity Exchange (MCX) is the prime such institution which offers price discovery and the key gold price benchmark in the India market. It also offers price risk management through several gold contracts, both futures and options. The prime futures contract is for 1 kg of gold of 995-999 quality, with the price quoted in Rupees per 10 grams. There is also a gold mini contract for 100 grams, with the same quotation style as the main gold contracts; both specifications also offer options contracts. Two more smaller contracts are also available: the gold guinea (8 grams) and the gold petal (1 gram). these are smaller contracts geared towards smaller market participants who deal with smaller quantities of gold.

Singapore

Just like Hong Kong, Singapore has been historically an important business hub and transhipment centre in Asia. Singapore's gold bullion market emerged soon after the collapse of the London Gold Pool in the late 1960s. Trading was allowed initially for non-residents, until 1973 when residents were allowed to trade in gold as well. Today Singapore is an active importer and exporter in gold. About a third of its imports come from Switzerland, with Japan and Australia generating an additional 1/6th each.

The first attempt at trading gold was made in the late 1970s with the launch of the Gold Exchange (GES), which was later merged with the Singapore International Monetary Exchange (SIMEX) and eventually became part of the multi-asset Singapore Exchange (SGX) which emerged in 1999. In the meantime, the Singapore Bullion Market Association (SBMA) was founded in 1993 to promote Singapore as a Asian gold hub. In 2014, SGX launched its "kilo bar" gold futures contract, which was hailed as the beginning of a new era of the city being a major gold trading centre both for investors and fabricators. The contract did not meet with success, probably because of its size (25 kgs) which made it less appealing to smaller investors.

ICE Futures Singapore also launched a kilo bar contract, but with the contract size being only 1 kg. At the time of writing, ICE is trading one gold and one silver contract, for 100 oz. and 5,000 oz. respectively, both of them traded in all three ICE hubs, namely London, New York and Singapore.

Finally, Singapore's bullion market is complemented by Metalor for refining, the Singapore Mint for coins and vaulting in the city and at the freeport area.

Japan

In 1973, around the same time Singapore and USA allowed their citizens to hold gold, Japan allowed imports of gold and five years later it also allowed exports. In the last few years, Japan has imported half of its gold from Taiwan, with the rest coming from Malaysia, S. Korea and Switzerland. However, Japan exports far more than it imports, with the largest two recipients being Hong Kong and Singapore.

In 1982, the Japanese government began allowing Japanese commercial banks to market investment bars and coins to their domestic retail customers. The same year, the Tokyo Gold Exchange launched a 1 kg gold futures contract. The following year a "loco Tokyo" OTC market was established and in 1984 the Tokyo Commodity Exchange (TOCOM) was launched, merging the Tokyo Gold Exchange, the Tokyo Textile Exchange and the Tokyo Rubber Exchange. Since then, TOCOM has been the key market for gold, albeit under the umbrella of the Japan Exchange Group (JPX). There are futures and options contracts for gold, as well as futures on silver, platinum and palladium. The key contract though is gold standard futures, with a 9999 fineness and a size of 1 kg. Trading on TOCOM is supplemented by several domestic refiners, three of which are LBMA members, and exchange approved warehouses.

The OTC market continues to operate, with the involvement of well-known sogo sosha which are involved in many other commodities, such as Mitsui (also an LBMA member), Sumitomo and Mitsubishi. Their involvement expands to gold refining, precious metals trading and importing, TOCOM trading, gold warehousing, gold ETF products, and offering gold accumulation plans. All in all, the Japanse gold market is quite sophisticated but often overlooked due to its proximity to the gold market of China/Hong Kong and Singapore.

Dubai

We have already seen the importance of Dubai as a key trading centre for jewellery, coins and bullion in the M. East. Because of the importance of wholesale and retail trading, the OTC market is still the most important. Dubai is quite active in exporting and importing gold, with the fifth largest exports in 2022. The key recipient markets are Switzerland, Hong Kong, Saudi Arabia and Turkey. On the import side, Dubai imports more gold from Turkey than it exports to it. Other key import origins include Mali, Sudan, Niger and Guinea, implying that these imports must be in the form of lower-quality bars.

In 2002, the government established the Dubai Multi Commodities Centre (DMCC) at the centre of Jumeirah Lakes Towers free trade zone. Headlining the commodities it covers are gold and precious stones. The DMCC offers gold options, the Dubai Good Delivery standard, vaulting services and the Dubai Gold and Commodity Exchange (DGCX). The exchange trades the gold 1 kg futures contract for all types of investors and the larger 12.5 kg daily gold futures contract. There are also contracts for physical gold spot contracts, Shari'ah gold, India gold quantos and silver. As in other markets, the market is completed with several companies refining and vaulting services.

Turkey

Like Dubai, gold bullion is actively traded in Turkey whether by fabricators, high-wealth or small investors. Until the early 1990s, gold trading was restricted to the central bank. The liberalisation of the financial market in 1993 meant that gold became more accessible to a lot more market participants. Soon after, in 1995, the Istanbul Gold Exchange (IGE) was established and IGE members were also authorised to import and trade gold. Gold spot and futures contracts were offered on the IGE that year and in 1999 this extended to silver and platinum contracts.

In 2013, the IGE merged with the Istanbul Stock Exchange to form Borsa Istanbul, a new multi-asset exchange with a brand new division for trading previous metals and diamonds. The Borsa itself is an affiliate LBMA member and its Precious Metals Market (PMM) has ca. 20 members, half of which are banks.

Spot trading of gold is denominated in three currencies: USD/oz, TRY/kg and EUR/oz. Both "standard" and "non-standard" gold is traded. The former must have a minimum fineness of 995‰ and can be is several forms, including mini bars from 1 500 grams, 1 kg and bigger bullion bars, all of which must have a refinery stamp, serial number, weight and fineness. Non-standard gold is unprocessed gold in the form of gold bullion, gold bars, doré bars, granules, powder or scrap below 995‰ fineness. Domestic non-standard gold requires an assay certificate (of fineness) from the Turkish Mint or assaying institutions approved by the Turkish Mint.

Borsa also operates a lending market, where gold can be lent against loan certificates, which can also be traded. Loans are in physical gold and can either be cash-settled or settled by physical delivery of gold (this will be specified in the original orders). Borrowers are required to put up collateral to the Borsa in the form of cash or precious metals, and can borrow up to 90% of the collateral. A typical borrower would be a jewellery company or a gold product manufacturer.

On the derivatives side of Borsa, called VIOP, gold futures can be traded, alongside futures on silver, platinum and palladium. There are two gold contracts, one in TRY/gr and one is USD/oz, while all other precious metals are in USD/oz only.

Underlying all this trading activity is a considerable importer, sixth in the world, of gold. In 2022, Switzerland provided 65% of the gold imported in Turkey, with another 15% coming from the UAE.

Gold for investment and finance

So far we have seen several different ways in which gold can be acquired, whether as a production input as an investment. Gold can be traded spot as bullion, with delivery and payment two days after the transaction. It can also be traded for forward delivery, which is typically priced on the basis of spot plus carry charges, typically the cost of capital and a relatively small cost for storage and insurance. on the OTC market, gold options are also available. We have also seen gold traded in the form of futures and options contracts on COMEX and various other exchanges; and gold lending against loan certificates on Borsa Istanbul. Finally, we also commented on the popularity of gold ETFs as an investment vehicle, for those who want to invest in paper, but without wishing to be involved in the futures markets.

For those who would like to hedge the differential between gold in different locations, or gold and one or more currencies, gold swaps are available. A loco swap is for those who prefer dealing in bullion between different locations but are conscious of the costs of moving their gold between locations. As loco London is an international benchmark, most miners, for example would effectively sell at this price. So rather than transfer their gold to London, they trade (normally) at a discount to loco London. A loco swap is a way to move gold or silver to another location without physically shipping it. It is a transaction where two parties agree to exchange (swap) gold they have in different locations (locos) with each other. This means that the loco discount or premium needs to be transferred between the swap parties in addition to the metal itself. It also means that each location can trade at a premium or discount to London depending upon local supply and demand at that time. As a result, loco discounts/premiums are not fixed and change over time as local supply/demand changes.

In previous times, it was possible to do a swap between gold and major currencies, notably USD. This meant that gold could be used as a collateral to borrow USD against it; this was also known as the gold lease rate (GLR). To facilitate this, LBMA quoted a daily Gold Forward Offered rate (GOFO), effectively an interest rate for borrowing gold to use as a collateral for securing a loan of USD, typically the difference between LIBOR and GLR. The use of this rate fell out of favour, however, and LBMA stopped quoting it in 2015.

Some financial institutions offer gold (and silver) accounts. This offers the opportunity for investors to deposit cash on a regular basis, which is then converted to gold and/or silver at the current market rate. The value of the account can go up and down, in tandem with the prices of the two metals. The key selling point of such an account is that one gets the benefits of holding metal, without the need to buy and hoard bars.

Another way of holding gold, indirectly this time, is to hold shares of gold-mining companies. This type of investment does entail unsystematic risk though, emanating from the specifics of each individual company, from their extractive operations, reserves, management style, jurisdiction and so forth. It may be simpler, therefore, to hold gold directly and deal with its price fluctuations, rather than having to analyse all the company-specific parameters as well.

Gold finance

A conventional dollar bond has a face value, and pays interest in, dollars. A gold-backed bond does the same thing, but the face value is denominated, and the interest is paid, in ounces of gold. This may be appealing to institutional investors who may not want, or are not allowed, to hold physical gold; a gold-backed bond can be a long-term investment which expresses a position in this commodity. In a similar way, governments could also issue gold-backed sovereign debt; this has been suggested in the past by Belke (2012), especially for highly distressed countries in the Eurozone. In a different scenario, if a mining company is issuing gold-backed bonds, they may be convertible to gold mining stock, which is also an indirect investment in the metal. In a slightly different variant, a warrant can be used instead; this is a bond with a call option on a basket of precious and base metals.

A gold loan is a secured loan wherein the borrower keeps their gold, ranging from 18K to 24K, with a bank or a financial institution as security and draws down capital against it. From the bank's perspective, it has a solid collateral which can be liquidated quickly, depending of course on whether it is gold bars or gold jewellery. The purity of the collateral gold will also determine the interest rate charged; the higher the purity, the lower the interest.

An alternative use of a gold loan, similar to asset-backed finance, can be used by mining companies. The mechanics of such a loan work as follows:

• the mining company borrows gold from a commercial bank who has borrowed it from the central bank;

• the gold sold in the market (spot or forward) to raise capital for new development or expansion of the mining company's assets;

• the gold is recovered from mining and returned to the lender.

The long-lasting attractiveness and appeal of gold makes it an incredibly versatile metal. This is reflected in the length of this section of the chapter, but many of the aspects we have discussed, especially bullion and paper trading, also hold for our next precious metal we turn our attention to: silver.

Silver

Compared to gold, silver is a more abundant metal, but scarce enough to make it a precious metal. Historically, silver was discovered after gold and copper and has been used in tandem with both of them in very similar applications: jewellery, ornaments and coinage. We saw earlier how the Lydians used coinage made of electrum, a naturally occurring alloy of silver and gold, and how silver was extensively used in the monetary systems of many countries, in addition to gold. Silver occurs with other mineral, typically copper, zinc and lead.

"Lead ores were smelted to obtain an impure lead-silver alloy, which was then fire refined by cupellation. The best-known of the ancient mines were located at the Laurium silver-lead deposit in Greece; this was actively mined from 500 BCE to 100 CE. Spanish mines were also a major source. ... By the 16th century, Spanish conquistadores had discovered and developed silver mines in Mexico, Bolivia, and Peru. These New World mines, much richer in silver, resulted in the rise of South and Central America as the largest silver-producing areas in the world."[7]

Physical characteristics

Silver has the highest known electrical and thermal conductivity of all metals and is used in fabricating printed electrical circuits and as a vapour-deposited coating for electronic conductors; it is also alloyed with such elements as nickel or palladium for use in electrical contacts. Silver's sensitivity to light made it particularly useful in photography because it can be used to create black and white images. Most twentieth-century black-and-white photographs are gelatin silver prints, in which the image consists of silver metal particles suspended in a gelatin layer. A more recent use of silver is in solar PV panels, due to its high electrical conductivity.

Like gold, silver is commonly measured in troy ounces (31.1035 grams) in the avoirdupois system, as well as in kilograms and metric tons in the metric system. Similarly to gold, a troy ounce of silver can be drawn to a wire 5 microns thick extending over 60 km.

Supply determinants

Silver is widely spread around the globe, but it forms only ca. 0.05 ppm of the earth's crust. This is still ten times more than gold, which makes silver more abundant than gold and, therefore, cheaper.

Latin America is the leading supplier of mined silver, led by Mexico and Peru, and several other countries in the region contributing more, as can be seen in Exhibits 28 and 29. This region's production comes mostly from copper and lead/zinc production. China is the second largest producer after Mexico, with most of the chinese production coming from lead/zinc; we have already seen how important China is for both of these base metals. In Europe, the key producer is Poland, with most supply coming off copper production. In the CIS, Russia and Kazakhstan as the key producers, with supply coming either form copper or direct silver production. US and Canadian production comes mostly from silver mines, while in Australia silver is either produced in primary silver mines, or as a by-product of zinc/lead.

Processing and refining

Because most silver-bearing ores are sulphides, after the usual crushing and grinding, flotation separation is used to concentrate the valuable metals. How silver is extracted then depends on what is the main base metal. In the case of copper, after electrolytic refining insoluble impurities called slimes accumulate at the bottom of the electrolysis tank. These impurities contain much higher concentrations of silver and also gold and platinum group metals. They are fired ina small furnace to oxidise all other metals, except the precious ones. The resulting metal is called doré, which we encountered in the gold section, and which contains mostly silver. This metal is formed into anodes which are electrolysed as well, in order to produce 99.9% to 99.99% silver (also known are three nines or four nines fine).

Lead concentrates, which have the most silver, are roasted and smelted to produce a lead bullion from which impurities such as antimony, arsenic, tin, and silver must be removed. To remove silver, zinc is added to the molten lead bullion, which reacts rapidly and completely with gold and silver, forming very insoluble compounds that float to the top of the bullion. 

As with gold, the purity of silver is important for its applications. Silver is assayed using the same methods we have already seen and it purity can be stated in percentage or per mille (parts per thousand). The best known silver-copper alloy is sterling silver; this is 92.5% silver and 7.5% copper, also denoted as 925‰. Although the caratage system can also be applied to silver, it is much more common to use per mille, with the highest purity being four nines fine, i.e. 999.9‰.

Demand determinants

Silver has many industrial uses, even more so than gold. It is used extensively in electrical and electronic applications, as a catalyst, in jewellery fabrication and in photography. It is also used as an investment vehicle and is traded in the form of bullion bars and coins. Exhibit 32 gives an overview of the shares of the various uses of silver, while Exhibit 33 shows how these uses have developed in the last few years.

Nearly 10 m.oz. of silver are used as a catalyst in the manufacturing of ethylene oxide (EO).  EO is the building block for a range of plastics including polyester, the textile used in both mainstream fashion and specialty clothing. This same substance is an ingredient in various moulded plastic items such as insulating handles for stoves, key tops for computers, electrical control knobs, domestic appliance components and electrical connector housings.

Another industrial use is silver brazing, a joining process where a non-ferrous filler metal, also referred to as the alloy, is heated to melting temperature (above 800°F). Silver brazing produces strong, sealed joints due to grain structure interaction. Additionally, silver brazing produces joints that meet mechanical performance specifications, electrical conductivity, pressure tightness, corrosion resistance, and service temperature.

Jewellery and silverware

Although less valuable than gold, silver has always a great appeal, especially for those able to afford only mid-priced jewellery, in combination with semi-precious stones. At times when gold prices are exceptionally high, silver jewellery may also be a form of investment or security, if the gold equivalent is unaffordable. Although pure silver can be used for jewellery, the norm is sterling silver (925) which is sturdier and longer-lasting. The various jewellers mentioned in the gold section are also involved in the manufacturing of high-fashion, albeit more affordable, silver ornamental items.

Indian demand peaked in 2015 at ca. 110 m.oz. but returned again in 2022, possibly because of the relatively high price of gold, which pushed smaller investors back to silver bars, primarily, and coins. India accounts for 20-25% of this demand. China, surprisingly, generates less than 5% of physical investment demand, possibly because gold is the precious metal of choice.

Exchange Traded Products

Although called ETPs by the Silver Institute, ETFs are also popular for investors in silver, who do not wish to hold the physical commodity themselves. Instead, the funds hold silver inventories, replicating the exposure to the metal's price. Silver demand by ETFs has shown broadly similar patterns with that for gold. Of note are the years 2019 and 2020, when investors rushed to safe haven precious metals. Silver also registered record demand, especially in 2020 and 2025, as can be seen in Exhibit 37. iShares is a key player in silver ETFs, with Sprott taking second place, as can be seen in Exhibit 38. Notice how their silver holdings jumped in 2020, before subsiding to ca. 1,000 m.oz by 2024 and then again in 2025.

Trade and pricing

The LBMA is the largest OTC market in the world for silver, as it is for gold. Over 100,000 M.oz. of silver were traded in 2024, comparable to silver turnover on COMEX (CME), although SHFE stands heads and shoulder above both of them - see Exhibit 39. Price discovery takes place in these markets, as we have seen earlier. The LBMA publishes two price for silver every day, AM and PM. It follows the same procedure as it does for gold, which is also administered by the ICE Benchmark Association (IBA). Similar OTC products (spot, forwards and options) are offered by the same making LBMA members members that we saw for gold. The only difference is that silver contracts have much larger sizes than gold which is expected, given silver's much lower price.

The other important OTC market in Europe and internationally is Zürich, which publishes a daily price quotation for silver, expressed in Swiss Francs per kg - see Exhibit 40 for LBMA and Swiss Pool prices for comparison.

The final word in this section is on physical markets. Silver markets operate alongside those for gold. In the previous section we discussed extensively all the key markets for gold: London, Zürich, Germany, Russia, Austria, France, Italy, USA, China, Singapore, Japan, UAE and Turkey. All of these markets perform the same functions for both gold and silver, so the reader is directed to the relevant text in the previous section.

International trade flows

Silver is traded internationally, but it does not feature in the top 20 traded commodities. Around 50k metric tons are traded, worth ca. $30-35 billion. Hong Kong and UK are on both sides of the trade, being substantial exporters and importers, as they are both important trading hubs. Switzerland and UAE have the same role to a lesser extent. China and Mexico are another two important exporters, while on the import side, India and USA are the top two countries. Exhibits 42 and 43 give more details on exports and imports.

Gold-silver ratio

The relationship between gold silver is often encapsulated in what is known as the gold-silver ratio. In the simplest sense, it is the number of silver ounces needed to buy one ounce of gold. The ratio usually fluctuates between 40-100, although further extremes at either end have been recorded, e.g. in 2020. The gold-silver ratio is frequently traded as any other inter-commodity spread, but the key is what each precious metal represents.

Gold can represent weather storage, as we have seen, while silver can be a proxy for industrial activity, given that silver has mostly industrial uses. When the ratio is high, gold is relatively more expensive than silver, which can be associated with slower economic activity, a sluggish economy and a rush of investor to gold as a safe haven. Conversely, a low ratio, indicates a relatively low demand for gold because the economy is prosperous and, as a result, industrial demand for silver is high and so is its price. Exhibit 44 shows this relationship in the last five years. With this final comment, we are now ready to move on to our two platinum group metals (PGMs), starting with platinum.

Platinum

In 1735, the French Royal Academy of Science sponsored two scientific expeditions with the aim of settling the problem of the dimensions of the earth. One would go to Lapland, the other to Ecuador. The leader of the second expedition was Antonio de Ulloa, a Spanish scientist, soldier and sailor. During this trip and while visiting the gold mines of the Pinto River in Peru, he discovered what he called "platina del Pinto", which the locals treated as impurities in their gold and silver mining.[8] At around the same time, the British Charles Wood, who was overseeing lead mines in Jamaica, also took an interest in the metal and carried out the first experiments on it, as a metallurgist. He smuggled back with him specimens of platinum for further study by his friend William Brownrigg, a Fellow of the Royal Society. This is where the story of platinum begins, a metal which gives its name to the group of six metals known as PGMs, which we encountered at the very beginning of this chapter.

Physical characteristics

Supply determinants

Mining

Like gold, platinum is relatively rare on the earth's crust, at only ca. 0.01 ppm. This is still twice as abundant as gold, but rarer than silver. Whereas gold is found in almost pure form, platinum occurs in small concentrations in rocks and deposits. Some of the common ores containing platinum are [10]:

• Sperrylite (PtAs2): this is the most common platinum mineral and is composed of platinum and arsenic. It is typically found in nickel-copper sulphide ore deposits.

• Cooperite (PtS): this is a platinum sulphide mineral that is often found in association with other platinum minerals in ultramafic rocks, which are igneous, silicate rocks rich in magnesium and iron.

• Braggite ((Pt,Pd,Ni)S): this is a platinum, palladium, and nickel sulphide mineral that is commonly found in layered intrusions and ultramafic rocks.

• Platarsite (PtAsS): this is a platinum arsenic sulphide mineral that is found in association with other platinum minerals in some platinum ore deposits.

• Michenerite (PdBiTe): this is a palladium bismuth telluride mineral that is often found in association with platinum minerals in some platinum deposits.

• Spinel group minerals: some minerals from the spinel group, such as chromite (FeCr2O4), can also contain trace amounts of platinum.

Platinum ores are relatively rare and their distribution is not as widespread as, say, gold. Their deposits are found in limited geographic locations, which can be seen in Exhibit 46. There are essentially three main producers and reserve holders of platinum: South Africa, Russia and Zimbabwe. Smaller amounts are found in Canada, USA and Australia. The platinum deposits in South Africa are primarily located in the Bushveld Complex, a layered complex of igneous rocks in the northern part of the country. Russia's platinum resources are located in the Norilsk-Talnakh region of Siberi and are associated with the nickel-copper sulphide ore deposits of that region. Zimbabwean deposits are located in the Great Dyke, a geological feature that runs north-south through the country. The Great Dyke is also a layered igneous mafic complex that contains platinum, palladium, and other valuable minerals. Finally, the Subury deposit in Ontario, Canada, is another source of platinum ores.

Exhibit 47 shows the dominant role S. Africa plays in the mining supply of this metal, while Exhibit 48 shows the development of mining supply in the last decade - note that the two exhibits use different units (tons vs. ounces). Notice how S. African production was hit on two occasions: 2014 and 2020. The latter is, of course, due to Covid. The former, however, was due to extensive miners' strikes in the country during the first half of 2014, which affected ca. 60% of capacity. S. Africa produces around 4.5 million tr. oz. (ca. 140 metric tons) of platinum every year, or three quarters of the world total.

Autocatalysts generate even higher demand than jewellery, an average of 40% of total demand, or 3 m.oz., over the last decade. This also accounts for the largest part of industrial demand, which comprises an array of additional uses[11, 12]:

• In the chemical industry, platinum is used as a catalyst in various chemical processes, including the production of fertilisers, pharmaceuticals, and specialty chemicals. Platinum’s high catalytic activity, stability, and resistance to corrosion make it ideal for many chemical reactions, enabling the production of a wide range of important products.

• In the electrical and electronics industry, platinum is used in various applications, including electrical contacts, spark plugs, and electrodes. Platinum’s high electrical conductivity and resistance to corrosion make it suitable for use in demanding electrical and electronic environments. Examples include antilock braking systems (ABS), airbag initiators, engine management systems, sensors and computer hard disks.

• In the glassmaking industry, platinum is used for the production of specialised glasses, due to its high melting point and resistance to corrosion. Platinum is used as a material for glass furnace electrodes and other components that are exposed to high temperatures and corrosive environments.

• In the energy industry, platinum is used in two major ways:

  • in petroleum refining, platinum has been used since the 1950s as a catalyst to reform naphtha into high octane blending components for gasoline reforming, i.e. RBOB. We have encountered catalytic reforming before in the chapter on refined petroleum products;

  • in fuel cells, which are devices that convert hydrogen and oxygen into electricity through electrochemical reactions, with heat and water as by-products. The fuel and oxidant (oxygen or air) are supplied externally, enabling them to continue operating as long as they are fed. So, unlike batteries, they never "run out". Platinum’s high catalytic activity and stability make it an important component, alongside ruthenium, in fuel cells, which are being developed as a clean and efficient alternative to traditional energy sources.

• Finally, platinum is used in various medical and dental applications, including surgical instruments, implants, and dental crowns. Platinum’s biocompatibility, inertness, and resistance to corrosion make it suitable for use in medical and dental devices that come into contact with the human body. Platinum, for example, is used to create key components for a variety of medical devices, including pacemakers, catheters, stents, neuromodulation devices and implantable defibrillators. Platinum is also used in anticancer drugs such as cisplatin, carboplatin, and oxaliplatin.

For many years, platinum has been seen by many as much a store of wealth as gold is. It is even less abundant than gold, it is extensively used in jewellery as in industrial applications and until late 2011 its price was consistently above gold. As a result, it has attracted the interest of investors who want to hold a portfolio of precious metals as a hedge against inflation and poor economic growth. As can be seen from Exhibit 50, retail investment has generated an average of ca. 0.5 m.oz. in the last decade, but it has had considerable fluctuations. In 2019 and 2020, platinum attracted the attention of retail investors, especially as gold prices rose and physical investment in gold slowed down, as can be seen in Exhibit 12. After the pandemic, however, demand for retail investment fizzled out and in 2022 there was divestment from platinum, making it essentially an industrial metal.

Trade and pricing

There are two key markets for the pricing of platinum, and also for palladium: London and New York. In London, the two markets are known as LPPM (London Platinum and Palladium Market), platinum/palladium prices are known as "LBMA platinum/palladium", but the mechanism is administered by the London Metal Exchange. Reference prices are determined twice a day, AM and PM, just like LBMA gold and silver; prices are quoted in USD/tr.oz. and are also available GBP and EUR.

The LBMA has a set of rules of what constitutes good delivery, which are similar to those for gold and silver. More specifically, for both platinum and palladium:

• Form: Plate or Ingot

• Weight: The maximum weight permitted is 6 kilograms (192.904) troy ounces. The minimum weight permitted is 1 kilogram (32.151 troy ounces)

• Purity: At least 99.95% platinum (palladium)

• Markings: Each plate or ingot must bear - the producer’s recognised mark; the letters PT (PD) or PLATINUM (PALLADIUM) with a stamp indicating the purity; an individual number or mark; year of manufacture; the weight in grams, kilograms or troy ounces (if in grams to one decimal place, if in kilograms to four decimal places and if in troy ounces to three decimal places).

• Appearance: Smooth, free from cavities and easy to handle

The rest of the rules regarding loco London and trading platinum and palladium in the OTC market are the same as discussed in the gold section. Exhibit 48 shows the price history of platinum in the London market since the beginning of 2007. The reader can see the huge dip in the price experienced during the financial crisis, which is similar to all other metals with the exception of gold. Platinum prices recovered in 2009, remained high until 2011 and then started sliding from the second half of 2014. That was attributed to the strong recovery of S. African production after the miners' strikes in the first half of 2014, which created an oversupply of platinum in the global market. In 2015, platinum prices fell below $1,000 and since then they have been hovering around this price, occasionally jumping as high as $1,300, but never reaching the highs experienced earlier in its history.

In New York, platinum and palladium are traded on NYMEX, alongside COMEX gold and silver, all of which are under the umbrella of the CME. There are traded futures and options for both platinum and palladium, as well as two spreads: gold-platinum and platinum-palladium. For platinum there are monthly contracts listed for 3 consecutive months and any January, April, July, and October in the nearest 15 months. Similar trading arrangements exist for palladium, with monthly contracts listed for 3 consecutive months and  any March, June, September and December listed for 15 months. These listed contracts provide the market with a forward curve; Exhibit 49 shows a snapshot of the forward curve for platinum.

Platinum and palladium are traded in a few more markets, e.g. TOCOM-JPX and SGE, which we saw earlier in reference to gold. However, London and New York remain the two most dominant markets in terms of volume and price setting.

International trade flows

Platinum trade flows are relatively small in comparison to both gold and silver. In 2023 they totalled ca. $17-18bn, split between unwrought platinum and platinum semi-manufactures. Exhibits 53 and 54 show the key countries involved. Notable is the position of S. Africa on the export side and the appearance of UK, USA, Hong Kong, Switzerland and Italy on both the export and import side. The latter country is known for the use of platinum in high-end fashion jewellery, whereas all former countries represent important trading centres of platinum bullion, especially the London market.

Palladium

As early as 1700, miners in Brazil were aware of a metal they called ouro podre (worthless gold), which is a native alloy of palladium and gold. It was not until 1803, however, when  the English chemist and physicist William Hyde Wollaston managed to separate it from platinum, declared its discovery and called it palladium. Wollaston was the first to use aqua regia, mentioned earlier, to dissolve platinum and that's where he observed the residue which contained palladium and other PGMs. The element was named after the asteroid Pallas which was discovered the year before, which was in turn named after Pallas Athena, one of the several acquired names of the ancient Greek goddess. Wollaston went on to discover and name rhodium (after the Greek word for rose - ρόδον) in 1804. He acquired his wealth developing his secret method of producing platinum in marketable quantities and for several years he was the only supplier of the metal in England.

Physical characteristics

Supply determinants

Mining

At 0.015 ppm of the earth's crust, palladium is more abundant than platinum, but still relatively rare when compared to other metals, precious or base. The metal can be found fused with platinum and other PGMs and is found with them in braggite, which we saw earlier. Most palladium, however, comes as a by-product in the refining of copper and nickel ores. We have already seen that S. Africa is the largest reserve holder of PGMs and this applies to palladium as well. Other reserves can be found in the Ural Mountains, Zimbabwe, USA, Canada and Colombia. Exhibit 55 shows operation palladium mines, which are frequently the same ones as for platinum, while Exhibit 56 shows the most recent data on production and reserves.

The key difference in palladium mining production is the fact that Russia and S. Africa are close competitors. In the last decade, Russia has produced 40% of global palladium output, while S. Africa 37% - see Exhibit 57. This is in contrast to platinum, where S. Africa is the dominant leader. Exhibit 57 shows the development of mining production. Notice how S. African production contracted in 2014 and 2020, as for platinum. Russian production, on the other hand, remained relatively stable over the period, but did start to slowly decline after 2019. It is worth noting that a contraction of Russian supply, or threat thereof, would have a larger effect on the supply of this metal, compared to platinum.

Recycling, processing and refining

Like platinum, palladium is also sourced through recycling. On average, a quarter of global supply comes from recycling, of which the vast majority is from autocatalysts, as can be seen in Exhibit 58.

Processing and refining of palladium has already been discussed under platinum in the previous section. After platinum is removed, palladium is recovered by precipitation with ammonia and eventually turned into the pure metal with the use of formic acid.

All other sources of demand are considerably smaller when it comes to palladium and they are similar to what was discussed earlier. Of these other uses, electronics takes the biggest share, with palladium being used in ceramic capacitors, which store energy in electronic devices in the form of an electrostatic field. They are used in broadcasting equipment, mobile telephones, computers, electronic lighting and high voltage circuits to name but a few applications, which all have one in common: they require a high reliability. Due to its conductivity, durability, high temperature stability and oxidation resistance, palladium makes an excellent material for use for ceramic capacitors.

Trade and pricing

The pricing of palladium has already been discussed under platinum. The two main markets are London (LBMA) and New York (CME-NYMEX). The products offered are very similar, if not identical, to those for platinum in both markets. What is notable in palladium is the way its price has developed since 2016. Starting with a reduction in the supply of palladium from S. Africa, Russia and Canada, the market also faced increasing demand due to the introduction of more stringent car emissions regulations in both China and the EU (Euro 6 standards were introduced in 2015). These new regulations came at the back of the "dieselgate" scandal which resulted in reduced demand for diesel cars and a switch towards petrol cars, which use mostly palladium in their catalytic converters.

The combination of the above factors on both supply and demand resulted in rally for palladium prices which took of in the second half of 2018 - see Exhibit 60 - and continued unabated until Q1 2020 when the rally was reversed because of Covid effects on transportation and car sales. Prices have fluctuated considerably since then, driven primarily by demand for petrol cars and the overall growth of the world economy. What is also interesting, however, is the relationship of platinum and palladium prices. Exhibit 61 shows this ratio, how it peaked at over 5x in 2009 and how it has been declining since then. In 2017, as demand for platinum declined and that for palladium took off, the ratio dipped below one, meaning that palladium is more expensive than platinum. The ratio has been fluctuating around 1 cince 2024.

International trade flows

Global palladium trade is bout twice the size of platinum. Exhibits 62 and 63 show the top exporters and importers of the metal in unwrought or semi-manufactured forms. Russia and S. Africa are the key exporters, while the UK, USA and Switzerland are important on both the export and the import side, as one would expect from key trading centres of bullion palladium. Italy and Germany also appear on both sides of the trade, the former largely because of its jewellery industry, the latter because of its industrial use of the metal, including autocatalysts. Japan and China are also key importers, mostly because they have large automotive industries which require palladium for autocatalysts.

Conclusion

Precious metals still hold a unique place in the minerals sector. Rarer than base metals, they are more expensive, smaller in volume, easier to store and hand over, and are used as much for industrial applications as for storing wealth, especially gold. They are often sought after as a hedge against inflation and traditional asset volatility, and during times of economic decline, financial uncertainty, or crisis. 

Six millennia after their discovery and initial use, they are still a source of fascination for humans, because of their lustre, attractiveness, symbolism and value. Their endurance means that they stay for a long time in the economy, often across multiple generations, and can be recycled more than traditional base metals.

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