Gold Supply Chain

How declining ore grades, the split between material and monetary demand, and the permanence of above-ground stock create a commodity where the psychology of holders matters more than the output of mines.

Introduction

Gold bars sit in central bank vaults as sovereign reserves. Gold jewelry circulates as wearable wealth across South and East Asia. Gold contacts carry signals inside every smartphone and server. Gold crowns cap damaged teeth. Gold leaf covers cathedral domes. The metal is simultaneously a financial instrument, an industrial input, a cultural artifact, and a unit of stored value — and each of these functions operates under entirely different supply and demand logic.

What makes the gold supply chain structurally distinct from other mineral supply chains is not the metal's value but the interaction of three root constraints. The ore that contains gold is getting harder to extract — modern mines routinely process a ton of rock to recover a single gram of gold, and grades continue to fall. The demand for gold is split between two markets that respond to completely different signals — jewelry and electronics follow income and industrial cycles, while investment and central bank demand follows fear, monetary policy, and geopolitical instability. And unlike almost every other commodity, gold is not consumed. Virtually all gold ever mined — roughly 210,000 metric tons — still exists in some recoverable form. Annual mine production of around 3,500 tons adds less than two percent to the existing stock each year.

These three forces create a supply chain unlike any other commodity. The cost of new supply rises inexorably with ore grade decline. Demand can surge from directions that have nothing to do with physical use. And the supply that actually determines price is not what comes out of the ground but what comes out of vaults, jewelry boxes, and central bank balance sheets. The system's behavior is governed as much by the decisions of holders as by the operations of miners.

Root Constraints

Why have gold ore grades fallen from ten grams per ton to about one?

Gold mining has always been an exercise in processing large volumes of rock for small quantities of metal. But the ratio has shifted dramatically over the past century. In the early twentieth century, South African mines processed ore grading ten or more grams per ton. Today, the global average grade for gold mines is roughly one gram per ton. Many large open-pit operations process ore at grades of 0.5 to 0.8 grams per ton — meaning a million tons of rock yields less than a single ton of gold.

This decline is not a failure of exploration technology, which has in fact improved enormously. It is the geological consequence of mining the richest deposits first. The high-grade, near-surface deposits that built South Africa's Witwatersrand and Nevada's Carlin Trend have been largely depleted. What remains is deeper, more dispersed, and more chemically complex. Refractory ores — where gold is locked inside sulfide minerals and cannot be recovered by simple gravity or cyanide leaching — represent a growing share of global reserves, requiring additional processing steps that add cost and energy consumption.

The consequence is structural and one-directional. Each new generation of gold mines must move more earth, consume more energy, use more water, and employ more complex metallurgy to produce each ounce. The all-in sustaining cost of gold production has risen from roughly $600 per ounce a decade ago to over $1,300 per ounce at many operations today. This cost floor rises over time because it is set by geology, not by management efficiency or commodity cycles.

Why does gold serve two markets that follow completely different logic?

Gold demand divides into two fundamentally different markets that happen to consume the same metal. The first is the material market: jewelry fabrication, electronics manufacturing, dentistry, and other industrial uses. This market follows familiar commodity logic — demand correlates with income growth, consumer spending, and industrial activity. When economies grow, jewelry demand in India and China rises. When electronics production expands, gold consumption for contacts and connectors increases.

The second is the monetary market: investment demand from individuals, institutions, and central banks. This market follows entirely different logic. Investment demand for gold rises during periods of monetary uncertainty, inflation anxiety, currency instability, geopolitical tension, and loss of confidence in financial systems. Central bank purchases — which have accelerated dramatically since 2022 — respond to reserve diversification strategies and de-dollarization impulses that have nothing to do with jewelry or electronics.

These two markets can move in opposite directions simultaneously. A global recession might reduce jewelry demand in India while simultaneously increasing investment demand in Western markets as investors seek safety. A strong dollar might suppress gold's appeal as an alternative store of value while the electronics industry's demand for gold bonding wire continues unchanged. The supply chain must serve both markets from the same production stream, but the signals driving each are uncorrelated and sometimes contradictory.

The consequence is that gold demand is structurally unpredictable in ways that purely industrial metals are not. Copper demand can be modeled from construction starts, vehicle production, and grid investment. Gold demand requires modeling both industrial activity and the collective psychological state of investors and central bankers — a fundamentally different kind of forecasting problem.

Why does almost all the gold ever mined still exist?

Gold is not consumed in the way that oil is burned, grain is eaten, or even copper is installed in buildings for decades. Gold persists. A gold bar cast by the Romans is chemically identical to one cast yesterday. The gold in a melted-down necklace is indistinguishable from freshly mined metal. This permanence means that virtually all gold ever mined in human history — an estimated 210,000 to 215,000 metric tons — still exists in recoverable form: as jewelry, bars, coins, central bank reserves, or embedded in electronics and dental work.

Annual mine production adds roughly 3,500 tons to this stock — less than two percent per year. This ratio is unique among major commodities. For copper, annual production represents a meaningful share of the usable stock because copper degrades and is lost to corrosion over decades. For oil, the stock-to-flow ratio is inverted — consumption far exceeds any strategic reserve. For gold, the above-ground stock is so large relative to annual production that miners are, in economic terms, a marginal supplier.

The practical consequence is that gold supply is determined not primarily by mining output but by the behavior of existing holders. When central banks sell reserves, the supply impact dwarfs any change in mine production. When Indian households choose to recycle old jewelry — a practice that fluctuates with the gold price and economic conditions — the recycled supply can represent twenty-five to thirty percent of total annual supply. When ETF investors liquidate holdings, gold flows from vaults back into the market without any mining activity whatsoever.

This creates a supply dynamic fundamentally different from any other commodity. The question is not "how much can be produced" but "how much will holders release." And the answer depends on price expectations, monetary policy, cultural practices, and geopolitical calculations that are distributed across millions of individual and institutional decision-makers worldwide.

How Constraints Shape the System

Who mines gold, and at what scales?

Gold mining operates across a wide range of scales and methods, from artisanal miners panning alluvial deposits in West Africa to massive open-pit operations in Nevada processing 300,000 tons of rock per day. Large-scale mining is dominated by a handful of companies — Newmont, Barrick Gold, Agnico Eagle — that operate portfolios of mines across multiple continents. The top ten producers account for roughly thirty percent of global mine output.

Geographic concentration in gold mining is less extreme than in some metals but still significant. China, Australia, Russia, Canada, and the United States together produce over half of global mine output. However, because above-ground stocks dominate supply, mining concentration matters less for gold than for metals where annual production is the primary supply source. A disruption that removes five percent of global mine output removes less than 0.1 percent of total available gold.

The interaction between ore grade decline and mine economics creates a structural ratchet. As grades fall, the minimum gold price required to justify new mine development rises. Projects that were economically viable at $1,200 per ounce may require $1,800 or more per ounce for their successors processing lower-grade ore. This rising cost floor provides a structural price support — below a certain price, new supply stops entering the system — but it also means that each cycle of mine development is more capital-intensive than the last.

Why does gold refining depend on a chain of trust?

Gold refining is the critical transformation where mined material — doré bars containing roughly 80-90 percent gold — becomes the standardized product that global markets require. The London Bullion Market Association (LBMA) maintains a Good Delivery List of approved refiners whose bars are accepted for settlement in the global gold market. This accreditation system creates a chain of trust that underpins the entire financial gold market.

Swiss refineries — Valcambi, PAMP, Argor-Heraeus, and Metalor — process a disproportionate share of global gold, estimated at sixty to seventy percent of all refined gold output. This concentration exists not because of ore proximity but because of trust infrastructure. The Swiss refining industry built its dominance over decades by establishing the assaying standards, chain-of-custody protocols, and institutional relationships that the global gold market requires. A gold bar stamped by an LBMA-approved Swiss refiner is accepted without question in London, New York, Shanghai, and Mumbai. A bar from an unapproved source requires re-assaying and may be refused entirely.

This trust chain also serves as the system's primary chokepoint for provenance and compliance. Conflict gold, illegally mined gold, and gold from sanctioned jurisdictions must pass through refining to enter the legitimate market. Refiners bear the regulatory burden of verifying source material — a responsibility that has intensified as anti-money-laundering and conflict mineral regulations have expanded. The refining step is where the physical supply chain and the regulatory supply chain intersect.

Why does recycled gold respond so quickly to price?

Recycled gold — primarily from old jewelry, with smaller contributions from electronics scrap and dental recovery — supplies roughly 1,100 to 1,200 tons per year, representing about twenty-five percent of total gold supply. Unlike mining, recycling responds rapidly to price signals. When the gold price rises sharply, recycling volumes increase as holders sell jewelry and scrap at prices they find attractive. When prices fall, recycling volumes contract.

This price-responsive recycling supply acts as a natural stabilizer in the gold market. Sharp price increases trigger increased scrap supply, which partially offsets the demand pressure driving prices higher. The mechanism is particularly strong in price-sensitive markets like India, where gold jewelry is widely held as a savings vehicle and households make calculated decisions about when to sell based on local gold prices and economic need.

However, the recycling pool is not unlimited. It draws on the stock of gold held in forms that owners are willing to part with, which is a subset of total above-ground stock. Central bank reserves, institutional investment holdings, and culturally significant jewelry are unlikely to enter the recycling stream at any price. The accessible recycling pool is large but finite, and its responsiveness to price is not linear — there are price levels at which most willing sellers have already sold.

Why do central banks buy and sell gold on a different logic than everyone else?

Central banks collectively hold roughly 36,000 tons of gold — about seventeen percent of all above-ground stock. Their buying and selling decisions operate on a completely different logic than any other market participant. Central banks do not buy gold because the price is low or sell because the price is high. They buy to diversify reserves, reduce dollar exposure, or signal monetary sovereignty. They sell to raise foreign currency, rebalance portfolios, or — as European central banks did under the Central Bank Gold Agreement from 1999 to 2019 — coordinate an orderly reduction of holdings.

Since 2010, central banks as a group have been net buyers, and the pace accelerated dramatically after 2022. This shift — from net sellers in the early 2000s to large net buyers — represents a structural change in the gold market's demand profile. Central bank purchases absorb a significant fraction of annual mine production and operate on institutional timelines that are insensitive to short-term price movements. A central bank building reserves over a multi-year program will continue purchasing through price fluctuations that would cause other buyers to pause.

Flows and Visibility

Gold moves through the supply chain in distinct forms with starkly different visibility. Mined doré bars flow from mines to refineries — a traceable, documented movement. Refined bars flow from refineries to central bank vaults, ETF custodians, and bullion dealers — still largely visible through LBMA and exchange reporting. But once gold enters the jewelry fabrication chain or the informal savings systems of South and East Asia, visibility drops sharply. The gold held as jewelry by Indian households — estimated at 25,000 tons, more than any single central bank — exists outside any reporting system.

London and Shanghai function as the two primary trading hubs, with London dominating over-the-counter institutional trading and Shanghai dominating Chinese domestic flows. Zurich serves as the refining and physical distribution center. Dubai acts as a transit and re-export hub connecting African and Asian markets. Each hub has different regulatory frameworks, different reporting requirements, and different transparency levels, creating a global system where aggregate flows are estimated rather than precisely measured.

Gold ETFs — primarily the SPDR Gold Trust (GLD) and similar vehicles — provide a window into Western investment demand. ETF holdings are reported daily and represent a transparent pool of roughly 3,000 to 3,500 tons. When ETF holdings increase, physical gold must be sourced and delivered to custodian vaults. When holdings decrease, gold flows back out. But ETF flows capture only one segment of investment demand. Central bank purchases, private vault storage, and physical coin and bar purchases by individuals operate with varying degrees of opacity.

The capital flows in the gold system reflect the dual-market structure. Mining investment follows long-cycle resource economics — exploration spending rises and falls with multi-year price trends. Investment flows into gold ETFs and futures respond to monetary policy expectations, real interest rates, and risk sentiment on timescales of weeks to months. Central bank reserve allocation operates on multi-year strategic timelines. These three capital cycles overlap and sometimes conflict, creating price dynamics that cannot be explained by any single demand driver.

What Disruptions Have Revealed

In 2022, Western sanctions froze roughly half of Russia's foreign exchange reserves following the invasion of Ukraine. The reserves held in gold — stored physically within Russia — were unaffected by the sanctions. This asymmetry was observed by central banks worldwide and is widely credited with accelerating the shift toward gold in sovereign reserves. The disruption revealed a property of gold that had been theoretical for decades: physical gold held domestically is immune to the financial sanctions that can freeze digital and foreign-held assets.

The COVID-19 pandemic in 2020 disrupted the physical delivery chain between London and New York, creating a pricing dislocation between the two markets that had not been seen in decades. Gold futures in New York traded at premiums of $50 to $70 per ounce over London spot prices because traders were uncertain whether physical bars could be transported between the two markets to settle contracts. The disruption was logistical — flights were grounded, refineries were closed, assay offices were shuttered — but it revealed how dependent the global gold market's apparent liquidity is on the continuous physical movement of metal between a small number of locations.

Artisanal and small-scale gold mining (ASGM) — responsible for an estimated fifteen to twenty percent of global production — operates largely outside formal supply chain structures. This sector employs an estimated fifteen million people, primarily in Africa, South America, and Southeast Asia, often under dangerous conditions and with significant environmental damage from mercury use. Periodic regulatory crackdowns and formalization efforts disrupt these supply flows without eliminating them, because the economic incentives driving artisanal mining are rooted in rural poverty and limited alternatives. The informal sector reveals the limits of supply chain governance: gold's high value-to-weight ratio and chemical permanence make it uniquely suited to extraction, smuggling, and laundering outside institutional systems.

What This Reveals

• Mining is marginal to the system it serves — Annual mine production adds less than two percent to above-ground stock. The gold supply chain is one of the few commodity systems where the extractive industry is not the primary determinant of supply. What holders choose to sell matters more than what miners choose to dig.
• Dual demand creates structural unpredictability — A commodity that serves both as an industrial material and a monetary reserve asset receives demand signals from two uncorrelated and sometimes contradictory sources. Modeling gold demand requires understanding both consumer economies and sovereign monetary strategy — a combination that resists conventional commodity analysis.
• Ore grade decline raises the floor, not the ceiling — Falling grades do not constrain how much gold exists but how much it costs to add to the stock. The rising cost of new production sets an escalating floor price below which new supply stops. Above that floor, the stock-to-flow ratio means mine supply has limited ability to influence price.
• Trust infrastructure concentrates power at the refining step — Swiss refineries and LBMA accreditation determine which gold is liquid and which is not. This chokepoint is built on trust and regulatory compliance rather than on physical scarcity, making it both durable and difficult to replicate.
• Central banks have become structural demand — The shift from net selling to large-scale net buying by central banks represents a durable change in the demand profile of the gold market. This demand is price-insensitive, strategically motivated, and concentrated among actors who operate on institutional rather than market timelines.

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