What the Global Supply Chain Chaos Means for Gold

The Spotlight
10 minutes read
Oct 19, 2021

The rapid spread of Covid wreaked havoc in the global supply chain, which is likely to last for months. How can this situation affect the economy and, most importantly, the gold price?

Wondering why everything from cars and electronics to books and toys is in short supply, and why some grocery stores are running short of canned goods?

Blame the strained global supply chain that connects manufacturers to their assembly lines before distributing the final product to consumers.

The problem struck shortly after the COVID-19 pandemic erupted and only seems to be getting worse, with many physical gold investors thinking about the possible implications to the global economy.

But before looking at how we got ourselves into this situation and what it could mean for the gold price, let’s freshen up on what the supply chain is, exactly.

What’s the supply chain?

To put it simply, a supply chain is a network between a company and its suppliers to produce and then distribute a specific product or service to the final buyer.

The functions in a supply chain include product development, marketing, operations, distribution, finance, and customer service.

In other words, it’s how your iPhone, your car, or your new sofa will manage to go from their factory to your hands.

What exactly is going on?

Until recently, as consumers, we were unlikely to give a single thought to how the products we buy actually get to us. But not anymore.

You’ve probably noticed that online purchases are now taking longer to arrive, that there are empty spots on store shelves and that the furniture you bought is taking months instead of weeks to arrive.

And the reason for all this chaos is the spreading disruption in the global supply chain. Let’s unpack what’s going on, exactly.

The COVID-19 pandemic impact on the supply chain

It's no doubt the pandemic has had a major impact on the functioning of the global supply chain: multiple national lockdowns slowed the flow of raw materials and finished goods, thus disrupting manufacturing and any further steps in the supply chain.

As a result of the pandemic, we see:

  • Cut-off access to key suppliers: Europe and the U.S. are heavily dependent on Chinese and other foreign suppliers in such strategic areas as raw materials, pharmaceutical ingredients, and semiconductors. But with factories closing down due to the pandemic and with bottlenecks in every link of the supply chain — labor, containers, shipping, and ports — many companies were cut off from their key suppliers and had to slow down production.

This was explained by the investment strategist at Safanad, John Rutledge: “The nature of epidemics is that they don’t just have a one-and-done wave of infections. They have many waves of infections […] Mostly, you produce more slowly, and that’s what hits GDP. If you can’t get the materials you need, you have to slow down production”.

  • Worker shortages: Covid has locked many people at home, sent entire cities into lockdown and has generally disrupted the workforce in many countries, thus creating labor shortages all over the globe.

“It’s not clear how many of those workers are afraid to go to work, don’t want to go to work, or still have plenty of cash. But it’s pretty clear to me that this worker shortage is not going to go away in three months or six months or 12 months,” Rutledge added.

  • Dependency on the Chinese sourcing: as mentioned above, Europe heavily depends on imports from China. Last year, China dethroned the U.S. to become Europe’s top trading partner for the first time on record. This is why any issues with the Chinese supply chain can have major ripple effects.

“One of the things that became apparent with COVID-19 is the rapid change that has occurred in terms of the critical mass of value chains that have built up in China from 2003 […] to 2019,” explained Alex Capri, a visiting senior fellow at the National University of Singapore’s business school.

And even if Chinese manufacturing companies were to resume their work at full scale, “countries and regions might receive a second hit from the drop in a trading partner’s supply, and vice versa,” according to Bruce Pang, the head of macro and strategy research at China Renaissance Securities.

Ports and hubs clogging up

  • Disruptions to global shipping: As we know, Covid partially or temporarily closed many ports in the U.S., Europe, and Asia, which has had a major impact on many key shipping hubs. In addition to new paperwork and Covid-related safety measures, this has created logistical nightmares at each step of the supply chain. And with recent floods and climate events in Europe damaging key supply routes on the continent, things have only worsened.
  • The lasting impact from the Suez canal blockage: While the Ever Given, the massive container ship that blocked the Suez Canal, might be free now, the situation is far from back to normal. Experts warn the impact of the blockage could reverberate through the global supply chain for months. In 2020, before the event, more than 50 ships per day on average passed through the Suez Canal, accounting for around 12% of global trade.

“We might celebrate the success of releasing the ship and unblocking the Suez, but that’s not the end of the story here. It’s going to continue to backlog ports and other delivery mechanisms as a result, and then, of course, the chaos that disrupts thereafter,” said Douglas Kent, the executive vice president of strategy and alliances at the Association for Supply Chain Management.

A concerning container crunch

As a result of the Covid, the Suez Canal incident, and other geopolitical factors, freight rates have spiked to heights never seen before. While a single container of goods shipping from Shanghai to Los Angeles cost $1,500 before the pandemic, the same container now costs as much as $30,000.

To sum up, it seems that a combination of Covid and bad luck has created a mess that seems to “have no parallel in recent economic history.”

What are the consequences?

While the consequences are many and far-reaching, let’s focus on the 3 key consequences that will affect us most.

Computer chip shortage

Today, we rely on computer chips (also known as semiconductors) for millions of products that we use daily - cars, smartphones, washing machines, etc. But, with the pandemic, we’re now seeing an increasing shortage of these high-quality computer chips.

How did we get there? Well, a few things happened:

  • Chip factories closed during COVID lockdowns: some factories had to shut down for several weeks for sanitation if workers happened to contract Covid-19.
  • A series of unlucky natural disasters affected chip supply: a winter storm in Texas closed several semiconductor factories, and a fire at a plant in Japan caused production delays.
  • Chip demand surged with growing consumer demand for durable goods such as cars and appliances: currently, car production is seriously constrained by available chip supply, which is one of the key reasons why, in some areas, used car prices are now almost equivalent to new car prices.

Inflation

Now, these delays and shortages are starting to cause another well-known and much-dreaded issue: inflation.

  • IHS Markit’s latest PMI survey of global manufacturing showed that the delays in delivery times are now the biggest on record, going back a quarter-century. As a result, this unprecedented situation has caused prices to increase at one of the fastest rates in a decade.
  • Also, supply can’t catch up with the level of demand currently hitting the market, which in turn fuels price inflation.

And seeing how most governments engaged in extreme levels of money-printing since the beginning of the Covid crisis, the combination of rising prices and a sharp increase in money supply (the money that’s available to use in the economy) is starting to look like a recipe for inflation.

Energy problems

Finally, there are the world’s energy problems, which have deeper roots than the COVID-19 pandemic. But energy plays an important role in the production of many goods and services. And if energy and international trade routes are in trouble, other parts of the economy are bound to be impacted as well.

The energy sector is currently facing 2 major issues:

  • Many countries have sought to switch to greener energy supplies without putting sufficient alternatives in place: as a result, China has seen major power shortages that have led to blackouts and power cuts in the world's second-largest economy. This not only impacts China’s production capability, further straining its supply chain, but it also adds new and unexpected demand from a major global economy on the already strained energy supply chain.
  • Growing demand for natural gas: as the recovery from the pandemic went on, the supply of natural gas has not been sufficient to meet new demand. Mostly because gas production was reduced in the earlier stages of the pandemic, and the recovery has been more rapid than the energy sector had expected. As a consequence, the E.U. faces the risk of not having enough energy supplies for the coming winter, while the U.K. has seen its natural gas prices jump 700% over the past year.

“Europe finds itself between a rock and a hard place. With global liquified natural gas (LNG) markets tight for nearly a year, and Russia facing its own upstream and infrastructure issues, Europe's two key sources of flexible gas supply have not shown up,” Per Samer Moses, the manager of Global LNG Analytics at S&P Global Platts, said.

And the situation has the potential to get even worse:

“Given just how depleted the region's storage situation is, any tremble of bullish news, be it weather or supply outage, has the power to send markets in search of ever higher price anchors, with fundamentals dictating the market will need to balance on demand destruction, a dynamic already being seen in the industry across both Asia and Europe,” he added.

How can the supply chain crisis affect the gold price?

Given the dramatic events of the past months, it's no surprise markets remain volatile, with many investors worried about how this situation could affect their physical gold investment.

But it seems that, amid all this supply chain chaos, the gold price has been mostly reacting to its “traditional” drivers like the U.S. inflation data and dynamics in the U.S. dollar.

This is what Nicky Shiels, head of metals strategy at MKS PAMP GROUP explains: “Price action has been boring with a skew to the downside which has not worked out; it has reacted constructively to the “old-world thinking” that inflation is bullish [for gold] prices […] Gold remains bid towards $1800 and has held onto its post CPI gains”.

Other analysts have noted a potentially growing demand for gold as a safe-haven asset favored by many investors in times of economic uncertainty such as today.

"Gold is entering a period where risks now outweigh the reopening trade, and we'll see more safe-haven flows into gold. This is a major reversal of trends and very positive for gold,” OANDA senior market analyst Edward Moya said.

So what’s the bottom line?

Of course, we all want to know when the supply chains will be back to normal, so we can buy a new couch and have it delivered promptly.

But it looks like we will have to get used to this new reality, according to Alex Capri: “I don’t think things will return to normal as we’ve known them over the last couple of decades. We are in a completely different new era now and globalization, as we’ve known it in the past, is over”.

While Tim Uy of Moody’s Analytics is echoing this analysis with his forecast, saying things “will get worse before they get better.”

“Border controls and mobility restrictions, unavailability of a global vaccine pass, and pent-up demand from being stuck at home have combined for a perfect storm where global production will be hampered because deliveries are not made in time, costs and prices will rise, and GDP growth worldwide will not be as robust as a result,” Uy said.

With the direction of our current economic situation still unclear, investors might be right to protect their investment portfolio with a safe-haven asset against persistent global supply chain issues.