Historical Lessons from Past Bullion Shortages

The supply of gold and silver is not always consistent. There have been distinct periods where there just hasn’t been enough to go around.

However, policymakers and investors alike might not be thrilled about a lack of available gold or silver. Additionally, silver has an additional draw in industrial demand, as industries like solar energy, electronics, and electric vehicles are increasingly requiring more of the white metal.

So, let’s talk about when shortages have occurred, how policymakers and investors have responded, and what we can learn and expect from shortages moving forward.

What is a Bullion Shortage?

A bullion shortage means that the bullion available on the market is insufficient to meet the market demand for it. However, we need to be more specific about what we mean by “bullion.”

Bullion is not the amount of a particular metal known to exist in the world. There are vast stores of both gold and silver that remain trapped within the earth that either have not been discovered or – more likely – are economically unfeasible to recover.

The metal we do mine out of the ground isn’t bullion, though. When it is recovered in its raw state, it is ore.

It only becomes bullion after it is processed at a refinery and rendered much purer than it was in its original form. Ore can contain any number of impurities or other rocks, while bullion is often more than 99% pure gold or silver.

The remaining impurities only serve to give the bullion structure, as both silver and, especially, gold are quite soft in their pure forms. Pure gold and silver are soft metals, so small alloy additions improve durability and make them easier to work with.

It is entirely possible for there to be a bullion shortage without an ore shortage. If there are bottlenecks in the refining or transport processes that slow the transition from raw ore to finished bullion on the market, the result is a shortage.

Examples of Notable Shortages

Both gold and silver have experienced these types of events in the past. We’re going to discuss a few of those events, especially those that have occurred recently.

However, we must talk about one particular event in Europe that had a major impact on the world at large. In fact, a bullion shortage may have precipitated the creation of the modern world.

The Great Bullion Famine

In the middle of the 15th century, Europe experienced a severe shortage of both gold and silver bullion. Though there are no hard-and-fast dates for the event, its peak occurred around 1457.

The likely cause for the shortage was the depletion of Europe’s silver mines and the outflow of coinage to the East. Because European countries traded heavily with merchants in what is now the Middle East, much of their existing coinage left the continent, leaving many nations literally out of money.

However, the shortage left most countries in an untenable position to move forward. So, several of them began investing more heavily in exploration efforts, in hopes that new sources of bullion would appear.

One such country was Spain. In 1492, the Spanish throne funded an expedition led by Italian explorer Christopher Columbus. While the Great Bullion Famine had largely eased by that point due to new mine discoveries in Central Europe, the long-term drive to secure new trade routes and resources helped set the stage for Columbus’s voyage.

Modern Bullion Shortages

In more modern times, there have been several shortages that have aimed the United States in different directions.

Here are a few of them:

The Great Depression – After the stock market crashed in 1929, the American public grew quite suspicious of the banking system. Many of them responded by exchanging their dollars for gold, which drained government vaults and threatened to make the entire government insolvent. So, President Franklin D. Roosevelt issued Executive Order 6102 in 1933, which restricted most private ownership of gold, excluding jewelry and rare coins, and began a 43-year period during which Americans could not trade gold easily. He also acted on silver the following year under the Silver Purchase Act of 1934, through Executive Order 6814.

The End of Silver Coinage – In the 1960s, the underlying price of silver began to rise due to simple market pressures and growing industrial demand. As a result, Americans began hoarding the silver-bearing coinage present at the time, including dimes, quarters, and half dollars. The hoarding created a currency shortage, which the Treasury did not like. Thus, the Coinage Act of 1965 removed silver from the composition of most American coins and ushered in the era of cupronickel coins – which remains the composition to this day. Half dollars, however, retained 40% silver until 1970.

The End of Bretton Woods – The Bretton Woods system was an agreement between most of the world’s industrialized nations to set gold’s price at $35/oz and to allow foreign countries to convert their U.S. dollars readily into gold. The system worked well enough until the U.S. built up large trade deficits and foreign governments began redeeming their dollars for gold in massive amounts. This caused a bullion drain from U.S. reserves. So, President Richard Nixon ended the system in 1971 and severed the country’s last link to the gold standard, thus allowing the price of gold to fluctuate with the world market. Unsurprisingly, the price of gold shot through the roof throughout the rest of the 1970s.

The Hunt Brothers’ Move – While gold underwent its radical price shift in the 1970s, another event was taking place in the silver market. Oil heirs Nelson and William Hunt, who feared the devaluation of the dollar due to inflation, attempted to gain significant control over the world’s silver supplies. For the final three months of 1979, they began purchasing vast quantities of silver – roughly 100 million ounces of physical silver and another 100–200 million in futures contracts. The result was a bullion shortage and a price spike that, when adjusted for inflation, was the most dramatic in American history. The market only righted itself after the COMEX stepped in and enacted rules that promoted a tremendous sell-off, culminating in “Silver Thursday” in March 1980, when prices collapsed from a record $50 per ounce.

The COVID-19 Squeeze – Both gold and silver entered shortages during the 2020 pandemic for two very simple reasons. For one thing, the shutdowns that afflicted many businesses touched the top precious metals refiners and reduced the amount of available bullion on the market. For another thing, the pandemic’s uncertainty also prompted many investors to increase their precious metals holdings, further squeezing bullion supply and driving prices of both gold and silver higher.

Gold bullion is not considered to be in a shortage at the moment. Its recent price surge is largely due to massive demand driven by tremendous geopolitical and economic turmoil both domestically and abroad.

However, silver bullion has remained in a structural deficit since 2021. In the 2020s, the demand for silver has grown exponentially due to industrial demand from companies in the solar power and electric vehicle spheres. Annual shortfalls have consistently ranged from 100 to 250 million ounces in each of the years in question, according to Silver Institute data. This “deficit” refers to supply lagging demand, not necessarily a total absence of physical silver.

How Do Policymakers Respond to Shortages?

Not well. As mentioned above, significant bullion shortages can threaten the very solvency of entire governments and cause economic downturns and depressions.

So, policymakers tend to react dramatically to a shortage of gold or silver. After all, the discovery of America was due, in part, to a government’s reaction to a bullion shortage.

Let’s talk about some of the ways that governments tend to react in the face of bullion shortages:

• Changes to monetary policy – Policymakers may enact new regulations or laws to limit trade, increase tariffs, or increase the money supply to stave off some of the effects of the shortage.
• Adjustments to supply – The government may try to increase potential supply in several different ways. It may attempt to stockpile the existing bullion to backstop its own economy. It may accelerate the issuance of mining permits. It may even ration or confiscate bullion from the citizenry, as seen with FDR in the 1930s.
• Supply chain exploration – Policymakers may also seek to establish trade partnerships or supply lines with other countries to open new supply chains for gold or silver bullion. In particular, they may seek new ways to acquire bullion to reduce their country’s dependence on a single, and/or hostile, provider.

What Shortages Mean for Investors

In general, bullion shortages are not good for the precious metals market or its investors. Less bullion means trade becomes more constrained and the market loses liquidity.

However, that statement reflects the long-term viewpoint. In the short run, shortages almost always beget higher prices. The simple supply-and-demand of the situation speaks for itself.

For those looking to acquire more gold or silver, shortages are not good. Not only will prices be higher, but it will be more difficult to find the metal that you want to buy to boot.

As a savvy investor, though, you can recognize your likely courses of action at the beginning and end of a shortage, and how to gauge its progress while it is in effect.

It is extremely likely that the price at the beginning of a shortage is the lowest it will be for a while. It is extremely likely that the end of a shortage will signal an imminent price decrease.

Lastly, be ready to recognize when those government interventions come into play during a shortage. Some of them may alleviate the shortfall and cause a price drop. Others, however, may only raise the price due to higher inflation.