Bling Bling: Gold and Globalization
Bling Bling: Gold and Globalization

Reaching a 28-year high, gold is hot again, at least for the time being. Whether in jewelry or watches or as currency, gold has always served as a valued commodity worldwide. Its value has increased and decreased based on supply and demand and the perception of its value. Local, national, and international events and circumstances play a role as well.

There is a total of 30,145.7 tonnes of gold reserves owned by countries and institutions worldwide. As of March 2009, the United States government is the largest holder of gold, with 8,133.5 tonnes of gold; Germany is the 2nd largest holder with 3,412.6 tonnes; and, the IMF is the 3rd largest holder with 3,217.3 tonnes.1

Broadly speaking, today, the “largest futures markets are in the U.S.; the physical capital of gold is Europe. Africa is the largest producer; and Asia is the largest consumer.”2 South Africa has the most gold mines.3 Nearly half of the gold that has ever been mined came from South Africa’s Witwatersrand Basin.4

This analysis will address how gold is mined, the various human rights and environmental challenges associated with mining, as well as a brief historical overview of gold’s use as a currency and as an investment.

Historical Overview: Gold as currency (since 1800s)

Britain was the first country to adopt the Gold Standard in 1821, followed by the rest of Europe in the 1870’s and the United States in 1900. During World War I, most European countries suspended their gold standards to fund war efforts and briefly reinstated them after the war ended.

During World War II, European countries suspended the gold standard and never returned to it. The United States severed the link between the dollar and the gold standard, but maintained the gold standard until 1971. The IMF created a new system of exchange rates and fixed the price of gold at $35/ounce; after which, many countries pegged their currency to the dollar (rather than gold).

In January 1980, gold reached an all-time high of nearly $1600/troy ounce of gold, partially due to geopolitical crises, such as the Soviet invasion of Afghanistan and the U.S. hostage crisis.

The value of gold has fluctuated over the past quarter of a century. Notable increases/decreases in value include: a $453 increase after Black Monday in 1987 (when many were forced to sell their gold) and a decrease to $253/ounce in 1999 after the Bank of England sold half of its gold reserves. In 1999, the first Central Bank Gold Agreement was signed; limiting the amount of gold a country could sell annually (500 tonnes).

The price of gold has fluctuated wildly during the recent economic crisis. As Bear Stearns is acquired by J.P. Morgan in March 2008, gold trading in New York reached the $1000 mark. In June 2008, Vietnam banned the import of gold, as it tried to tackle its own trade deficit; Vietnam had become the biggest buyer of gold, surpassing China and India. The price of gold fell to $680.8/ troy ounce in October 2008 as de-leveraging hit the commodity markets, but bounced back again to $878.2/troy ounce by the end of 2008.5 2009 has seen similar ups and downs in the price of gold.

Gold as Investment

Speculating in gold is different that speculating in oil or most other commodities, because gold, for the most part, is not consumed. If converted into jewelry or other products, gold is still recoverable. Hence, with gold mining, the total supply of gold is always increasing. Gold mining is slowing down though; there was an eight percent contraction in mining in 2008. With higher production costs and lower output, as much of the surface gold has been found, miners are forced to dig deeper for lower grade gold.6

Private ownership of gold (as savings/currency, not as jewelry) was often limited by governments. From 1933 to 1975, private ownership of gold was prohibited in the U.S. In 1933, more than 500m tonnes of gold was exchanged for cash. Today, individuals/companies/institutions/governments can own, buy, and sell gold. Many choose to buy gold mutual funds or gold stocks, rather than physically owning the bars of gold. People buy gold to diversify their portfolio, or as a safe haven, since currencies and stocks tend to fluctuate in value.

After the Gold Standard was abandoned, governments could print as much money as they needed; many see this trend as worrisome, since there is no limit to the amount of money a government can print. Lately, there have been calls to return to the gold standard or a close hybrid of it, in order to stabilize monetary policy and enforce a “cost” to governments for printing more money, as well as to avoid bubbles. Some believe the current financial crisis could have been avoided if there was a gold standard, because banks would not have taken the high-level risks, if they had to back their actions with gold.7

Gold Mining

Gold can be found in many different forms, thus extracting or mining the gold can take many forms as well. Placer mining is used to find gold on the surface, in the sand or gravel. The gold is removed by suspending the sand and gravel in moving water, and the heavy gold sinks to the bottom. It is often done in river and creeks and can be done by small outfits or even interested individuals or hobbyists.

Sluicing, dredging, and panning are used to separate the gold from the gravel. Dredging usually requires more of an initial investment, as potential mining spots are tested beforehand. Dredging also is used to access gold as deeper leveler, at least two feet underground. Hydraulic mining, using high pressure water to spray an area, break up the rock, and dislodge the ore, is also used; however, it can be quite destructive and is banned in many places.

To mine deeper, hard rock mining or open pit mining is used. Both methods are very expensive and require a lot of capital to explore the areas to find the gold; thus it is carried out only by major gold conglomerates.8 This type of mining are often used to find gold embedded in other rocks, known as gold veins (instead of free-standing nuggets).

To extract one ounce of gold, 100,000 ounces of gold ore is processed. The ore crushed, and then amalgamated with mercury to separate out the gold from the other particles, often using a simple panning process. After the mercury separates the gold, it needs to be scraped off using a knife or other tools.9

Environmental Concerns

Environmental challenges arise from all aspects of the mining process. Smelting the gold often leads to air pollution, smog, acid rain, and greenhouse gases. Heap leaching, a process some miners use to extract the gold through dripping a cyanide solution onto the ore, leads to large amounts of waste. These heaps, some reaching over 300 feet, have been left after the mine is closed, causing untold environmental problems. The cyanide pollutes water, kills fish and animals, and destroys plants and ecosystems. Other waste byproducts, such as mercury and heavy metals, have also been found in the food chain, wreaking havoc on families for generations.10

Recently, mines have been required to take extra precautions to avoid cyanide leakage, through the use of special leach pads; the cyanide is also captured and reused or treated.

Once all the gold has been found in an area, returning the land to its former pristine state is often difficult to achieve, as abandoned mines and waste are not universally required to be returned to their former state.

After the 2002 Earth Summit in Johannesburg (‘Rio+10’), the mining community agreed to coordinate the Mining, Minerals and Sustainable Development’ (MMSD) project, in order to examine how to make mining sector sustainable. The summit explored how to balance social, economic and environmental factors. MMSD teams met in four different regions (Southern Africa, South America, Australia, and North America) before they issued their findings.11 There has been no official MMSD follow-up after the reports were issued.

Human Rights

Unfortunately, there are many documented cases of human rights abuses within the gold mining industry. One example was illustrated in an in-depth USA Today article12 outlining the use of child labor to mine gold in Africa. The Associated Press (AP) visited six bush mines in Africa and interview 150 child miners and tracked the gold from these mines to Bamako (capitol of Mali) to Switzerland. Once the gold reached Switzerland it was melted with other gold into bars and thus became indistinguishable.

Twenty percent of the world’s gold, is mined from bush mines (basically holes in the ground) in Africa, South America, and Asia. Child labor is common in these mines. Senegal has prohibited children under 18 years old from doing hazardous work, such as mining; unfortunately, the laws are rarely enforced. In these mines, children often get mercury poisoning from the amalgamation processes described above, since there are few safety precautions in place for preventing them from breathing in the fumes.

In 2005, Tiffany’s and other jewelers created the Responsible Jewellery Council, which now includes over 80 members across the gold and jewelry supply chain. The council developed a certification system, which requires a specified code of practice and the use of accredited auditors to verify the standards are being carried out. The council tries to ensure that there is no child labor.

Other human rights concerns include displacement of local farmers when a new mine opens in a community, land expropriation without sufficient compensation, and lack of respect for indigenous communities and their sacred connections to the land.

Conclusion

Since the dawn of time, gold has been the object of fascination. Its malleability and strength makes it relatively easy to manipulate and use in jewelry, electronics, coins, and any other desired item.

Throughout history, gold rushes have brought success and wealth to the early miners; however, there are many cases of exploitation, especially in the developing world, where miners are ill-treated, underpaid, and exposed to toxic fumes and unsafe mining conditions. As the world focuses on sustainability, hopefully, the gold mining industry will continue to focus on these issues as well.  If they do, they will make it an extremely, attractive investment.


1 Blas, Javier. “Gold sales cost Europe’s central banks $40bn.” Financial Times. May 7, 2009.
2 “
Gold: Truly International Commodity.” Gold News. July 8, 2008.
3 Cowen, Richard. “
DIAMONDS, GOLD, AND SOUTH AFRICA.”
4
http://www.zealllc.com/2009/huistocks.htm
5 Flood, Chris and Alistair Gray, Helen Warrell and Steve Bernard. “
Gold the Unstable Metal.” Financial Times. May 6, 2009.
6 Cui, Carolyn. “
Gold’s Rise Is the Envy of Gold Miners.” Wall Street Journal. May 7, 2009.
7 Kim, J.S. “
Gold and Economic Freedom: Reinterpreted for the 21st Century.” Seeking Alpha. May 10, 2009.
8 Minar, Jude. “
Types Of Mining Operations.”
9 “
Amalgamating Gold and the Danger Involved.”
10
Polluted Air. No Dirty Gold.
11 Mudd, Gavin. “
Gold mining and sustainability: A critical reflection.” Encyclopedia of the Earth. September 12 2008.
12 Callimachi, Rukmini And Bradley S. Klapper. “
Kids working in African gold mines.” USA Today. August 10, 2008.

* Pictures: http://www.flickr.com/photos/27117418@N07/2558158691/ and http://www.flickr.com/photos/aresauburnphotos/861425339/

Related Resources:
Peru: The Curse of Inca Gold, October 2005

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