Cassandra has moved. Ugo Bardi publishes now on a new site called "The Seneca Effect."

Sunday, December 9, 2018

Why do Dragons Love Gold so Much?


We, humans, love gold so much that we have even imagined that giant, flying reptiles would share our love for the yellow metal. This curious vision of dragon's motives has a certain logic, although it takes some work to understand it. But it is sure that gold has been important in human history from the time, at least five thousand years ago, when our Sumerian ancestors started to collect gold and use it to prop the power and the prestige of their big men, the Lugals. 

Cassandra's Legacy has published several posts dedicated to gold. Below, a reflection by Pepi Cima, here some links to older posts. 



What has Gold Ever Done for us?

by Pepi Cima



Could it be that gold mining is in modern times completely useless, very costly and terribly detrimental to the environment and nobody has seriously thought about it? Could gold acquire a status not too dissimilar to that of the rhinoceros horn?


Warren Buffet, the most revered investor of all times, says: “Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”

Present day Gold economy is very costly for the environment and for our fossil fuel reserves. Gold bank reserves, equivalent to tens of years of civilian use of the metal, could be sold on the open market to reduce gold mining together with all its environmental and social negatives without affecting any of its industrial uses.

GOLD MINING FACTS

Global gold production totaled roughly 3300 tonnes in 2017. 10 listed gold mines are responsible for nearly 30% of global output, the remaining mines are private unlisted mines and very many Artisanal and Small Mines, ASM. ASMs, triggered by booming gold prices, have become a lucrative source of income in countries such as Thailand, Peru, and Senegal over recent years.


They involve a lot of people, one widely used estimate is that more than 100 million people globally depend either directly or indirectly on ASM for their livelihood. In Africa alone, more than 6 million people are directly employed in ASM.
Gold mining is a very big industry in absolute terms: in 2017 the market capitalization of the first 20 public gold mining companies was reported at 140 B US$, for comparison oil companies in 2018 totaled 1250 B US$.

China, the largest gold producer in the world, in 2016 accounted for around 14% of total annual production but no one region dominates. Asia as a whole produces 23% of all newly-mined gold. Central and South America produce around 17% of the total. Around 19% of production comes from Africa and 14% from the former USSR.

Increased gold prices, together with low energy costs, are encouraging the exploitation of lower and lower grade mineral in bigger and bigger mines.


GOLD AND THE ENVIRONMENT

The consequences of all this mining are land damage produced by deforestation and environmental destruction at the mine and its surroundings. Its impact is particularly damaging because it mostly occurs in pristine environments, see for example the huge mines of Las Claritas in the Caribe Indian region of Venezuela and El Sauzal in the astoundingly beautiful Tarahumara region of the state of Chihuahua in northern Mexico.

A quick look at the aerial pictures of Google Earth, ( 6°11'35.00"N, 61°26'9.60"W and 26°59'52.73"N, 107°54'3.51"W are the relative geographical coordinates) would suffice to get an idea of the physical devastation. Artisanal and small-scale mines are responsible for similar, smaller scale, havoc but in larger numbers.


Gold mining is particularly destructive also from the pollution point of view: mercury and cyanide are the two main chemicals employed in gold extraction.

For every gram of gold produced using the amalgamation process between one and two grams of mercury are released in metallic form or as vapor. UNIDO (UN Industrial Development Organization) estimates that small-scale gold mining is responsible for about a third of world mercury emissions.

Every year, 2,000 tonnes of mercury arising from human activities such as coal-fired power plants and gold mining are emitted into the atmosphere, according to FOEN, the Swiss environment office. The heavy metal is found at the site of contamination but because of its extreme volatility also at locations far from where was originally released.

Cyanide, mainly used in large industrial mines, is highly toxic. Low-grade ores are stacked into heaps and sprayed with a cyanide solution at a concentration of about one kilogram NaCN per ton of ore, a few grams of gold. The precious metal is complexed by the cyanide to form soluble derivatives, e.g. Au(CN)2. The "pregnant liquor" is separated from the solids which are then discarded to a tailing pond or spent heap, the recoverable gold having been removed. The metal is recovered from the "pregnant solution" by reduction with zinc dust or by adsorption onto activated carbon. This process can result in environmental and health problems. A number of environmental disasters have followed the overflow of tailing ponds at gold mines. Cyanide contamination of waterways resulted in numerous cases of human and aquatic species mortality.

Switzerland hosts the environmental policy center of competence for chemical products and toxic waste in Geneva, Global Environment Facility (GEF), a 183 member countries environmental cooperation voluntary organization. Coincidentally most of the gold produced in the world physically transits Swiss refineries. In 2017 2,404 metric tons of raw gold were imported into the country, worth 70 BSF, and 67 BSF were exported. Only the chemical/pharmaceutical sector is more important with 98 BSF.

GOLD MINING AND THE SOCIAL ENVIRONMENT

Degradation of the social environment is an associated issue too. Although the vast majority of artisanal scale mines are undertaking a vital livelihood activity, there is strong evidence that elements of organized crime are involved. A host of players have vested interests in maintaining the status quo of informality and illegality for example because of money laundering or smuggling schemes or of support to civil war. Incidents occur related to unsanitary work environment, child labor, human rights abuses. Some have little to do with the mining company but take place on or in the direct vicinity of the mining concessions.

Furthermore large industrial mines don't necessarily provide jobs for local unskilled populations, as is the case for the mines in the Tarahumara territories of northern Mexico where literally none of the locals are employed and all the mine workers are flown in and out from neighboring regions to an otherwise isolated mine.

GOLD MINING AND ENERGY

Gold mining is a very energy-intensive industry. In 2013 the EIA reported that the top 5 Gold mining companies were using 104 liters of diesel fuel per gold ounce extracted, at more than 10% of the extraction cost at diesel price untaxed rates. At European street pump rates, it would have accounted for nearly half of production costs.

Incidentally, Bitcoin perpetuates the energy wastefulness of gold, another money-form which has materialized as an environmental nightmare.

There is an ample literature on gold recycling and gold is often cited as an example of virtuosity of circular economy. Unfortunately an example of something of which we already have too much. A broader view of how the "system" works is badly needed.

GOLD ECONOMY

Most of the gold ever dug out of the earth in the whole history of humanity is still stored somewhere since it is precious and doesn't corrupt. In a chemical sense.

The best estimates currently available suggest that around 190,000 tonnes of gold have been mined throughout history, of which around two-thirds have been mined since 1950. Because of its indestructibility, almost all of it is still around in one form or another. On earth, we store a supply of gold large enough to keep us going for more than 100 years. But going where? Roughly 20% of production is used in electrical contacts and jewelry but most of it as a reserve of value of one kind or another.

Many think of gold as something without which financial markets would not work.

On the other side liquidity problems with a gold-based monetary system caused the Nixon administration to abandon the gold standard and from that point forward no currency has a natural resource tethered to it. All money is now created from thin air, 95% or so via commercial bank loans. 

If there is something all economists seem to agree on is that the gold standard is a bad idea for a modern economy.

Most people don't have a clear opinion about the opportunity of saving gold as a reserve of value but many stash gold in deposit boxes anyway. Freud interpreted this behavior in his usual way.

Distinguished economists seem to have a clearer idea about the subject for example, in this excerpt from General Theory of Employment, Interest, and Money, par. VI, Keynes says with a sense of humor worthy a Monty Python sketch:

Just as wars have been the only form of large-scale loan expenditure which statesmen have thought justifiable, so gold-mining is the only pretext for digging holes in the ground which has recommended itself to bankers as sound finance; and each of these activities has played its part in progress….

GOLD AND BANKING

Governments seem to know everything there is to know, in their vaults, they accumulate gold in gigantic amounts and at tremendous cost.

Central bank reserves consist of foreign currencies and precious metals, mostly gold. From the following table, one can see central bank gold distribution among countries, as a percentage of their reserves and in grams per citizen. Interestingly the two largest economies, the US and China are at the opposite sides of the spectrum. The large US reserves percentage, 75%, has to do with the belief that the US dollar doesn't need much in terms of foreign currencies reserves, its weight in the world markets makes it believable by itself. China's small percentage reflects the young age of that country as a world financial/industrial power. Modern money theory doesn't support the use of physical gold as currency reserve.


Collectively, at the end of 2015, central banks held around 31,400 tonnes of gold, approximately one-fifth of all the gold ever mined. Moreover, these holdings are highly concentrated in the advanced economies of Western Europe and North America, a legacy of the days of the gold standard. This means that central banks have immense pricing power in the gold market, crucial to the fate of gold mines all over the world. In recognition of this, major European central banks signed the Central Bank Gold Agreement (CBGA) in 1999, limiting the amount of gold that signatories can collectively sell in any one year. There have since been three further 5 years agreements, in 2004, 2009 and 2014 and the signatories have stated that they currently do not have any plans to sell significant amounts of gold. Central banks have committed to being stewards of stable markets and that they will not engage in uncoordinated large-scale gold sales. Are they aware of their environmental responsibilities too?

WHAT TO DO WITH GOLD

Can we do something useful with this giant reserves of gold? Yes, we can, we can exploit the huge labor investment done by humanity since ancient history to the advantage of the physical and social environment we live now in, without affecting the present uses of the metal.

Recognizing the little utility in hoarding present-day gold reserves most governments could agree to destine their gold to civilian use in competition with gold mining. They could do so for tens of years in a row with no practical repercussions. A side benefit would also be the one of reducing the appeal of gold for illegal money recycling and tax evasion. Our fossil fuel reserves would benefit too.

CONCLUSIONS

The commercial sale of gold reserves would represent a great victory of the environmental cause over superstition and fear of the wrong enemy, a good starting point to reexamine priorities in our economy and its relationship with a degrading environment.

The gold industry is one egregious example of how badly the demand/offer feedback loops of our exchanges work. Our right hand doesn't know what the left hand does.

The supply side of energy and labor is much more heavily scrutinized that the demand one. We investigate and invest in new energy sources far more than thinking of what to do with the energy they produce.

Do we know if we are developing so much activity and destruction for a good reason? Is this subject discussed? Are legislators taking proactive initiatives, like they do about vehicles gas milage? With cars, we move around for work and pleasure, and we should question this too, but what are we achieving with gold?

Could it be that gold mining is in modern times completely useless, very costly and terribly detrimental to the environment and nobody has seriously thought about it? Could gold acquire a status not too dissimilar to the one of the rhinoceros horn?

The gold tragedy keeps reminding me of Atahualpa's execution at the hands of the conquistadores after requiring a ransom in gold. Different actors but the end of that sad story is still not in sight.


Inca jewel, very original and beautiful art was melted to pay for Atahualpa's ransom

32 comments:

  1. Tegucigalpa no, that's the capital of Honduras in Central America, you mean the Inca Atahualpa of Perú.

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    1. Thank you Armando, absolutely, I wonder how I missed that.

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    2. Pep, some points:

      All money is now created from thin air, 95% or so via commercial bank loans.

      Which is why the world is now mired in unpayable debt. We need a different, more sustainable system And we need DEGROWTH. Yes, let's stop mining gold, and use the gold we have as the basis for a new monetary system. It's perfect for that.

      If there is something all economists seem to agree on is that the gold standard is a bad idea for a modern economy.

      No, that's not what Austrian economists think.

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    3. OK: If there is something ALMOST all economists seem to agree on is that the gold standard is a bad idea for a modern economy.
      It's unfortunate because otherwise your original idea would be a good one to stop mining. Hey, if it works for you I am for it.

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  2. Ugo and his socialistic friends clearly doesn’t understand gold.
    Gold is money, nothing more or nothing less, and money has an extremely important role in human civilization.
    Without honest money (gold and silver) the civilization is doomed.
    What irredeemable currency (fiat-money) does to civilization is what we are experiencing at the moment, it is the way to total and utter ruin.
    When the rulers of the roman empire began to dilute their silver coins with copper the path was set and the rest is literary history.
    So folks, keep on digging after the best money the human race ever had.

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    1. Markus - You clearly do not understand how money works. Money has value only if the ruling entity says it does. The whole time Rome "diluted" its coins is still served as money because the rulers said it did, not because they succeeded in pulling the wool over the population.

      Your comment shows that you don't understand, or more likely don't like the reality that money is and has always been backed only by the threat of violence.

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    2. No Jef, it is you that don’t understand.
      The government can force people to use diluted money, but then the money alter its properties and becomes just a currency with constantly decreasing value.
      That is also called Greshams law; bad money drives god money out of circulation.
      That is what happens in the world today. Fiat-money is driving gold and silver out of circulation. Instead gold and silver are hoarded, and most important they retain their value.
      Fiat-money the other way constantly loses value and always becomes worthless in the end, causing a crashing economy, wars and famine.
      This is the main problem today. Of course are oil and minerals depleting but there are still lot of it available in the ground. Metals are still cheap and so are oil.
      Too much bad money / money-printing is the problem.

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    3. money (or gold or any other substitute) is a social construct and its value depends only on the trust that collectively people place in it and this because the whole economy is a social construct. As long as trust exists, then there is a value.

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  3. Since energy is the ultimate currency, it is no surprise that something requiring lots of energy to extract would be of high value.

    As for the gold standard being a bad idea, it is only in so far as returning to it would be. Once unleashed from the constraints of physical supply of gold, the world economy has ballooned tremendously such that we can never shrink it or 'right size' it again without triggering collapse.

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    1. Bingo! Gold = embodied energy, in a very concentrated and transportable form. That's why it's been an asset, or even money, for about 5,000 years.

      And when our current flawed monetary system collapses, it will make a big comeback I suspect.

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    2. No, the base unit of wealth is agrarian land, you can't eat gold.

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  4. >If there is something all economists seem to agree on is that the gold standard is a bad idea for a modern economy.

    I often wondered if a gold standard could be a good idea exactly because it would cripple the economy and cause the kind of de-growth we need.

    And with my conspiracy theorist hat on, I sometimes wonder whether Europeans created the Euro as an ersatz gold standard with the express aim of destroying the middle class and, ultimately, the industrial economy.

    About the Central Bank Gold Agreement (CBGA): I see those largely useless gold reserves as a clear indication of a "plan B" for the Euro.

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    1. Absolutely, the gold standard would be a good candidate for de-growth although better ones are available. Military expenditures are still among the most eficient, sofisticated armaments in particular, with their high concentration of intellectual labor, have also limited environmental impact.

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    2. It matters not what the "money" actually is. All money is brought into existence as a political policy decision. There has been periods throughout history when that policy was reasonable, meaning beneficial to the general population. The main way that worked was by pulling the future forward to the present. Even the "gold standard" functioned this way. This is also a key element of overshoot.

      MMT has the potential to be the most "honest" money possible. Problem is that for TPTB who are the ones who decide and enforce what money is, this is the last thing they want.

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    3. pep,

      I am not sure that I understand your reply. Are you saying that, in order to limit environmental impacts, we should invest more money in the military?

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    4. Disc, can you think of a more wastful, less productive kind of investment than a billion dollar stealth bomber the size of a bus?

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    5. Well, hmm... how about if, instead of channeling investments towards unproductive but dangerous uses, we just limited investments tout court?

      Also, strictly speaking, if an investment is something that increases productivity, military expenses are not investments.

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    6. Of course, piano lessons are what we should all be engaged in for a better world, but I was talking about relevant expenditures in the world we are presntly in. Spending in the military is unsurpassed to reduce overall productivity. If you are one of those who think that fear of retalaition is what keeps wars from happening we pacifist environmentalists should all work for the army.
      My definition of investment is what increases production, not productivity.

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  5. Jef, I am not debating the advantages of the gold standard over fiat money, or even an MMT approaches.

    In fact, I think that Keynesianism worked well in the glorious thirties, monetarism much less so since the 1980s, and MMT would be good for today's problems (especially when countries like mine will leave the Euro).

    However, a well-functioning monetary system brings resource depletion and pollution with it. As much as I have sympathy for Keen and Mosler, this is a time to destroy the economy, not to let it flourish.

    The gold standard would be a great way to drag the world economy into a downward spiral.

    Or of course we could force central banks to strangle the economy with high interest rates.

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    1. DISc - Thank you for your considered response. There is an inherent element implied in MMT that goes something like this;

      (I am going out on a limb here so....)

      MMT by definition is the balance of potential production vs required demand/need. IMO there is an implied technocratic or economic/ecologic element to this concept.

      It is when money leaves the realm of Ecological Economics that it begins to have a negative and destructive effect on life on the planet. I don't give a rodents anus what everyone in the dominant society calls money it will be destructive when removed from the physical realities of life on a finite planet. All those who wish for it to be different are in dream land.

      The argument that gold is by nature restrictive and therefor would be better for life on earth are leaving out the other 99% of what an economy is. All a gold standard does is make it easier for the ultra wealthy to eventually own it all.

      I am not sure of the exact figures but for gold to represent the existing world economy it would be worth hundreds of thousands an ounce ( I think a few guys just creamed their jeans), making anyone who has some, ( about .01% of the population) mega mega mega mega rich, and everyone else penny less poor.

      Money is not a social construct otherwise we would not have millions dying every year simply because they don't have any. If it is a social construct then what does that say about society?

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    2. I find interesting that this piece on gold and the environment pushed once more the discussion towards the meaning of money, like so often happens. The business of what is money is scaringly central to our dealing with everything else.

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  6. Thanks for this nice and intelligent post. There is some new and interesting information (for me) in it, e.g. how much some countries rely still on gold, and it gave words to a blurred feeling in me, that the gold standard is, yes, a kind of superstition.

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    1. I believe no country is still relying on gold in their central bank reserves, the ones who still held some do so because of historical reasons

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  7. Headline today: Debt Worldwide Hits Record $184 Trillion, or $86,000 Per Person

    https://www.bloomberg.com/news/articles/2018-12-13/debt-worldwide-hits-record-184-trillion-or-86-000-per-person


    That's the result of going off a Gold Standard. How long do you think this will last?

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    1. few economists think that debt is a negative thing (check the MMT for an introductory explanation), even fewer think that it's a result of getting off the gold standard
      In the GOLD ECONOMY section I deal with this, in particular at the "all economists seem to agree on" link.

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  8. Wow, my comments are not appearing. Ugo never used to censor me before. This is sad to see.

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    1. Sorry, Gerry, I passed everything I received from you. If something is missing, please send it again.

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  9. It’s not just the cost that determinate the price of things, it’s how much people “need” and want those things... and GOLD for its color and texture makes people’s mind irracional... GOLD became a myth ...

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    1. I agree with you and this is precisely the point of the article: to show and quantify what we are disregarding in terms of things we also love, the natural environment, for what we appreciate in gold, in particular the big chunk of it hiding in the vaults of the central banks.

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  10. Yes, gold mining has a terrible impact on the environment but please show me any human economic activity (at scale) that doesn't. Have you looked into copper mining? Also show how I can protect myself from currency debasement without counterparty risk... Bananas maybe? Or why not faith? I guess the author's currency is not mismanaged...

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    1. The point of the article is the one of the cost/benefit ratio of gold, a big industry.
      If we agree on the cost and the only problem we have is the one of " how I can protect myself from currency debasement without counterparty risk", I am dealing with it in the GOLD ECONMY section by reporting the current and past economic wisdom. In particular I recommend the "all economists seem to agree on" link:
      http://www.igmchicago.org/surveys/gold-standard

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Who

Ugo Bardi is a member of the Club of Rome, faculty member of the University of Florence, and the author of "Extracted" (Chelsea Green 2014), "The Seneca Effect" (Springer 2017), and Before the Collapse (Springer 2019)