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

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)