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What do Record-High Gold Prices Mean For Sustainability?

Historically during times of market turbulence investors turn to gold in hopes of not only staving off losses but also creating panicked gains from the precious metal, with their reasoning being that it is a stable and dependable resource in times of worry. One example of the market’s reliance on gold before recent record setting highs is shown in the spike in gold activity when announcements of the Brexit referendum were released where gold jumped over 22% against the pound in what was quoted as being a “dramatic indication of worldwide panic”. Compared to the current unprecedented rise however, the post-Brexit goldrush pales in comparison. Since it’s dip in March 2020 the price of gold has risen nearly 39% as analysts claim that the end to the boom isn’t even in sight. After breaking $2000/oz for the first time in recorded history, gold continues to climb with some experts claiming it could be over $3000 within 18 months.

But if we look past the meteoric market figures, what are the real impacts that this hitherto unseen profitability causes on the gold mining industry itself and the environments that surround them? Last year alone the gold industry was responsible for dumping over 180 million tonnes of toxic waste into lakes, rivers and oceans and with this sudden bump in profitability those numbers will only grow. In addition, small-scale gold mining operations are responsible for 35% of all man-made mercury pollution leading to further destruction of the Amazon rainforests.

What is behind the rise in gold prices?

Unlike most previous instances the current increase in the price of gold is being mostly determined by multiple motivating factors which are mainly based stateside, but all of which have worldwide consequences.

The most overt cause for investors reaching for a safe haven in which to store their capital is undoubtedly the COVID-19 pandemic which still runs rampant throughout the US as it continues to lead the globe in total deaths from the virus. The unsurity towards the longevity of the virus coupled with the impacts on industry we are already seeing has people straying away from conventional investments and towards commodities. Mining production in Ecuador jumped 51% compared to the previous years during the peak of the pandemic with Burkino Faso and Bulgaria increasing production by 18% year on year during the pandemic.

Continued friction between the US and China has their long standing trade partnerships in doubt, causing investors to lose even more faith in multiple industries as long term investments. Coincidentally China has also been the largest producer of gold globally for a number of years, producing over 383 tonnes annually, followed by the Russian Federation who produce 329.5 tonnes.

Combined with these topical factors, a perfect storm for commodities has been created with the addition of historically low interest rates, the end of the US unemployment bonus and the current weakened state of the dollar.

The negative effects of sustained high gold prices

In some of the areas of the globe where gold mining is rampant there has been an incredibly high demand for mining rights to certain pockets of land. According to a Forbes report there are over 60 different mining companies vying for ground in the Victoria area alone. It’s not only new land that is being mined however as older plots that were deemed non-profitable before the rise are now being reopened. With higher gold prices, marginal mines are being reopened and mining companies are drilling deeper and wider, dredging up lower quality ores which are now considered premium whilst causing more fallout to the surrounding areas.

Illegal mining is also on the rise due to the price fluctuations. In an interview with Greenpeace UK, senior forests campaigner Daniela Montalto estimated that “72% of all mining conducted in the Amazon from January to April this year was illegal and took place on indigenous lands” and it’s not just the land that these illegal mining operations are ravaging. In the Amazonian Yanomami territory at least five of the indigenous peoples have died from COVID-19 which was spread to them by illegal miners and a much higher number of the tribe at risk of infection. Activist group Earthworks have also recently released a report on how mining corporations are also taking advantage of the pandemic for profits at the expense of local populations, fueled in part by the recent boom.

Gold ETFs saw $7.4 billion worth of inflows in March which is the highest amount invested in an 8 year period. Throughout the same month bond and equity ETFs experienced outflows which would suggest that this shift towards gold is inevitably taking momentum away from the recent wave of ESG funds.

The positive effects of sustained high gold prices

Despite the many negatives brought about by the mining industry, there are also some positives that have come from the rise in gold profitability. Gold recycling is on the rise as the process is now worth the time and effort to businesses. In India the recycling of gold has increased by 35% in Surat and South Gujarat Region meaning that fewer mines are opened or expanded. This is also driven in part by the high price of gold reducing cash sales of gold jewellery, which has reportedly dropped 40% in the same area. In an interview with the Times Of India back in March the director of the Indian Bullion Jewellers Association Nainesh Pachchigar claimed that “out of 40kg of gold jewellery manufacturing per day in Surat, about 12kg consists of recycled gold.”. This is not only important due to the fact that mining is reduced, but also because it has been shown that recycled gold has 600 times less emissions than mined gold.

There are also a range of initiatives gaining momentum in the gold industry which focus on the principles of sustainability. The World Gold Council (which among other members includes mining monolith Barrick Gold) has laid out the framework for its initiative for Responsible Gold Mining Principles (RGMPs) which much like standard ESG criteria set out responsible standards for the sector. The RGMPs will aim to “set out clear expectations for consumers, investors and the downstream gold supply chain as to what constitutes responsible gold mining” and if the initiatives set out by the WGC can be upheld by its members then true change could be made to the detrimental side of gold mining.

Overall, from the perspective of sustainability, the increase in gold prices is overwhelmingly negative. With the increase in profitability there is a rise not only in legal mining, which harms both the environment and the local populace, but also illegal mining, which can be seen as one of the most harmful industries in the Amazon and worldwide. The influx of investment into gold not only takes cash flows away from impactful securities but also lines the pockets of corporations who are responsible for dumping hundreds of millions of tonnes of toxic waste each year. With the increase in profitability the World Gold Council is attempting to further enforce its measures for increased responsibility with its RGMPs but it will ultimately be up to the industry leaders such as Barrick, who took in a revenue of over $9.7 billion last year, to enact real transformations.

Analytics by: Jacob Armstrong