gold-investigation

Can Illegally Mined Gold Suppress Prices?

May 5th, 2017 by

More so than many other industries, the gold market is especially concerned with supply chain integrity. This means that where your gold comes from is important.

The point is that gold is not simply any old commodity. Like diamonds, its extraction from the earth is often so desperately sought-after that criminal activity—primarily but not limited to illegally-mined gold and money laundering—becomes entangled in the process. There is an especially high risk of such criminal operations in poorer countries, where the legitimate gold trade is much more informal and regulation is much more lax.

illegal gold mining

The results of illegal gold mining with mercury. Image courtesy of Mining.com via Youtube.

We’ve all heard of “blood diamonds,” and how the sale of some diamonds from Africa is linked to criminal activity or terrorist groups. The same concept in precious metals is sometimes called “conflict metals,” and other rare earth metals used in high-tech electronics fall under the same category. These resources are often extracted by illegal means in war-torn parts of the world and then sold on the black market. It’s an unfortunate reality of the global gold trade.

There are important measures being taken to crack down on conflict gold finding its way into normal channels for the gold trade, such as the London Bullion Market. Governments around the world have passed legislation that attempts to hold corporations accountable for only getting their metals from legitimate sources. Nonetheless, even with these extra requirements, it’s an imperfect system that is susceptible to oversight.

That appears to be the case in the high-profile story about the U.S. bullion retailer Elemetal, which formerly operated under names such as NTR and OPM. CoinWeek recently reported on a scandal involving illegally mined gold from South America making its way into Elemetal’s inventory. This built upon the exposé about the company’s connections to illegal South American gold that originally appeared in Bloomberg News in March.

gold-investigation

The blistering report about Elemetal relied upon information from investigators for the Chilean government, which had been tracking one of the company’s sources on the continent because of suspicions that he was taking illegal gold—perhaps mined in the Amazon using mercury as a catalyst, a very pollution-intensive process—and re-smelting it himself into “Good Delivery” bars that looked legitimate. The report cast some doubt on the innocence of Elemetal employees, who claimed to know nothing about the illegal activity further down its supply chain. The press in South America has been covering the problem for the past two years.

If Elemetal, a dealer of (supposedly) good standing with a global operation, could either be fooled or complicit in a scandal of such dire implications, this raises questions about how greatly the world’s gold supply beyond this one company is tainted with illegal gold. If the amount of such gold is of significance, it would mean that the supply is being inflated—and that illegal gold is actually driving prices lower. Because the gold in these cases is acquired by illicit means, the middlemen are generally willing to take much less money than the metal is worth. This fact alone lets the next firm or individual down the supply chain to also sell their gold for less than it’s worth on the open market. All of this has the effect of driving down prices.

Therefore, the effort to remove illegally sourced gold from the global supply (as the laws and regulations in many countries, including the United States, prescribe) could turn out to be a boon for gold prices.

 

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.

2 thoughts on “Can Illegally Mined Gold Suppress Prices?

  1. Joshua Gibbons

    Adding illegal gold to the supply side does artificially lower prices. The lower prices that the middlemen are willing to take, however, does not effect the price: that is just pure profit for the people who turn the bad gold into seemingly good gold. The middleman accepts a lower price, but the refiner that ends up with the metal isn’t going to sell it for less than spot. So that extra money goes to someone after the middleman.

    1. Everett Millman Post author

      You’re right, that does represent pure profit and is indeed why someone selling illegal gold would accept the under-market price. The existence of the black market for gold does not alone impact the “honest price” of gold. However, it’s when significant quantities of this gold make it into legitimate sources — such as with the Elemetal / NTR case — that market prices may actually be affected. I should’ve made that caveat clearer.

      Thanks for the comment!

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