As incredible as it sounds, particularly given the absurd prices that gold has achieved over the last few weeks, more than half of the gold that is produced daily goes straight to a vault; there is no real demand for it.
So, what the world is doing is spending millions of dollars and polluting immense quantities of land and water, just to move the gold from the ground to a vault where it only accumulates dust.
This has been happening for almost always. If all gold production stops today, real users (electronics, jewellery), are unlikely to run out of stock.
Obviously, the question that emerges is: why does gold production continue?
The answer appears to be that investors and central banks believe in the value of keeping it in storage. Perhaps the rationale, if any, is that gold reserves worldwide must be limited.
The intention of this article is not to question the value of gold, but to offer an alternative option to the current practice.
The proposition is simple: "leave the gold in the ground."
Let’s start by saying that most investors buy gold they will never see, all they will get is a certificate stating that a number of gold ounces belong to them.
If some of this gold is sold, the new buyer gets exactly the same, a certificate transferring a number of ounces from one investor to another.
If all that investors need is a document that says they own certain quantity of gold, what would be the difference between keeping that gold in the ground or in a vault?
Another question emerges: what if the gold (in the ground) is not there? Well, I wonder if the gold is really in the vault too, as most likely nobody has verified it for years, but let’s assume the records and the physical stocks are accurate.
For the gold that has not been mined yet, there are methods, internationally accepted, that provide assurance that the gold is there. A quick Google search gives this information: "The Joint Ore Reserves Committee (JORC) Code is one of the most widely accepted and recognised international standards for reporting exploration results, mineral resources and ore reserves. It is highly respected by global financial institutions, mining companies, and regulatory bodies."
Hence, if mining companies can use JORC codes to certify ore reserves to finance their projects, they could easily use the same codes to certify the existence of gold that would be traded in the ground.
While I have been teasing my colleagues’ brains at Otago University with this idea, it only started to take shape when Matt Levine from Bloomberg published an article reporting that a Canadian mining company NatBridge Resources Ltd has started to work on the idea of selling gold in the ground.
Later in informal conversation with a mining company director in Australia, I confirmed they were also working on this.
If mining companies are looking at this option, it could be the time for countries like New Zealand to lead in this process.
To begin, every time mining is mentioned in New Zealand a big controversy emerges.
Is it worth polluting the environment to mine ore in places that otherwise are attractive to agriculture or tourism?
For example, the Bendigo-Ophir Gold Project. Santana Minerals is working hard to get the relevant consents for its exploitation. The government appears to be supportive as is desperate for new projects with the hope that they will have a positive effect in the economy.
However, the locals, farmers and tourist operators, are strongly opposed. A suitable mechanism that could work for all is for gold reserves identified by the company to be made available for investors to buy.
While the price investors would have pay might still be based on the international gold price, either from London or New York, the fact that the gold has not been mined will require some provisions for its further exploitation.
Today it is generally accepted for gold mining, that all mining costs and royalties are $US2000 ($NZ3360) per oz, so an amount like that would need to be kept aside to pay royalties and guarantee future exploitation, if/when real demand requires so.
Once these technicalities are dealt with, this could be a win-win mechanism for all parties.
The mining company that has invested in prospecting a site, could sell the gold and make their profits, the government could collect the royalties for the gold that has been sold for the first time, investors would be able to take their market position and trade the gold pretty much in the same way that today gold sitting in vaults is traded.
Environmentalists would also like this as no pollution was created and finally those that keep claiming that their economic activity would be put in jeopardy, like tourist operators or other businesses, might have the opportunity to buy the gold and never sell it if their economic activity truly generates more wealth than gold mining.
Just to be clear, this idea only applies to gold because of its cycle from ground to vault.
Most minerals are produced because there is a real demand.
— Sergio Biggemann is an associate professor of marketing, University of Otago Business School.
