The geography of gold

June 2012

The price of gold reached an all-time high in 2011. This is a product of the global economic downturn that began in 2008 which left investors wary of buying company shares and government bonds. In contrast, gold is viewed as a "safe haven" for investment. But as prices have soared, more people have begun to question how, and by whom, their gold is mined and procured.

The gold trade’s critics describe it as "dirty". They say it is riddled with exploitation, pollution and conflict. In this article, we explore the geological and economic processes that give gold value. The costs and benefits for mining communities and their local environments are also analysed.

Finally, some new ethical gold mining initiatives are outlined. These aim to clean up the global gold trade, focusing in particular on the practices of the informal (artisanal) mining sector in China, the Democratic Republic of Congo and other countries where millions of people work in one of the world’s most dangerous industries.

In the Members' Area:

• Gold, geology and the global economy

• The global gold trade, ethics and the environment

• References

Gold, geology and the global economy

Driven by investor demand, the price of gold hit a new all-time high of $1,913.50 an ounce on August 23, 2011. Since then, prices have dropped a little but still remain far higher than during the 1990s. What geological, economic and political factors have led to this new gold rush? And what does it all have to do with globalisation?

A brief history of gold as a global currency

For thousands of years, gold has helped financial interactions to be conducted on local and global scales, thanks to its rarity. Even today, after millennia of extraction, you could take all the gold that has ever been mined and it would fill a cube measuring just over 20 metres in each direction. The United States Geological Survey (USGS) summarises its global appeal as follows: "Gold was among the first metals to be mined because it commonly occurs in its native form, that is, not combined with other elements, because it is beautiful and imperishable, and because exquisite objects can be made from it."

Gold was valued highly by the great ancient civilizations. The Egyptians mined for gold along the Upper Nile near the Red Sea and in the Nubian Desert area; Aztec and Incan gold is believed to have been extracted in Colombia. As a truly global economy developed during the colonial era, gold came to underpin early world money markets. After 1821, with the introduction of the gold sovereign, Britain became the first leading nation to adopt the gold standard (this gave physical value to paper money, meaning citizens could convert banknotes into gold during crises).

A combination of global economic catastrophe, world wars and the acceleration of globalisation led to the gold standard being abandoned in the 20th century. The story is complex but key episodes included:

• The gold standard being blamed for prolonging the Great Depression of the 1930s.

• At the end of the Second World War, the Bretton Woods Agreement of 1944 established a new international currency market model based on a US dollar that was convertible into gold at a rate of 35 dollars per troy ounce of gold). However, this fixed link with gold continued to create problems.

• This last link between gold and paper money was severed with the "Nixon shock" of 1971. The US dollar was transformed into a "fiat" currency (one that is based solely on the government's promise to redeem it at its face value).

Since the 1970s, the value of gold has risen and fallen, reaching peaks in the early 1980s and again in 2011. Its price fluctuations are driven by surges and falls in demand that relate to changing prices for other commodities and investments such as oil, share prices and government bonds. During times of economic uncertainty, the price of gold tends to rise. The New Statesman (29 August 2011) suggests this may be because "gold underpinned our currencies for such a long period of history that, like children running to the safety of our mothers' skirts, we rush to gold when panic strikes."

Where does gold come from?

Gold is relatively scarce, which gives it value, although it occurs naturally in many different rock types and geological environments. It is called a "noble" metal, meaning it does not oxidize under ordinary conditions. Geologic and erosional processes combine to produce a spatial pattern of concentrations of gold that consists of two types of commercially-exploitable deposits:

• Lode (primary) deposits are "the targets for the hardrock prospector seeking gold at the site of its deposition from mineralizing solutions," according to USGS. Wherever they are found, primary veins of gold offer the potential for large-scale industrial recovery (e.g. in Nevada). In remote areas of poorer countries, informal or artisanal mining of lode deposits takes place too.

• Placer (secondary) deposits are locally-occurring concentrations of gold derived from the lode deposits by the weathering (disintegration or decomposition) or erosion of the surrounding rock. In the former case, free gold is found directly above the surface of weathered gold-bearing veins. In the latter case, flakes and nuggets of gold are freed from enclosing rocks by abrasion and attrition when carried downstream by a river. The finest gold particles then collect in sand and gravel bars inside meander bends where stream energy is lowest. Recovery of these sediments - through panning - favours informal activity.

The origin of gold lode deposits is disputed, with various hypotheses attempting to explain the distribution of gold throughout the Earth’s crust. Interestingly, recent research has found that gold is most likely extra-terrestrial in origin. In a press release, a team of scientists at Bristol university claims to have found clear evidence that the planet’s accessible reserves of gold and other precious metals are the result of a bombardment of meteorites more than 200 million years after the Earth was formed. The research is based on a study of rocks from Greenland that are nearly four billion years old. Several vying hypotheses explain the mechanism by which gold later came to be precipitated in lode deposits. Read more about these on the USGS website.

Gold prices and the current global economic downturn

Since 2008, global capitalism has been in a state of crisis. The first phase was dubbed "the credit crunch" by the media and consisted of a global banking crisis (that we have explored in a previous Geography in the News article - Credit Crunch Geography). The result was an unprecedented contraction in world domestic product during 2009. After a period of relative calm in 2010, money markets plunged into chaos once more in 2011, this time driven by investors losing confidence in some highly-indebted governments, notably Greece and other Eurozone members.

"It used to be that, in times of panic, investors sold out of stocks and invested their money in the haven of government bonds. This time, however, it is government debt that is at the heart of the crisis. Investors are buying record amounts of gold to protect against inflation and hedge against currency devaluation - and, as with any other bubble, simply because everyone else is doing it," argues The New Statesman (29 August 2011).

Throughout this current period of great economic uncertainty, a perception has grown amongst investors that gold is a "safe bet" for their savings. Demand for gold drove the price above $1900 an ounce in 2011. This makes quite a contrast with the first half of the past decade, when the gold price hovered between just $200 and $500 per ounce while investors were still pouring money into bank-backed equities and funds.

Could over-supply of gold become an issue?

With demand for gold at an all-time high, mining output has rocketed upwards. Many known reserves of gold have only recently begun to be exploited (see table above). The new gold rush has led to as many as 150 million people working in either the formal or informal (artisanal) mining sectors worldwide.

Some important production facts include:

• About 50% of all gold ever produced has come from South Africa. Production in 1970 accounted for 79% of the world supply (about 1,480 tonnes). Today, the output is far lower.

• Around one-quarter of all gold is estimated to originate from artisanal or small scale mining.

• Much of the surge in output during 2009 and 2010 was driven by the rise of China as the world's largest miner of gold (as well as many more minerals, including most rare earths). The scale of Chinese production increases might even ultimately undermine the scarcity value of gold!

The global gold trade, ethics and the environment

Like the diamond industry, the gold industry’s association with conflict, bloodshed, pollution and unethical working conditions for miners is giving it a bad press. What are the issues that gold investors should be informed of? What can be done to improve conditions for miners and to guarantee that the industry and its supply chain can meet ethical and environmental standards?

In 2005, an NGO report entitled "The Curse of Gold" documented human rights violations in the gold fields of Democratic Republic of Congo (DRC) by militias and the army. Similar stories have been heard in recent years about Honduras, Ghana (Action Aid’s "Gold Rush" report) and the Philippines.

Unethical metal

Many of the tens of millions people working in the artisanal and small-scale mining (ASM) informal sector risk disease, serious injury and death. ASM miners are also often taken advantage of by unscrupulous middle men, according to the Fairtrade Foundation and the Alliance for Responsible Mining (ARM). There are three main inter-related concerns:

• Pay, health and safety There are over six times the number of accidents in ASM compared with large scale mining, mainly due to its larger labour force and poorer working conditions. According to The Financial Times (02 December 2011), a quarter of the world’s mined gold comes from artisanal mines. These are often simply holes in the ground where miners – who may include young children – climb down and hack at rock. They rarely get the full price for their gold at market, say Fairtrade.

• Environmental issues The environmental impacts of gold mining depends on where it occurs (on land or in rivers) and whether it is formal or informal. Many examples can be cited of gold mining’s negative impacts including deforestation, land degradation through air, water and soil pollution from toxic substances, as well as indirect effects on local ecosystems (see costs and benefits table below). Humans and other organisms can be harmed by contact with the toxic chemicals used to process gold ore, including mercury, cyanide and nitric acid. 80% of all human mercury poisoning is caused by artisanal gold mining.

• Conflict Poverty pushes many people into working in artisanal mines. But some are actively forced to do so by militias operating in conflict zones, notably so in the Democratic Republic of Congo (see our previous Geography in the News feature on DRC). In DRC’s Mongbwalu region, 80% of young men are estimated to work in artisanal mining, according to the World Bank. "Artisanal mines tend to be located in areas that are remote and hard to police, and there are many tales of rape, kidnap and forced labour" (Financial Times, 02 December 2011).

Despite these issues, reformers recognise that a total boycott of "dirty gold" might do even more harm to exploited communities, as gold mining brings benefits as well as costs.

Costs

• Pollution is routine in the gold mining industry, especially in poorly-regulated places. In 1995, at Guyana’s Omai mine, three billion litres of cyanide-poisoned water flowed into the Essequibo river, leading the Guyanese president to declare 80 km of the river a disaster zone. The operation was run by a subsidiary of Canadian TNC Cambior.

• Even in high-income countries, the costs of gold extraction can be high. In Alaska, the new Pebble Mine gold project is sited at Bristol Bay, an area that supports the world's largest sockeye salmon population. Chemical runoff from the mine looks set to imperil the salmon, claim protestors.

• Fairtrade say that, globally, 100 million ASM miners suffer high levels of poverty. "Most mining communities lack basic sanitation, clean and safe drinking water, have poor housing, little or no access to education and healthcare and are financially unstable. The unskilled handling of toxic chemicals such as mercury and cyanide poses severe risks to miners' health and natural environments".

Benefits

• Not all forms of mining are polluting. Gold found in riverbeds or river terraces is easy to extract without the aid of chemicals. Some artisanal mining consists simply of digging pits without the need for chemicals. If workers can be paid a decent sum of money, for instance as part of a Fairtrade initiative, benefits can outweigh costs.

• The Pebble Mine could potentially become North America's largest open pit operation, given the estimated size of the gold reserves sited there. Many hundreds of billions of dollars’ worth of gold and other precious metals could be extracted, creating thousands of jobs for local people.

• When it is done right, mining benefits local people. "Large-scale, formalised gold mining can generate a wide range of social and economic benefits for the local community and country, including tax revenue, foreign exchange earnings and foreign direct investment," Terry Heymann, a director of the World Gold Council, tells the Financial Times (02 December 2011).

Seeking a solution

How can better working practices be achieved than minimise social and environmental costs? One landmark event has been the introduction of the world’s first Fairtrade and Fairmined gold on 14 February 2011 (Valentine’s Day, when gold jewellery purchases traditionally peak).

• The Cotapata Mining Co-operative in Bolivia is the first Fairtrade and Fairmined conventional mining organisation to be certified.

• Condoto is the first mining group certified to produce "ecological gold", known as Oro Verde, in Colombia.

To gain certification, artisanal miners in a region must first band together to form an organisation that Fairtrade can deal with directly. Each organisation pledges to:

• participate in the social development of their communities

• eliminate child labour (under 15) from their organisation

• require the use of protective gear alongside health and safety training for all miners

• recognise the right of all workers to establish and join trade unions

• use safe and responsible practices for management of toxic chemicals in gold recovery, such as mercury and cyanide

In their press release, Fairtrade add: "More mining organisations from Latin America are expected to join the system in 2011. Work with miners in Africa and Asia to bring them into the system from 2012 has also begun. The scope of the work only covers ASM miners, rather than medium or large-scale industrial mining, because this is where Fairtrade and Fairmined certification could have the most impact."

A number of other ethical actions and initiatives have recently been reported in relation to gold, practised by a range of players at different scales (including companies, multi-governmental organisations and NGOs):

• The world’s oldest jeweller, Garrard, and the luxury jeweller Harriet Kelsall are among 20 companies that have already adopted Fairtrade and Fairmined gold for their supply chains.

• The famous jeweller Tiffany has announced it will not buy gold from the controversial Pebble Mine in Alaska. The company has signed a pledge, vowing not to buy gold from the mine, were it built, and expressing "their opposition to the proposed mine, and [recognizing] the Bristol Bay watershed as an ecosystem of international significance."

• The American government recently introduced the Dodd-Frank Wall Street reform act of 2010. It includes a provision that requires public companies to disclose what measures they are taking to ensure that minerals in their supply chain, including gold, do not benefit militia groups in conflict-ravaged DR Congo.

• New international rules on the use of conflict gold will be introduced by the Organisation for Economic Co-operation and Development during 2012. OECD will offer "Good Delivery" accreditation for mined gold, providing buyers with re-assurance that human rights have not been infringed. New European Commission rules are also expected.

• NGOs are working to promote the Initiative for Responsible Mining Assurance. Aimed at mining companies, this is a new voluntary code on human rights and protecting the environment.

• The Alliance for Responsible Mining (ARM) is an international multi-stakeholder initiative that has been created to enhance equity and wellbeing in ASM communities. "ARM supports ASM mining organisations and communities to meet criteria for responsible social, labour, environmental, and trading practices, and works with governments for better rights for ASM communities."

Concluding remarks

While social and environmental progress is clearly being made within the gold mining industry, the gold supply chain remains "complicated and opaque, with plenty of weak points where illegal metal can leak into the system" (Financial Times, 02 December 2011). While the largest mining TNCs are often prepared to adopt new international guidelines, many small-scale operators and exploration companies continue to pollute and exploit communities. Rising prices are also bringing reclaimed gold into the system, whose origins are unknown. Too often, "lack of transparency in supply chains makes it virtually impossible for consumers to know where and under what conditions the gold in their jewellery was mined," say Fairtrade.

Another concern is that poor people employed by unregulated companies could receive even less money as demand slackens for gold that lacks ethical certification. Critics of the Dodd-Frank law say that it has already had unintended and devastating consequences for poor people in DR Congo. "No one wants to be tarred with financing African warlords... It’s easier to sidestep Congo than to sort out the complexities of Congolese politics — especially when minerals are readily available from other, safer countries. For locals, however, the law has been a catastrophe. In South Kivu Province, I heard from scores of artisanal miners and small-scale purchasers, who used to make a few dollars a day digging ore out of mountainsides with hand tools. Paltry as it may seem, this income was a lifeline for people in a region that was devastated by 32 years of ... brutal war and internal strife (New York Times, 08 August 2011).

Despite these limitations, however, as Valentine’s Day approaches again, wouldn’t it be better if more people chose Fairtrade gold? There seems to be growing agreement amongst investors, consumers, miners and mining companies that this is the right way forwards for many geographical reasons.

References

"The new gold rush" New Statesman, 29 August 2011

USGS gold fact-sheet

"Mining the truth" Financial Times, 02 December 2011

"How congress devastated Congo" New York Times, 08 August 2011

USGS 2011 gold mining fact-sheet

Fairtrade gold information

"No dirty gold" pressure group website

"Fairtrade hallmark sets the gold standard" Guardian, 14 February, 2011

OECD information about gold "good delivery"

"Where does all the gold come from?" Bristol University press release, 07 September 2011

Written by Dr Simon Oakes a Chief Examiner for the International Baccalaureate diploma course in geography. He is also a senior examiner for A-level geography and GCSE citizenship.