The price of gold on the international market has skyrocketed following the war in Ukraine and Hamas’ attacks on Israel. This scenario has impacts that go far beyond the financial sector.
(DW) With economic uncertainties increasing as a result of the war between Israel and Hamas, an old favorite has reappeared as a safe investment: gold. Just when the metal was coming off a fall in prices, the conflict has given a new boost to prices, which have risen by around 10% since the attacks on October 7th. The repercussions of this rise go beyond the financial sector to Latin American gold mines.
In addition to so-called physical purchases, ranging from gold bars to jewelry, many investors are looking for ETFs, or index funds, which replicate the metal’s movements on the international market. The main price on the markets is the so-called Troy ounce on the New York Mercantile Exchange (NYMEX), where gold is traded in dollars. In recent days, the metal has been hovering around 2,000 dollars (R$9,746) per ounce, close to its all-time high.
Until 2019, gold had been priced at around 1,300 dollars. The arrival of the pandemic, however, has boosted prices. With Russia’s invasion of Ukraine, the metal received another boost, partly due to increased demand for the commodity from central banks. After the sanctions against Moscow, gold came to be seen as safer by many governments, which stimulated demand from monetary authorities, which in the first half of 2023 was the highest on record.
“Central bank buying is one element that has supported gold prices. We see it mainly as a political statement to Washington, signaling discomfort with US international policy,” says Carsten Menke, head of research at Julius Baer.
“The most important trigger was the freezing of Russian assets, prompting countries that are not aligned with the West to diversify some of their monetary reserves into gold,” says the analyst. China and Turkey are among the recent big buyers, for example. “We expect gold purchases by central banks to remain strong in the near future, supporting prices,” he projects.
The rise in the price of gold since the Hamas attacks has, above all, been driven by a change in mood among speculative traders, says Menke. In his view, the increase in the metal’s price, which is higher than in previous conflicts, is also due to a general pessimism about the global economy prior to the attacks.
For Carsten Fritsch, commodities analyst at Commerzbank, it is “clear that gold is profiting from its role as a safe haven in times of greater uncertainty and risk aversion”.
Encouraging gold mining
The relationship between the rise in metal prices and the advance of gold mining in Latin America was already mentioned in an Interpol report in 2022. “There is a direct relationship between the increase in gold on global markets and the price on local markets, even if it is illegal,” says Daniel Bonilla Calle, professor of international business at the CEIPA University Foundation, adding that the prices of illegal mining behave in the same way as legal mining.
“When there are international peaks, there is what is called a gold bonanza in the local markets. This attracts illegal miners and armed groups, as well as other players who want to get into the business,” summarizes Bonilla.
The expert points out that one of the reasons that drives the illegal market is the 20% to 30% cheaper value of gold from this source. In Brazil, estimates are that around half of the metal exported by the country comes from illegal sources. In Colombia, it is estimated that 80% of gold sent abroad does not originate legally.
“There’s a complex chain, and often the end buyers don’t have a 100% view of where the material came from,” says Livia Wagner, head of governance at the Global Initiative, a civil organization that studies international organized crime. According to the expert, the metal is sought abroad not only for jewelry, but also for the production of electronic equipment.
Attraction for organized crime
A consensus among experts is that the greater profitability of mining has attracted organized crime to the activity, especially in the Amazon. Criminals are mainly looking to launder money from illegal mining, and the increase in violence is one result.
“The significant rise in the value of gold in recent years has had a significant impact on mining areas in the Amazon. Among the various consequences, the rise has resulted in an increase in investments in machinery, such as rafts and hydraulic excavators,” says Bruno Manzollli, a researcher at the Federal University of Minas Gerais (UFMG) who monitors the issue. He points out that such equipment, which can cost more than R$1 million, speeds up the process of deforestation and the removal of material from the ground.
“As a result, new mining fronts are opened up more quickly, using predatory practices with no environmental controls. Another important factor is that as soon as the price of gold rises, deposits that until then were not economically viable start to be explored,” says Manzolli. In addition to deforestation, the use of mercury is another problem.
In some cases, the attraction of the activity has led criminals to put aside other businesses. According to Bonilla, gold competes with the cultivation of coca, the base for cocaine, and in some regions the same groups can run both activities. As a result, people migrate from one market to another that “pays better”, he says. With a drop in international coca prices, there are records in Colombia of abandoned crops with no labor.
Better source of income and solutions
“Impoverished communities see mining as an easier opportunity to generate income,” says Wagner. According to Manzollli, even when they are approached by environmental or labor inspectors, it is common for prospectors to want to return to the activity, due to the lack of opportunities in the city or the better pay compared to the salary received in some jobs in the urban area.
In his opinion, legislation in Brazil needs to be updated to take account of the new reality of mining, requiring plans that cover everything from the pre-exploitation phase to the closure of mines and the area’s recovery plan. “And the miners can’t be left on the sidelines, there needs to be a training plan so that these people can find opportunities in other economic activities, in order to reduce their dependence on mining,” he says.
Two recent changes have tightened the rules for mining. In June, the Supreme Court suspended a rule that presumed the legality of the gold purchased and the good faith of the company buying the metal. In the same month, the government sent Congress a proposal for a new legal framework for the country’s gold market. In July, a normative instruction from the Revenue Service came into force, requiring electronic invoices to be issued for transactions involving gold as a financial asset or as a foreign exchange instrument.
Another means that could be sought is to expand the certification of gold’s international legality. According to Wagner, there are successful cases of this measure, including Colombia. “It’s important to try to do this on a smaller scale, not just with the end traders. All stages of the supply chain need to be checked,” he says.
*** Translated by DEFCONPress FYI Team ***