DIRTY SHINING?

Yes, gold price has been at an all-time high. But it is a good time to look at this precious metal, the original anchor of world economies, as the complex financial world of today is witnessing fluctuations in the currency and stock markets, boosting demand for gold as an alternative investment. But what are the real costs?

Over the last five years, gold purchase ‘intent’ in India has remained stable, in spite of the rising gold prices. Over the past ten years, the value of gold demand has increased at an average rate of 13 per cent per year. This trend outpaces the country’s real Gross Domestic Product (GDP), inflation and population growth by 6 per cent, 8 per cent and 12 per cent respectively. Did you know India currently has one of the highest saving rates in the world? Estimated at around 30 per cent of the total income, 10 per cent of these savings are already invested in gold.

You see, gold has always been an integral part of our social fabric. For centuries, it has been passed on as ‘stree dhan’ and families have been instilling a sense of ‘security’ in their daughters by giving them gold.
• Gold purchased during Indian weddings typically accounts for 50 per cent of the country’s annual jewellery demand.
• With 50 per cent of the Indian population under 25 and approximately 150 million weddings anticipated over the next decade, wedding-related purchasing will drive approximately 500 tonnes of gold a year.
 

“The motivation for a jewellery purchase in India can be inextricably linked to value, wealth preservation and growth rather than pure adornment – there is therefore little distinction between investment and jewellery demand,” according to the World Gold Council (WGC).

 Gold: Jewellery or Investment? 

That said, the blingy brilliance of gold has acquired a new and more pronounced connotation. Investment purchases of gold have been rising faster than jewellery purchases. No wonder banks have been quick to jump to the bandwagon. After all, gold is embedded in our DNA code and the banks are cashing in on our gold fetish. If not in the form of “99.9 per cent pure gold coins”, it is gold funds or gold saving schemes. Banks and their “pure gold” are claiming to offer “reliability and convenience”. Bank lockers must be beaming with pride thanks to the stacked up gold bars and coins!

“The Indian gold investment sector has seen enormous growth in the last one year. One of the major reasons for this development is the fact that the Indian equity market is in a pathetic state. Gold investments, on the other hand, have given a return of 30 per cent. Allocation in Gold Exchange Traded Funds (ETFs) has increased three fold. The gold investment market is extremely lucrative,” says Biren Vakil, a renowned commodity specialist.
 

What is Gold ETF?

Gold ETFs are open ended mutual funds that help you invest your money in 99.5 per cent pure gold. They are also known as paper gold. These are listed on the stock exchanges and investors are assigned units of the mutual fund where each unit often represents one gram of gold. There are ETFs where each unit can represent less then one gram of gold as well.

Banking on Gold

India accounted for 32 per cent of the global total gold purchase in 2010. What does this volume of consumption go to show? Why isn’t gold consumption affected by inflation?

 What influences gold demand? 

Not its price, for sure. Mahesh Vyas, Managing Director and CEO of Centre for Monitoring the Indian Economy (CMIE) explains the dynamics. “India is poised for a very strong period of economic growth and this has significant, positive implications for all forms of gold purchasing in India. Our findings endorse the fundamental strength of the Indian gold market. We predict that new demand for gold will be driven by rapid GDP growth, urbanisation, the emergence of a strong middle class, and a sustained and potentially rising savings rate of 30-40 per cent of income.

Also, gold will remain auspicious given its connection with tradition, whether religious or attitudinal. Indians tend to be risk averse and place great faith in the wealth preservation qualities of gold, which inspires confidence, stability and security. Therefore, the Indian demand for gold will be driven by the concept of enduring value, not price.”

 India’s Gold Industry: Facts 

• India's centuries-old gold industry is the world's biggest market for the metal, with imports meeting almost all the country's 800-900 tonnes per year requirements for jewellery and investment.
• India's gold market is estimated to have more than 300,000 jewellers, mostly small, family-run businesses, a WGC study showed.
• The gold jewellery market in India is going through a metamorphosis. It’s no longer old, family jewellers who are trusted. Corporate giants such as Titan, Reliance and the state-run MMTC Ltd, are targetting the retail market with ‘branded gold’.

 Gold pockets: Rural India 

The vast majority of Indian population living in villages has traditionally formed the source of more than two thirds of Indian gold demand. As much as 65 per cent of India’s private gold is held by rural India. This sector has been growing at less than 1 per cent per annum but is projected by CMIE to grow in future at over 5 per cent per annum. What does this mean? A further fuelling of the gold demand!
 

Gold: The environmental angle

Let’s not get lost in the shine and forget that gold, after all, is a metal. Yes, a metal that has to be mined and processed to be eventually converted into intricate and beautiful jewellery. We have spoken a lot about gold – how to invest in it, its supply and demand. Now, let us get down to the details. What exactly is gold supply? Where does all the mining happen? How does it work? Here is a look at how our favourite metal gets out of the ground.

1 - Finding Gold

Gold is everywhere on Earth, it's just not commonly found in significant concentrations. The Earth's crust contains approximately 0.004 grams of gold per tonne. There is a lot of gold in saltwater - but concentrating the trace amounts just doesn't make economical sense.

Gold is found both close to the surface of the Earth, and underground mixed in with other metals such as copper, silver and lead. Where the gold is located will dictate what type of mining process is used to retrieve it - and what costs will be associated with it.

2 - Open Pit Mining

The open-pit mining process is used when the gold is located close to the surface and the site makes an open pit economically and environmentally feasible. It is exactly what it sounds like - a giant hole dug in the ground with roads leading around and up to the top of the mine to facilitate getting machinery in and getting ore out of the mine. Excavation is done with explosives and heavy machines - both of which have high costs associated with them. Diesel fuel alone can account for 25 per cent of a mine's costs.

3 - Underground Mining

When an open-pit mine doesn't make sense because the gold is located much farther underground, or other concerns limit the mining, an underground mine is used. Shafts are dug with tunnels branching out, leading to the load deposits. The mining process is straightforward, yet technical and a lot of hard work - you have to drill holes for explosives, set off those explosives and then haul out all of the resulting blast debris. The days of picks, shovels and wheelbarrows have given way to explosives, muck machines and trucks or rail haulage.

4 - The Extraction Process

Once the ore has been liberated from the ground, the gold needs to be extracted. The processing consists of taking the big pieces of ore and making them smaller, until it reaches the consistency of beach sand. At this point a cyanide solution is added to the mix and milled further into a muddy, watery mix.

5 - Why Cyanide?

A weak cyanide solution combined with air dissolves gold, freeing it from the other rock and metals in the ore. Once cyanide dissolves what gold it can into the solution, the fluid is pumped off while the remaining solids are transferred into agitation tanks where the remaining cyanide continues to dissolve the remaining gold into the water with the help of air bubblers. The heavier materials sink to the bottom and the pregnant solution is combined with fluid and zinc to precipitate the gold out of the solution. This process is called cyanide milling.

The real cost

We all understand how mining takes a colossal toll on environment. But did you know gold mining is one of the ‘dirtiest’ industries in the world? Massive open-pit mines, some measuring as long as 3.2 kilometers, generate staggering quantities of waste – an average of 76 tonnes for every ounce of gold.

No Dirty Gold, a campaign by Earthworks and Oxfam Amercia, calls on mining companies to meet the following basic standards in their operations:

 The Golden Rules 

• Respect basic human rights as outlined in international conventions and laws.
• Obtain the free, prior, and informed consent (FPIC) of affected communities.
• Respect workers’ rights and labour standards, including safe working conditions.
• Ensure that operations are not located in areas of armed or militarized conflict.
• Ensure that projects do not force communities off their lands.
• Refrain from dumping mine waste into oceans, rivers, lakes, or streams.
• Ensure that projects are not located in protected areas, fragile ecosystems, or other areas of high conservation or ecological value.
• Ensure that projects do not contaminate water, soil, or air with sulfuric acid drainage or other toxic chemicals.
• Fully disclose information about social and environmental effects of projects.

Grasberg, located in West Papua, Indonesia is the world’s largest gold mine. Also known as “Freeport Mine,” it has generated significant controversy because of its waste disposal methods, impacts on a sensitive ecosystem, lack of transparency, and conflicts with communities around human rights and other issues. The mine generates a staggering amount of waste – 700,000 tons per day – and it is estimated that the mine will produce 6 to 7 billion tons of waste in its lifetime. This may well be the largest volume of waste produced by any single industrial activity in the world.

Gold in all its grandeur has become an economic anchor for millions of India families, especially the middle-class in today’s complex investment world. Even the government’s investment in the yellow metal has apparently paid off with a vengeance in the days of soaring gold prices. After all, the value of Indian gold has quadrupled in the last 15 years. Sure, the economics of it makes sense. But does it really? Consider the actual costs in terms of land, water, air and human health – and the balance begins to look rather off-centre. Let the golden haze not blind us to these ground realities.