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The dark side to Peru’s gold production

Over the weekend I watched a programme about the difficulties of protecting the Amazon rainforest, with a particular focus on Peru.

The premise of the show is to follow wildlife cameraman Charlie Hamilton James as he gets to grips with his newly bought 100 acres of the Peruvian rainforest. Bought in an attempt to feel that he could at least protect a small area of the rainforest against illegal logging and mining, the programme quickly unravels to show just quite how naïve Hamilton James has been and that behind every story of illegal logging and mining there is a tale of survival and human struggles.

The programme is one of a series but this one particularly interested me as the main bulk of it was on the illegal gold mining activities in Peru, that take place in the depths of the rainforest.

Generally when the gold industry discuss illegal gold mining it is in reference to African mines. Perhaps this is a sign of the times, and previously the focus has been on South America but in my short-time in the gold market I am unaware of such coverage. Part of me wonders if it is due to the fact that Peru is a major gold producer and it would do little good to draw attention to the amount of gold that is illegally mined and ends up on the international market.

Peru is a big gold-player

According to the country’s then Minister for Energy and Minerals, Peru has long been known as the ‘country of gold’. When we talk about the history of gold we quickly come to the Inca’s. The word ‘Inca’ refers to both Peruvian people and the leader of the empire. As Matthew Hart describes in his otherwise awful book ‘Gold: Inside the race for the world’s most seductive metal.’  They were well known for the gold mining techniques and the vast amounts of the yellow metal they had acquired. This made them an easy target for Spanish explorers, hunting for new sources of gold.

Today, Peru is South America’s largest gold producer and exporter of gold, in 2013 it was in the top six gold producing nations who collectively accounted for half of all gold globally produced.

A 2013 PWC report estimated that in the previous year gold accounted for 21% of Peru’s exports. Its gold production accounted for 6.5% of the world’s mined gold in the same year, producing 185 tonnes.

Peru’s gold mining industry is big business and contributes a significant amount to the economy. According to a 2011 World Gold Council report, 4,500 workers were directly employed by the four largest gold mines in Peru and contributed 1.4% to GDP. In 2013 PWC estimated that the gold mining industry contributed $8 billion to the country’s economy.

Illegal mining is also big

However this is the legal, nice and shiny side of the mining industry. Illegal mining, known as ‘informal mining’, only became illegal in April this year. Whilst much of the government’s dislike of the illegal mining activities are no doubt due to the $305 million in lost taxes, the industry actively destroys forests and pollutes rivers.

Illegal gold mining is destroying the Peruvian area of the Amazon rainforest faster than any other industrial and/or illegal activity in the region. According to this Guardian article, 70 sqkm of forest in Madre de Dios has already been destroyed through illegal mining.

Madre de Dios is known as Peru’s capital of biodiversity. It is also a region with desperately poor communities. Yet below the very feet of these people is earth that is made of money, it is literally paved with gold. It is estimated that in the state of Madre de Dios, an area the size of Austria, there are 159 tonnes of gold to be mined.

Illegal mining gives gold but silently kills

The government estimates that the illegal mining accounts for 20% of the nation’s gold exports. To those 4,500 who are legally employed by the top companies they are vastly outnumbered by the 40,000 or so who are thought to work in the dark underworld of gold mining.

Like many illegal industries whose operations turn out to be lucrative and financially benefit communities far more than the government is able to offer, they take advantage of government processes. The High Commissioner warned that in upcoming local elections voters need to be aware of the power and influence of illegal miners.

The money involved in illegal gold mining is vast, as is explained by the huge risks people take to work in the industry. The Peruvian government believes that industry is now more lucrative than the drug industry. Between August 2012 and January 2015, El Comercio estimates that the amount of money laundered through gold mining rose by 50%. A much bigger increase than was seen in drug trafficking.

Mercury poisoning

This illegal mining is not only a destructive force within the rainforest, but also for those who both directly and indirectly connected to the industry.

Mercury has been used in the gold mining process for centuries and is still an almighty presence in third-world illegal mining activities. According to the Amazon Conservation Association, ‘worldwide, small‐scale mining accounts for one third of all mercury pollution; in Madre de Dios alone an estimated 30 to 40 tons of mercury are dumped into the environment annually.’

We all know from school what a potent and dangerous chemical mercury is. Described as a neurotoxin it can cause anything from miscarriage, brain damage during pregnancy to cancer.

Mercury is added to water containing sediment that holds gold particles. The mercury amalgamates with the precious metal but no other elements. The resulting silver marble like structure is then heated over flame to separate it into mercury and gold. Not only is the water made toxic during this process but the poison is also released into the air during refining.

Mercury levels in the area of Madre de Dios are widely known to be dangerous. Yet the locals are seemingly unable to make changes to safe mining practices.

When sediment containing mercury is dumped in the rivers it is absorbed into the ecosystem as an organic compound, Methylmercury. When digested by the fish, people are exposed to mercury levels up to one million times higher than that in the water the fish came from. The World Health Organization estimates that children native to the area have mercury levels five-times that considered to be safe. Whilst those in urban areas near to polluted areas have levels twice as high.

What’s being done?

In one of last week’s Daily Nugget I wrote about how the Peruvian government had taken to setting on explosives off at illegal gold mines in an attempt to stop these activities. This isn’t a new step the government is taking, in April 400 trucks were destroyed by the authorities who also dynamited 13 illegal refineries valued at more than $30 million in the coastal towns of Chala and Nazca. 2 tons of gold were also seized.

In February the Peruvian government designated a 500-000 hectare corridor in Madre de Dios for gold mining activities, in the hope that a narrow, specific area would be easier to police.

The Amazon Conservation Association reports that the government have committed themselves to have cleared Madre de Dios of 70% of illegal miners by July-end and 100% by December. Not all of these miners will be shutdown. Instead, they can apply to be ‘formalized’ and to go through a year-long process that, according to nature.com ‘requires the mine operators to produce a work plan, an environmental-impact assessment and a clean-up strategy’.

Only 4,000 or so miners have met the government’s deadline of June 13th to register their interest in being ‘formalized’. This suggests that the remaining mine operators have no such intentions. Those who do not comply with new regulations will face up to 10 years in prison. However these may be empty threats given the wealth and power of some illegal gold mining organisations.

Does this affect my gold investment?

As we wrote about in a previous piece on ethical mining, here at The Real Asset Company we only buy our gold from LBMA-approved refineries, mainly Valcambi. In order to have received such an accreditation the refinery must abide by the group’s Responsible gold Guidance, which works to prevent any conflict or illegally attained gold from entering the system.

Towards the end of the programme the presenter was understandably distressed having watched and taken part in artisanal, illegal mining activities. He made a comment that it was all for putting a few thousand tonnes of gold into a bank vault because we can’t think of anything better to prop our economy up with.

The majority of you reading this do not need to be told that we are not propping our economy up with anything other than debt, so if this is the case why do we still demand so much gold? Why do we continue to demand it after thousands of years and why do we drive prices so high that fathers and sons are prepared to poison themselves and their families to find the yellow metal to sell it to us? Because it is the ultimate faceless currency. Because it is something that transcends borders and cultures, rich and poor and has survived the test of time.

The above does not mean, however, that people should be unnecessarily putting themselves at risk both in terms of their health and their freedom in order to attain this precious metal. Legal or illegal gold mining can still be hugely destructive, as gold investors we have a responsibility to ensure that we do not support practices that cause such damage. Instead we should support education and projects that work to encourage more sustainable forms of gold mining.

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About the Author

Jan SkoylesJan Skoyles is Head of Research at The Real Asset Company, a platform for secure and efficient gold investment. Jan first became interested in precious metals and sound money when she met Ned Naylor-Leyland whilst working alongside him in the summer of 2010. Jan then went on to write her undergraduate dissertation on the use of precious metals in the monetary system. After graduating from Aston University in 2011 Jan joined The Real Asset Co research desk. Her work and views are now featured on a range of media including BBC, Reuters, Wall Street Journal, Mail on Sunday, Forbes and The Telegraph. She has appeared on news channels including Russia Today to discuss the gold price and gold investing. You can keep up with Jan's commentary by subscribing to our RSS feed Gold Investment News.View all posts by Jan Skoyles