Commentary: It’s time gold miners act on unfair competition

Given some of the enormous gold sales on Comex last year, I was curious what it would take to mine that much ore.

One-gram-gold-per-tonne ore with a 2.5 stripping ratio requires moving 70 tonnes of rock to produce one ounce of gold. Four hundred tonnes of gold (12.9 million oz. gold) were dumped on the market on April 12, 2013. If produced in mines with a grade of 1 gram gold and a 2.5 stripping ratio, it would be necessary to move 907 million tonnes of rock to produce that 400 tonnes of gold. Operating at a rate of 4,000 tonnes per day, it would take 50 mines operating 365 days a year, with zero downtime, four years and 11 months to produce the same amount of gold that was sold in a few hours.

Gold is a precious commodity. It is hard to find economic deposits, hard to permit them and hard to mine them. These activities require a great deal of capital.

There is a disconnect when gold that would require moving 907 million tonnes of rock and processing 362 million tonnes of ore to produce is dumped on the market and sold in few hours. 

Are these sales, and their consequences, simply a result of the “vagaries of the market,” or are they unfair competition? I believe they are the latter.

Sale of large quantities of a precious commodity — by anonymous sellers, who may not have owned a single ounce of gold, dumped for unknown reasons — is not what I would call “fair competition.” Its consequences cannot be described with a straight face as “vagaries of a free market.”

Pools, with the ability to buy or sell large quantities of shares, manipulated stock prices during the 1920s. Whether the intent of sellers of enormous quantities of gold — all at once — was manipulation is unknown, at least to me. 

What we do know is that today, sellers’ computers are programmed to carry out certain algorithms. If each computer is programmed to place a market order to sell gold when the market declines by a certain amount, acting in concert, collectively backed by US$20 billion, these computers can have the same effect as a pool, even though participants are not explicitly acting in concert. 

The effect of this wolf pack of computer-driven billions will have a far greater impact — mines closing, drilling halted, people becoming unemployed — than the most ambitious mining project ever dreamed of, but their owners are not required to file an environmental-impact statement or explain their project before a public meeting. They just push a button, in a regulatory climate reminiscent of the 1920s. 

Whatever the motive of these sellers, the consequences of such massive gold sales are the same as that of the massive stock sales by short selling pools in the 1920s that were designed to overwhelm and discourage the market. We do not need to know or attribute motives. Whatever the motive, the effect these sales have had on the business of mining gold is clear. 

While producers are held to rigorous standards to permit and operate mines, anonymous sellers are permitted to make sales of a product they may not own and dramatically affect the price of the product, with the impunity of 1920s pools. 

As in the 1920s, they do so without any form of public disclosure. While mining companies with offices in both Canada and the U.S. need to file regulatory forms each time they send a wire to their own bank account on the other side of a national border to fund everyday operating expenses, sellers of billions of dollars’ worth of gold may engage in sales at will, with no evidence of regulation and no transparency. 

We are careful to protect the natural environment from the effects of mining, as we should, but are oblivious to the effect on families of unemployed mining workers, laid off as a result of the self-serving actions of anonymous entities. We enforce transparency in the forest; we permit opacity on the trading floor.

It is surprising that mining companies have accepted this double standard. When foreign steel is sold below cost, or deemed to have been “dumped” in the North American market, alarm bells go off and lights flash. Steel producers and steelworker unions call for an investigation, politicians express outrage, and lawsuits are filed to stop to the unfair competition.

When unfair competition hits the mining industry, producers and mining workers suffer in silence. I contend that the mining industry is not Cinderella. It need not sit in a corner and be abused. Producers should demand transparency and rules that will prevent what amounts to unfair competition. Producers could be proactive.

Mining company managements could take a lesson from the steel industry and follow its example. They could open to public scrutiny the unfair competition and abuse of the industry and its workers. They could ask how the public benefits from allowing a small group of anonymous trading entities to garner profits, at the expense of wreaking havoc on the gold-mining industry; facilitating transfer of gold (i.e., real wealth) at bargain prices from the U.S. to China; and hurting small gold-based borrowers in India and cutting off credit to its poor people. Mining executives could ask why this small group of trading entities is so favoured. 

Boards of gold-mining companies are stewards of ground and mines that are precious, hard-to-replace resources. When producers “high-grade” and take other measures to maintain production at a price that does not enable them to replace reserves, they are, in essence, presiding over the liquidation of the assets under their stewardship. 

I believe it would be more appropriate for producers with balance sheets that permit to withhold gold from the market when they cannot obtain a margin over all-in sustaining costs which justifies their investment. 

If this were done by each producer — individually, in conjunction with a clear policy, designed to provide each mine with a return on capital sufficient to preserve the enterprise — I think it would be difficult to confuse such a strategy with a cartel. 

I believe enlightened investors would welcome a disciplined strategy that would create a healthier industry and produce better long-term results. 

If modern-day pools or their computer-driven, functional equivalent wish to sell gold at a price that does not reflect the cost of production or provide an adequate return on capital, let them supply as much of the market as they can, for as long as they are able. 

Miners should not support them by selling all of their production at a price determined by what amounts to unfair competition. 

Stewardship of precious resources has never been an easy job for mining company managements and boards. Perhaps the perspective set forth above could be useful in helping them consider ways to do their difficult job better.  

— Based in Toronto, Jonathan P. Schwartz is a long-term investor. He can be reached at: matrix.mgt@verizon.net.