How international conflicts stimulate mining in Latin America

Gold prices on the international market soared after the war in Ukraine and Hamas attacks against Israel. This scenario brings with it impacts that go far beyond the financial sector. With the increase in economic uncertainty due to the war between Israel and Hamas, an old acquaintance has once again appeared as a safe investment: gold. Just when the metal was experiencing a drop in prices, the conflict gave new impetus to prices, which have risen around 10% since the attacks on October 7th. The consequences of this increase go beyond the financial sector and reach mining areas in Latin America.

In addition to so-called physical purchases, which range from gold bars to jewelry, many investors look for so-called ETFs, or index funds, which replicate the metal’s movements on the international market. The main price in 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 troy ounce, a value close to its historical record.

Until 2019, gold was priced close to 1,300 dollars. The arrival of the pandemic, however, boosted prices. With Russia’s invasion of Ukraine, the metal received another boost, in part due to increased demand for the commodity by central banks. After the sanctions against Moscow, gold began to be seen as safer by many governments, which stimulated demand by monetary authorities, which, in the first half of 2023, was the highest ever recorded.

“Central bank purchases are an element that has supported gold prices. We see this mainly as a political statement to Washington, signaling discomfort with US international policy”, says Carsten Menke, research leader at Julius Baer bank.

“The most important trigger was the freezing of Russian assets, leading countries that are not aligned with the West to diversify some of their monetary reserves into gold,” says the analyst. China and Türkiye are among the major recent buyers, for example. “We expect gold purchases by central banks to remain strong for the foreseeable future, supporting prices,” he projects.

The rise in the price of gold since the Hamas attacks was, above all, driven by a change in mood among speculative traders, says Menke. In his view, the increase in metal prices, greater than in previous conflicts, is also due to a general pessimism with the global economy before the attacks.

For Carsten Fritsch, commodities analyst at Commerzbank, it is “evident that gold is profiting from its role as a safe haven in times of greater uncertainty and risk aversion”.

Encouragement for mining

The relationship between the rise in metal prices and the advancement of mining in Latin America was already mentioned in an Interpol report in 2022. “There is a direct relationship between the increase in gold in global markets and the price in local markets, even that illegally”, reinforces Daniel Bonilla Calle, professor of international business at Fundação Universitário CEIPA, adding that the prices of illegal mining behave and have the same movement as legal exploration.

“When there are international peaks, what are called gold bonanzas occur in local markets. This attracts illegal miners and armed groups, as well as other actors who want to enter the activity”, summarizes Bonilla.

The expert highlights that one of the reasons that drives the illegal market is the between 20% and 30% cheaper value of gold from this source. In Brazil, estimates are that around half of the metal exported by the country has illegal origins. In Colombia, calculations are that 80% of gold shipments abroad do not have legal origins.

“There is a complex chain, and end buyers often do not 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 in jewelry, but also for the production of electronic equipment.

Attraction to 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 mainly seek to launder money through illegal mining, and the spread of violence is a result.

“The significant appreciation of gold in recent years has had a significant impact on mining areas in the Amazon. Among the various consequences, the increase 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 topic. He points out that such equipment, which can cost more than R$1 million, accelerates the process of deforestation and removal of material from the soil.

“Thus, new mining fronts are opened more quickly, based on predatory practices, without environmental control. Another relevant factor is that as soon as the price of gold rises, deposits that until then were not economically viable begin to be explored”, says Manzolli. In addition to deforestation, the use of mercury is another problem observed.

In some cases, the attraction of the activity caused criminals to put other businesses aside. According to Bonilla, gold competes with the cultivation of coca, the basis for cocaine, and, in some regions, the same groups can command both activities. Thus, 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 and without labor.

Best source of income and solutions

“Impoverished communities see mining as an easier opportunity to generate income,” says Wagner. According to Manzolli, even though they are approached by inspections, whether environmental or labor, it is common for miners to want to return to the activity, due to the lack of opportunities in the city or the better remuneration compared to the salary received in some jobs in the urban area.

For him, in Brazil, legislation must be updated to the new reality of mining, requiring plans that cover everything from the phase prior to exploration to the closure of the mines and a recovery plan for the area. “And garimpeiros cannot be left aside, a training plan is needed so that these people can find opportunities in other economic activities, in order to reduce dependence on mining”, he states.

Two recent changes have tightened the rules for mining. In June, the plenary session of the Federal Supreme Court suspended a rule that presumed the legality of the gold acquired and the good faith of the company that purchased the metal. In the same month, the government sent Congress proposing a new legal framework for the gold market in the country. In July, a regulatory instruction from the Revenue came into force requiring the issuance of an electronic invoice for businesses involving gold as a financial asset or as an exchange instrument.

Another means that can be pursued is the expansion of certification of the international legality of gold. According to Wagner, there are success stories of the measure, including Colombia. “It is important to try to do this on a smaller scale, not just at end traders. It is necessary that all steps in the supply chain are verified,” he says.