by Matthew Hart
On a prospecting trip in mountainous Hunan province, on the Burma border, X. D. Jiang saw artisanal gold miners using sulfuric acid—an insanely hazardous technique. “We came across little valleys filled with the white smoke of acid fumes,” he said. The hill miners used cyanide too. Men on motorcycles carried drums of cyanide up mountain tracks. The miners built leach pits downstream from the digs and poured in cyanide. It leaked, poisoning people and causing widespread cattle death.
In 1988 the Chinese government reversed its liberalizing policy. Gold became a “special mineral” under government protection. Yet the genie would not return to the bottle. For many Chinese, the idea had taken root that gold alone could free them from penury. In 1989 the Christian Science Monitor profiled the sad adventure of a farmer named Ma, who set out on a March day to seek his fortune in the goldfields of Qinghai province. “Ma hired a dozen men, spent his life savings on shovels, tents, food, and a truck, and left his ripening barley to the hoeing of his wife.” The men drove out of their village, crossed the Sun and Moon Mountains, and struck out westward across the high plain of Qinghai.
Ma and his crew were following a stream of outlaw prospectors and gold diggers who were ignoring the prohibition on private mining. The lure of gold was too great to resist, and the get-rich-quick promise of the “Crazy Yellow Rush,” with its stories of instant millionaires, drew them to the remote quarters of the province. Local officials also defied the law, helping the miners and pocketing substantial bribes and “fees.” One group in the central Qinghai city of Golmud reportedly made $270,000 selling bogus mining licenses.
Ma and his team plunged doggedly across the steppe. They traveled nearly a thousand miles on the rough roads that led to the gold country. Rain fell and the snow blew in and the roadway turned to mud. They ran into other gold seekers mired in the sucking mess. More than 8,000 men and 1,000 trucks were tangled in hopeless disarray. They had reached an altitude of 16,500 feet, within sight of the famed “Gold Platform” at Hoh Xil Lake. And then the food ran out.
News of the calamity reached the authorities, and the army tried to make a food drop. But the pilots could not find the stranded miners, concealed from the air by thick cloud. More than seventy men died in the freezing pass. Finally the army reached them with helicopters, bringing food. Ma and the others were ordered to abandon their doomed convoy and leave the area on foot.
The disaster in Qinghai did not eliminate small-scale gold mining. The fever had taken root. Moreover, small mining was an immemorial tradition. In acknowledgment of this the government found a way to tolerate small workings, under an unwritten but well understood convention known as “localistic protection”—a Maoist concept that gave weight to the folkways of the people. The people knew an opportunity when they saw one.
In Henan province, 178 small-mining teams used the cover of localistic protection to seize ground adjacent to state-owned mines. Some brazenly entered mines and collected ore at the minehead. In an incident at the Wenyu mine, the “carrying-ore-on-the-back people” had gathered so much ore they had to commandeer trucks to haul it away. The mine manager, desperate to conceal his helplessness from an impending state inspection, arranged with the looters for a three-day suspension in the plundering while he showed the government around.
Sometimes freelance miners organized into village cooperatives, a system known as min cai, or village mining. Even large state companies used min cai to recover hard-to-get-at ore, in one case suspending miners on ropes and lowering them 120 feet down shafts. In Shandong province min cai provided important income. But in 2001, in another shift of central government sentiment, the state abolished the system, declaring 295 mines and 138 refining operations illegal in Shandong alone. The government ordered more than 7,000 migrant workers from other parts of China to leave the province.
Officially, such micro-mining no longer exists, and gold recovery has passed to the industrial apparatus. This fiction does not withstand even the most cursory investigation. As we drove through the goldfields of Shandong, I badgered Feng Tao to prevail on Pang Min to show us one of the small operations. She finally threw up her hands, turned off the main highway, and took us down a little road through fields and orchards until we came to the quartz hills. The road ended at a midsize gold mine, and I thought that Feng Tao’s efforts had foundered on his difficulties with Pang Min’s Shandong accent. But then we saw it, in a field not a hundred yards from the gate of the modern mine. Steam poured up through the rusty, antiquated superstructure of a hoist that rose above a corrugated fence erected to conceal it. The volume and density of the vapor plume testified to the depth of the mine. Rock temperature increases with depth, and torrents of water were needed to cool the rock face. The water changed to steam and billowed back along the mining gallery and up the shaft. About a mile away another column of white vapor billowed up through the rickety derrick that marked a second shaft.
Official hostility to small operations comes partly from the role they play in providing cover for the theft of ore from the surrounding mines. A truckload of ore in the possession of a gold miner, however small, is not evidence of theft, because such miners often transport their ore to refineries rather than refine it themselves. With the connivance of insiders, thieves steal from one mine and sell to another. They may even sell ore back to the mine they stole it from. If the price is right, a mine may prefer to buy back pilfered ore rather than lose it entirely. In Shandong, where there are so many buyers, selling such stolen ore would not be hard.
In Zhaoyuan city alone there are six large refiners, but Pang Min knew that I was interested in the smaller, freelance side of the action. After nosing around in the hills we returned to the city and stopped at one of the industrial refineries. Pang Min chatted to the guards until a young man emerged and climbed into the backseat beside Feng Tao. We pulled away and plunged into the busy streets in another of Pang Min’s exuberant displays of navigation. Finally we sped across a bridge and into a suburb. Pang Min and our new companion kept up an animated dialogue. “What’s up?” I asked Feng. “I don’t know,” he replied, “I can’t understand a word.” We turned off a wide street and drove up a muddy lane until we came to a crumbling ten-foot-high brick wall. On the other side, towering above the wall, was a grayish yellow mountain of tailings.
We turned in through rusty gates and stopped by a decrepit lodge. Some men came out in shorts and T-shirts and plastic sandals, and our new guide spoke to them. Feng and I got out and took a look around. It was a concentrating mill. Ore from small mines in the hills, or stolen ore from larger mines, came down by truck to be crushed with millstones and refined into concentrate in flotation ponds. In flotation, the refiner adds an oily dark brown liquid with a pungent smell to a slurry of crushed ore. The chemical attracts gold-bearing sulfides into a froth on the surface of the pond, where operators harvest it as concentrate and sell it to industrial smelters, where they burn off the dross in large furnaces.
CHINA BECAME THE BIGGEST GOLD producer in the world because the country, taken as a whole, is an effective machine for sucking gold out of the ground. Part of the machine is the industrial gold mining structure. The other part is the rapacious mass that the government let loose in 1978 when it encouraged them to look for gold, and has never been able to recall. When farmer Ma and 8,000 others trudged away from Qinghai’s Gold Platform in defeat in 1989, there were thousands more to take their place.
In 1995 “gold lords” and their bands of peasant miners were still defying the government, and each other. “I’ve heard the bullets whizzing past my ears and seen people beside me dying,” a woman in her forties told a reporter. “Even if the government wanted to control us, we are stronger than they are right now, and our guns are normally much better than the ones carried by [police].”
Gold lords fought for the best ground. “The first thing we would do when we struck gold,” one said, “was set up a pillbox on the mountaintop and train more of our workers how to use guns; then we would u
se our blankets to make a flag, which meant: this mountain belongs to us.”
Rival gangs fought pitched battles with pistols, automatic weapons, and even homemade cannon. They chewed up the landscape with their mining, sending soil from the digs into rivers, threatening the habitat of such rare animals as snow leopards and white-lipped deer. In 2012, nomadic Tibetan shepherds in Qinghai fought with Chinese gold miners to keep them from digging a mountain that the Tibetans held sacred. Nothing, it seems, can stop the sack of China for its gold.
ONE DAY I DROVE OUT of Yantai through the orchards to look at a pit mine on a feature called the Jiao Lai basin. Overloaded trucks with squealing axles gasped up the ramp from the mining level. The pit was a shambles, the slopes scarred by gravel slides. The fence sagged along the ground. Illegal miners, the manager admitted, looted the property and the entire Jiao Lai basin more or less nonstop. In the cost conditions that prevailed, the low-grade mine and the plundering around it made a good contraption for extracting gold, as you could say for all of China. But it begs the question: with such intense mining, how much gold can be left?
In 2010 the World Gold Council warned that “China’s future prospects for gold supply look to be limited.” The WGC is a research and marketing organization run by the gold mining industry. Using data from the United States Geological Survey, the WGC said that “China may exhaust existing gold mines in six years or less if Chinese demand continues to grow strongly.”
For anyone in the gold business, other than Chinese miners, this was great news. China running out of gold? Imagine what would happen to the price.
The China-running-out-of-gold scenario raises the specter of “peak gold,” the scary bedtime story that gold producers like to tell. Peak gold describes the theoretical point of maximum world extraction, after which it’s downhill all the way as production fades until we’ve dug up every ounce and there’s no gold left to mine. I don’t know how much gold China has in the ground and neither does the WGC. Neither do the Chinese. But if they show signs of running out, the gold price will reach escape velocity. What it will escape is human reason.
9
THE SPIDER
Every three months the London market was trading twice as much gold as had been mined in all of history.
GOLD IS A MAD BAZAAR. The volume of bullion coming to market today is more than sixteen hundred times what it was in the sixteenth century, when Spanish treasure fleets were jostling up the river to Seville. Not only are people buying all this fresh gold, they are buying it and selling it and buying it again.
In 2011, the total value of mined gold was about $143 billion, yet the value traded was much larger. In one three-month period alone, 11 billion ounces of gold worth $15 trillion changed hands in London. The true size of this market only came to light that year. Gold movements are secretive. Most of the trade is in the hands of a cabal of banks in London. Those very banks led the way in exposing the size of the market. Their reason for uncovering the volume of the bullion trade was to provide it with a whole new class of customer—banks. As part of a campaign to promote the standing of gold as a “liquidity buffer,” a type of capital asset that European commercial banks were required to hold, the bullion market wanted to show European banking regulators how big the gold market was. First they had to find out themselves.
The London Bullion Market Association polled its members about the size of daily trading. Most bullion trades in London, the world’s oldest and most important market, are on a principal-to-principal basis. The transactions are private to the parties involved, and leave no public footprint. When the size of this trading emerged, it was astonishing. In the first three months of 2011, the value of gold traded was $15,200,000,000,000. In volume terms, the figure represented 125 times what the world produced in a year, or twice as much gold as had been mined in all of history.
These trading volumes helped cause rapid movements in the gold price. New investment vehicles make it easier to trade bullion. No longer does the speculator have to buy gold bars from a dealer. He can pick up a phone and buy shares in a bullion fund. The biggest of these funds appeared in 2004, only seven years before the London bullion market discovered its own size. The people who created the fund opened a crack in a dike that had been holding back an ocean of demand, and the money poured in. In a few years they had more gold in their vault than China’s central bank. Bullion analysts began to watch the gold flows in and out of the fund with as much attention as they watched such crucial market indicators as jewelry demand. In the gold world they call the fund the Spider.
The Spider is an exchange-traded fund, or ETF, an investment composed of a basket of assets that trades with the ease of trading stock. In this case the asset is a single one: gold bullion. The nickname “Spider” comes from the fund’s full name, SPDR Gold Shares. (The first-ever ETF was called Standard & Poor’s Depositary Receipts, or SPDR.) The nickname fits. The Spider’s customers could react with arachnid speed to the slightest tremor of investor sentiment. By removing the headaches of picking up physical gold and finding and renting vault space, the fund advanced gold ownership more than any measure since the creation of gold money in the seventh century BC. It democratized bullion. Anyone with a few hundred dollars could take a gold position. More importantly, and what gave the Spider fangs, so could anyone with a hundred million.
The Spider was a creature of the World Gold Council. The gold miners who ran it wanted a better way to sell gold, as they were producing so much more of it. From 1975 to 1985, world gold production ran between 40 million and 50 million ounces a year. New technologies, such as heap leaching, brought more reserves into the production stream. By 1995 world production had leapt almost 50 percent to about 72 million ounces, and ten years after that, to 80 million ounces. In thirty years the amount of gold coming to market had doubled.
As the gold supply ballooned, the WGC’s New York office looked for ways to expand the customer base beyond the jewelry market. They took a simple approach: they canvassed American investors who did not own gold, and asked them why they didn’t. “The very strong message we got back,” said the executive who ran the survey, “was that gold investment was cumbersome, costly, and complicated.” The investors wanted something that would be easy to trade, did not have to be vault-stored by the buyer, yet represented exposure to the spot price of gold. In short, they wanted to be able to bet on gold the way they could bet on stock. In 2000, the WGC set about inventing a product that wrestled the complexities of the bullion market into a simple form, yet one that would satisfy the strictures of the Securities and Exchange Commission.
“They hadn’t a clue how the gold market worked,” a WGC manager said of the commission. “I would go down to Washington with a lawyer and a gold trader and someone who had dealt in ETFs, about five of us all together, and we’d be ushered into a cavernous conference room and we’d sit around an enormous table. We’d start to talk about how the gold market worked, and you’d notice that people were filtering into the room, and at the end I’d be addressing forty or fifty people. There was a tremendous interest in how this exotic product worked.”
To license the ETF for sale, regulators had to be convinced that every share would represent real gold bullion in a vault. In 2004, the SEC licensed the Spider. For the gold believer, that warm feeling was now a phone call away. The Spider went on sale in November 2004. In four days it took in $1 billion. Eight years later the Spider owned about 1,300 tons of gold worth almost $70 billion. There was more gold in the Spider’s stash than in the central bank of China.
The Spider ETF made bullion ownership available to ordinary investors, who apparently wanted to own gold once the difficulties of doing so were removed. But ease of ownership added more to the gold market than additional owners. It added instability.
THE SPIDER DESTABILIZED THE GOLD price in two ways. One way was by making it so easy for people to buy and sell large amounts of bullion, and the other was a structural consequence of how the fund worked
.
In analyzing the Spider’s effect, it would be useful to know who its investors are, so as to understand the relative sophistication behind the trading. But there are no data to show who owns the Spider. Some of the owners’ positions show up in 13F filings—mandated quarterly declarations by American institutional investors that report their trading. For instance, 13Fs revealed that billionaire George Soros sold $650 million worth of Spider shares in the last quarter of 2010, while another billionaire, John Paulson, whose managed funds had $4.5 billion in the Spider, stayed put. But 13Fs document only those funds under institutional management, products sold to the public. If Paulson or Soros had a billion dollars of his own in the Spider it would not show up in a 13F. Jason Toussaint, a WGC executive, told me that 13Fs were his only window into ownership. He could not even say how many owners had the shares, and therefore could not estimate the average size of holdings. This means that there is no way to gauge investor sophistication. We can assume that some of them are not as sophisticated as Soros or Paulson.
The Spider (and the other gold ETFs that sprang up in the wake of its success) contribute to volatility by supplying a larger public with the means to make quick bullion trades. Presumably the moves of the more sophisticated practitioners influence some of this trading. In this view, the less sophisticated investors pile on, hurling themselves into the action in an imitative frenzy. ETF trading did not drive price action as a primary mover, said bullion analyst Sterling Smith, but made its movement “more intense.”