Over the past couple of months, and particularly the last two weeks, have had some terrific headlines for those of us who write and comment on the Financial Services industry, our country’s politics, and perhaps just generally on the state of the world at large.
One of the topics that may have slid under many reader’s radars has popped up on my company’s Twitter feed, and I felt it had a rather sinister undercurrent running through it. So much so that it seems to merit a closer look, as it could have big-time implications for traders and investors, the community that we serve.
Let’s look at the events under my current consideration, and have a chat with an old friend, a well-known expert in the field of precious metals on both the commercial and retail levels, and see if we can generate any conclusions based on his expertise.
We’ll begin by looking at the issue in the news, South American “Conflict Gold.” An innocuous little Bloomberg/Businessweek article from March 9, 2017 (“How to Become and International Gold Smuggler”) came to our attention at the time – highlighting one less-than-notorious yet very enterprising and very young (21-year-old at the time he began his exploits) college student who decided to go after the “real money” represented by smuggling illegal gold out of Peru. His exploits essentially began with a Google search of Peruvian gold dealers -- after deciding that his Chilean family’s chain of jewelry stores didn’t represent the kind of serious monetary gain he thought himself capable of generating.
The excellent article in Bloomberg had terrific weekend entertainment value, by highlighting this fellow’s self-contained, roughly $80 million enterprise, but shed little light on just how a relatively small, cottage operation like this could drop any number of potential killing blows to the enormous, legitimate American gold industry by inspiring the investigation into a labyrinthian network of otherwise legal gold processing, refinement and distribution.
Our curiosity peaked, we went to a friend of the past couple of decades who is a known authority on topic--Pete Thomas, the owner of one of the world’s premier online hedging platforms for Miners, Recyclers, Refiners and Bullion Dealers – TornadoBullion.com.
William Hoerter: Hey Pete! Our similar senses of humor and general curiosity has bred many conversations over the years on all sorts of silly-to-important topics, but when you approached me with a series of Bloomberg articles centering around conflict gold, you outlined what seems to be the beginning of a much larger, more influential and potentially conspiratorial series of events. Why?
Pete Thomas: Well, Bill, as you know, I’m plugged into, literally online -- as well as via my bi-weekly market letter, Risk Mitigation in the precious metals dealing industry -- my full-time business. I’m a member of the three big metals Guilds or organizations as both the head of a metals desk for a venerable old Chicago-based brokerage, and owner of an online distribution/hedging platform. Having read these articles, and seeing the naming of some names I’m intimately familiar with in the business, I became concerned. When the issue went beyond the rumor mill stage and into the “general population” stage via the Bloomberg article you’ve mentioned, as well as a couple of others your readers might be interested in (which we will reference later) I thought it would be a good idea to follow this story to what might be a dangerous conclusion as the story plays out. Hence, this interview.
BH: What specifically caught your eye, and why is it important?
PT: While most of the largest refineries of investment-grade Gold are in Switzerland, the USA has a good share of cost-effective firms that produce high grade refined product out of scrap metal and mining Dore bars – or lower grade gold and silver usually smelted from ore at the source mines. One of largest of these refiners is a familiar industry name in the United States, Elemetal, the parent company of NTR Metals out of Texas, has been named in conjunction with refining an enormous amount of illegal Conflict Gold from South America and Central Africa. This was revealed in the conclusion of the original article on Harold Vilches, the young Chilean you referenced earlier, and in a second Bloomberg piece, the “Salesman Who Brought Gold in Jungle to Fight Laundering Case” from Mar 20. This article highlighted the misadventures of a young NTR employee who was sent into the South American jungles to purchase gold for his employer, an innocuous but exciting task which, it turns out, had a very dark undercurrent running through it.
BH: What is Conflict Gold, as opposed to “Conflict-Free Gold” and its standard, and why is it important, this day and age?
PT: Second question first: The amount of global gold consumption has more than quadrupled in the 15 or so years since the price of gold has taken off from its relatively stable decades of the post-gold standard price curve which began in 1971 when Nixon repealed that 40-year law.
The planet’s population is consuming over 4300 tons of gold, nowadays, up from under 1000 tons/year pre-2001. This huge global appetite for the investment-grade product has led to the emergence of a kind of large-scale refiner with a specialty; having the capacity to do high-scale, high-quality production at a low cost producing material from regional mines, as well as refining “scrap” precious metals. This production is a big draw for NTR, a well-known entity in our industry, and therefore their mention as recipients of potentially illegal gold hit home with me.
The Conflict-Free Gold standard, defined by the World Gold Council, is “a common approach by which gold producers can assess and provide assurance that their gold has been extracted in a manner that does not cause, support or benefit unlawful armed conflict or contribute to serious human rights abuses or breaches of international humanitarian law”. On the flip side you have the gold we’re referencing today – gold being mined under substandard and inhumane conditions, financed by international drug cartels for the specific purpose of laundering vast sums of cash. South America is a haven for this illegal activity, and the smuggling of this product into the US for refinement and resale is literally financing narcotics and human trafficking.
BH: So, is this a global problem or contained to the US – and how large, in dollars, is this illegal market?
PT: Since it is early in the uncovering of this crisis, there is no way of knowing how widespread the problem is, but officials have claimed, and I agree, that until this investigation, the problem of illegal gold finding its way into general distribution was quite small. The Swiss, Tokyo, So. African and various sovereign-country mints take great pride in the maintenance of the highest standard of the raw product they refine, so it has never been an over-arching issue affecting price. But the huge increase in demand from India, China and the Mideast seems to have led to certain companies taking the easy, cheaper route to meet supply demands. Making huge profits in a relatively low profit-margin business, I might add. In my opinion, this is clearly a US problem, which developed over years of trading, where a lack of extensive oversight paperwork was commonplace and likely purposeful. You can draw your own conclusions on why this practice had been allowed to flourish.