Smuggling surges as gold prices jump… central banks in various countries begin direct purchases

Mining countries such as Madagascar and Ecuador

Increasing gold holdings in response to the spread of illegal trade

Recently, some national central banks have been buying gold directly from small-scale mines. This is to prevent mined gold from being diverted into illegal trade.

According to the Financial Times (FT) on the 2nd, the Central Bank of Madagascar recently set a goal to increase its gold holdings from 1t to 4t and expanded its gold purchase program targeting domestic small-scale mines. Aivo Andrianarivelo, governor of the Central Bank of Madagascar, said, "Smuggling organizations are using aircraft and helicopters to illegally transport large amounts of gold out of the country," and pointed out, "They are stealing tax revenue and foreign currency from the treasury." Madagascar's gold production is about 20t per year. At current value, it amounts to $2.8 billion (about 4 trillion won).

The Central Bank of Madagascar sends the purchased gold abroad for refining and then converts it into foreign currency or increases its gold holdings. Governor Andrianarivelo said, "The aim is to legalize the gold industry so that gold benefits Madagascar."

In Ghana, mercury emissions and water pollution from small-scale gold mining are problems. It is estimated that more than 60% of Ghana's waterways are polluted by mining activity. The Bank of Ghana established a central gold purchase organization last year.

In Ecuador, drug trafficking organizations are flocking to gold mines targeting cash. The Central Bank of Ecuador also expanded its domestic gold purchase program, which began in 2016. Diego Patricio Tapia Encalada, head of investments at the Central Bank of Ecuador, emphasized, "We offer good purchase prices for quick transactions" and "Price is important as an incentive to prevent mining companies from going through other channels."

The recent increase in illegal trading of newly mined gold is driven by rising gold prices. Last year, international gold prices rose by more than 60% from the previous year, exceeding $4,300 per troy ounce. The sharp rise in gold prices causes problems in areas with a lot of informal gold mining, including deforestation, water pollution, human trafficking and forced labor, and financing of conflicts and organized crime. According to the World Gold Council (WGC), gold mined by small-scale miners can reach up to 1,000t per year, and a substantial portion of this is smuggled.

Reporter Kim Joo-wan kjwan@hankyung.com