Green gold

ABSTRACT

Gold is a precious metal and an important asset class. However, mining for gold can lead to severe environmental issues. Against this backdrop, this study proposes an alternative to mitigate the negative externalities of gold mining. Instead of digging out gold for investment purposes we propose to leave it in the ground and let nature act as a natural vault and custodian legally protected by gold firms and the government. Empirically, we analyse whether portfolios of gold exploration companies with access to such ‘green’ gold also provide exposure to the world price of gold. The results demonstrate that gold mining is not necessary to give investors access to gold.

KEYWORDS:

• Gold
• sustainable
• mining
• exploration
• environmental
• ESG

JEL CLASSIFICATION:

• G11
• Q02
• Q51
• Q53

Acknowledgments

The authors thank participants of the 2nd Gold and Gold Markets conference in Delhi (2019) and seminar participants at UWA Business School. We also thank Trevor Keel, Josua Oll and David Thomas for their comments and feedback.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 In times of Bitcoin and cryptocurrencies, gold and gold mining may appear archaic and it is often labelled a ‘barbarous relic’ with reference to Keynes (1924). However, Keynes (1924) did not label gold a ‘barbarous relic’ but the gold standard (‘In truth, the gold standard is already a barbarous relic.’, p. 172).

2 See https://www.gold.org/goldhub/research/gold-demand-trends/gold-demand-trends-q1-2021

3 See World Gold Council webpage https://www.gold.org/goldhub/data/monthly-central-bank-statistics

4 https://www.gold.org/about-gold/gold-supply/gold-mining/how-much-gold

5 For gold's small but non-negligible industrial uses there is no alternative to extracting the gold and thus no puzzle.

6 Whilst the gold storage costs charged by gold ETF providers are relatively small at less than 0.10%, the costs of securing central bank gold reserves are considerably greater.

7 Another difference may be liquidity. However, securitized (and traded) in-ground gold is not necessarily less liquid than mined gold. If securitized in-ground gold is much cheaper than above-ground gold it could be more liquid under the assumption that lower value assets are more liquid than higher value assets ceteris paribus.

8 If the use of in-ground gold as gold deposits or natural vaults became more popular governments may consider royalty payments for in-ground gold deposits decreasing the relative cost advantages of un-mined, in-ground gold over mined, above-ground gold.

9 Adams (2019) discusses the role of exploration or alternatively junior mining companies in Chapter 11 (The Mining Cycle). The author also states that ‘junior mining companies are really in the information business and not in the mining business. They spend money on things such as exploration and feasibility studies in order to generate information […]’ (Chapter 11).

10 We use gold in US dollars as a benchmark for global investors.

11 Estimates of Australia's Resources and Reserves are reported in Britt et al. (2019) (Table 1). The 2017 estimates for Ore Reserves are 2903 tonnes, for Measured and Indicated Resources 6702 tonnes and for Inferred Resources 1949 tonnes.

12 We replicated the valuation provided by PCF (2019) for one gold exploration company, Prodigy. The 2019 Annual Report of Prodigy reports 141koz in Indicated Resources and 869koz in Inferred Resources. If the estimated Enterprise Value (EV) of Prodigy is estimated as $39.2m, reflecting a market cap of $45m, adjusted for available cash of $5.8m (cash & term deposits net of trade creditors, disclosed in the Annual Report) is divided by 1,010,000oz total gold resources, then a $39/oz EV results. The $39/oz implied valuation per ounce is about 2.5% of the world gold price and thus heavily discounted.

13 Ulrich, Trench, and Hagemann (2020) estimate average GHG emissions intensity of 471 kg CO${}_2$ equivalents/ oz AUeq for UG mines and 777 kg CO${}_2$ equivalents/ oz AUeq for OP mines.

14 Artisanal mining of gold is often associated with mercury and cyanide poisoning (e.g. see Hilson (2002), Hylander and Meili (2005), Veiga, Maxson, and Hylander (2006), Spiegel and Veiga (2010) and Kim and Choi (2012).

15 Gold is sometimes cited as a conflict mineral (e.g. see Freedman (2011) and Bleischwitz, Dittrich, and Pierdicca (2012)).

16 See https://minerals.org.au/environmental-managment

17 The number of firms is fixed for illustrative purposes but can be easily changed. The portfolio analysis is based on code written in R.

18 The four ETFs are (i) VanEck Vectors Junior Gold Miners ETF (GDXJ) ‘which is intended to track the overall performance of small-capitalization companies that are involved primarily in the mining for gold and/or silver’, (ii) Solactive Pure Gold Miners Index which ‘tracks the performance of the largest and most liquid gold mining companies globally’, (iii) NYSE Arca Gold Miners Index (GDM) which is ‘a rules-based index designed to measure the performance of highly capitalized companies in the Gold Mining industry’ and (iv) The MSCI ACWI Select Gold Miners Investable Market Index (IMI) which ‘aims to focus on companies in the gold mining industry that are highly sensitive to underlying prices of gold. The index includes companies primarily engaged in gold mining or that derive a majority of their revenues from gold mining’.