GOLD MINING IN LATIN AMERICA UNDER PRESSURE?

The government of El Salvador enacted a ban on metal mining last week. In an unprecedented move a World Bank tribunal refused the claim of OceanaCorp to compensation for the refusal to mine gold in the country. This move together with an overwhelming support by the country’s lawmakers and citizens resulted in El Salvador becoming the first mining-free country in the world. As the gold mines of El Salvador present only a tiny fraction of global supply, there is no reason to expect a reaction in gold markets.

 

GOLD PRODUCERS’ RELATIONSHIP WITH GOVERNMENTS

However, the question remains what may happen to gold supply, should other countries of Latin America follow suit. Costa Rica already passed a partial open-pit mining ban in 2010, slowing down the development of the country’s biggest gold mine. Miners in Colombia are facing a dispute over mining rights. A recent spill in an Argentine gold mine led to suspension of the mining company. This event could lend additional momentum to the anti-mining movements that have already shown their strength in the country.

With gold prices rising and miners outside of US benefiting from a stronger USD, gold-miners are planning to increase production this year. Could a strong pressure of environmental concerns create enough of a headwind to present a significant hindrance to this plans? Since Latin America has benefited from a relatively bullish gold since the start of the millennium with a large role played by investments of foreign corporations searching for gold, providing foreign exchange, jobs and tax revenues, the relationship between governments and corporations is more nuanced than we might be led to believe through the media. Even the notorious left-wing governments of Ecuador and Bolivia are not against mining projects.

 

MARKETS’ OPTIMISM ABOUT GOLD

Despite the recent slump, analysts are optimistic about gold in 2017 as investors are likely to be timid about securities reflecting global uncertainties. It is reasonable to assume the tensions between local costs and national benefits in Latin America can be resolved as long as gold continues to perform relatively well. Especially as the industry displays resolve to do more about environmental and health issues and gold is expected to continue its rebound. There is even hope that the industry can be weaned off its use of cyanide in the production process.

The world economy is still supportive of higher gold prices with its uncertainties like Brexit, protectionist sentiment of US and China still not regaining its former pace of growth.  Gold producers got good returns on their assets in 2016 and are expected to get even better returns in 2017. There is no reason to believe they will not meet environmental and regulatory standards of the governments more sensitive to local demands.

David

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