1/19/98

KUFM KGPR

T. M. Power

Mining Gold from Our Bank Vaults Not Our Wildlands

At times it seems as if Montana is under siege by gold mining companies. Over the last year we have struggled with the proposal to build a huge open pit mine along the headwaters of the Blackfoot River, a proposal to mine adjacent to Yellowstone Park, the ongoing pollution associated with the Pegasus mines in the Little Rocky Mountains in north central Montana, Golden Sunlight’s sliding spoil banks towering above the Boulder and Jefferson Rivers outside of Whitehall, the poisoned waters and abandoned mine near Pony. It seems as if one could go on and on listing the permanent industrial sores on Montana’s landscape that are bleeding toxic wastes into our waters.

What if there were a pollution free way of obtaining the same gold that did not require any mauling of the landscape? One would assume that we would jump at the prospect. Well there is. Instead of digging underground in Montana and elsewhere in the West to obtain gold ore and then processing and refining it using heavily polluting industrial methods, we could instead be digging in the vaults of the world’s central banks, including the deposits of gold bullion found at our own Fort Knox.

Most of the new gold produced these days goes into the production of jewelry. But the world has huge deposits of refined gold sitting unused in bank vaults around the world. Those deposits could be "mined" to provide the raw metal to the jewelry business for decades into the future with almost no negative impact on the environment. In the past these gold bullion "deposits" were held by each nation’s central bank as backing for that nation’s paper currency and other debt. Gold was, until relatively recently, looked upon as the ultimate store of value, a secure way of holding wealth.

That has changed dramatically over the last several decades as the value of each nation’s currency has come to depend primarily upon what that nation’s economy is actually able to produce in terms of valuable goods and services. Gold itself has proven to be a very unreliable store of value. In terms of dollars, gold has fallen from about $900 per ounce in the early 1980s to about $290 per ounce today. That is, it has fallen in value at a rate decline of about 7.5 percent per year. Investors who purchased industrial or government bonds or common stock instead of gold saw returns that averaged 7.5 to 12.5 percent rather than the losses associated with gold. The huge gap between the losses on gold compared to the gains on almost any other way of holding wealth has taken more than a little of the glimmer off of gold as an investment.

That is the reason that central banks around the world have either begun to sell off their gold hoards or are seriously considering doing so. They are looking for relatively liquid assets that hold their value better than gold has.

This could present a great opportunity for Americans to "have their cake and eat it too." Instead of pursuing the glittering metal with which we wish to decorate our bodies with by trashing the natural landscape and permanently poisoning our waters, why not use the gold buried in the vaults of our central banks to buy out new mines that propose to dig new gold ore from the earth. In some ways, it would be a simple trade: The central bank gets to permanently keep deposits of gold, but trades that sitting idle in its vaults for that sitting idle in our mountainsides. In the process, we avoid the environmental damage associated with trying to pry low grade ore from the earth.

To keep this from becoming another raid on the US Treasury, the ore deposit associated with a proposed mine would have to be fully explored, the engineering of the proposed mine would have to be worked out in detail, and the full cost of environmental controls that would have been imposed would have to be estimated. From this information, one could calculate the likely profit that could have been earned from the mine. That is all that would have to be paid to obtain those mining rights. For marginal mines with high costs, low quality ore, and significant environmental risks, the price that would have to be paid might be close to zero given how low gold prices have fallen.

This type of calculation would not be easy, but private mining companies regularly buy and sell mineral properties. So it can be done. The weakness of present mining and environmental laws, including the infamous 1872 Mining Law, creates a certain amount of moral hazard here. Mining companies can propose mineral developments in the most outrageous places using the most outrageous methods in order to blackmail the public into buying them out at an outrageous profit. This is a little like a homeowner threatening to burn old automobile tires and other toxic waste in his backyard unless his neighbors will pay him handsomely not to poison their air. We now have zoning ordinances and air pollution laws to block this type of economic blackmail. Unfortunately, when it comes to metal mining, we have not acted to eliminate this type of moral hazard. As a result, we still face the prospect of having to pay private individuals not to poison us while they permanently damage our public lands. Maybe a few outrageous blackmail payments of this sort will revitalize the efforts to reform our mining laws.

Meanwhile, lets get on to exploiting this "new" environmentally benign way of obtaining the gold we want for decorative purposes. Instead of permanently damaging our natural landscapes and waters in the pursuit of these glittering aesthetic goods, let us get on with the task of putting those buried bars of bullion to more productive use.