Gold trading: what happens in Africa?

Business Insider article. English version.

African gold

While the so called South American oro sucio (dirty gold) industry involved buyers such as the United States and Europe (NTR Metals, Republic Metals Corp. and Italpreziosi), business from Africa would especially involve Dubai (with a gold import bill of 12.7% of the total gold import, that would be worth about 16.8 billion USD), Shanghai and Hong Kong.

The largest exporters among African countries are Ghana (it is ranked 10th worldwide with a 2016 production of 95 tons), Guinea (20tons), Uganda, Sierra Leone, Kenya and Camerun.

But look out, exporting in Africa it comes with high gains, high risks and a (sometimes) illegal modus operandi.

This implies that great attention should be paid for budgetary losses caused by price collapses and not only for this reason:

Not all that glitters is gold

Transactions with local vendors could be legal, illegal (the result of excavations by thousands of poaching miners known locally as zama zama, all at the behest of local smugglers), or simply fake.

In the latter case, vendors tend to ask for a huge cash advance just to go off the grid.

And buyers, drawn to the easy money, are turning a blind eye; this is how millions of dollars get lost. Indeed, it has been estimated that the value range of these illegal transactions ranges from $500 million to $2 billion annually.

How does this gap come about? Some factors include theft, abandoned mines, and mines closures (you can find 6,000 mines in South Africa, and 5,000 mines the following year).

Official data from Africa show a significant portion of the gold industry is operated by local sellers. This generates hundreds of millions of dollars, and that doesn’t even include the amount gold selling going on under the table.

It is also noteworthy that, worldwide, mining companies employ 3.7 million workers. However, making up the artisan gold mining, including the zama zama illegal activity, the number of workers rises to 25 million.

In illegal mines, the modus operandi relates to a kind of work which is not so different from slavery: miners are expected to work tirelessly, usually at night, and at a maximum speed. These conditions are the result of miners knowing they have to work as fast as possible because of the high risk they may be closed at any moment by authorities or, worse, because of the danger of actual attacks by criminal groups trying to steal the gold.

“So basically, owning gold in Africa poses high risks, and the rush to seal the deal to avoid keeping the gold in their hands is the main reason why prices become competitive” says Carlo Alberto de Casa, chief analyst at ActiveTrades.

Lowering prices, thus, constitutes a double advantage for these local sellers: they can seal the deal quickly or they can dump the hot commodity because is vulnerable to theft and illegally sourced.

On these occasions, losses could become huge for buyers if the vendor decides to disappear after the advance payment.

In this sense, the most attractive element of this kind of transaction is that it stays competitively priced with big corporations, which enjoy a position of trust and transparency in the eyes of the international market, prices of which reach a value of $40,000/Kg. Among those, the most important are the South African Gold Fields, AngloGold Ashanti, Kinross, Acacia Mining with a 2016 turnover of $31.56, $5.334, $3.5, $1.05 billion respectively.

How to pick up the scam

The first way to figure out if deals are built on legal grounds is to evaluate the seller flexibility towards the terms of the buyer: Stankevicius Management Consulting, a consulting company and international business trade specialist, states it is pretty easy to see fake deals exposed by carefully observing contracts proposed by these fake sellers who also ask for advance payment up to $500.000 USD. Misleading conditions also exist. Refineries, for instance, tend to provide fake test results on merchandise, indicating it is gold when it is not. Sometimes these vendors also ask to receive the paid amount in cash at non-formal places such as resorts or hotels. These are also cases where risks to security and health become relevant.

“Clients send us many contracts a week to go through and check for legitimacy. This is not a typical consulting business because the stakes are very high. Every deal a client brings to the table is worth millions and sometimes even billions of dollars. That’s why protection is a very important issue, and that’s why gold consulting companies have a huge responsibility,” says Paulius Stankevicius, founder & CEO of SMC.

The demand is huge. Gold business is one of the few industries in the world that doesn’t require marketing activities. According to Stankevicius Management Consulting, the demand for gold is only growing, and it could lead LBMA prices to jump to $ 1.258 per oz. China, the US, and Europe refuse to sell gold at a discounted rate, but Africa and South America will and that’s where foreign investors will be visiting the most in the next five years.