The question of how best to protect the gold industry is not one that can be answered easily. Sitting in the Western world we think of protecting the structure of the global gold market and the regulatory changes that have taken place over the last decade. We think about measures that we, as an industry, can take to ensure that gold remains an important and relevant part of global financial systems. We also think about the physical flow of metal that takes place in the gold market, which has a truly global reach both in terms of supply and consumption. The size, reach and sheer value of the gold industry has a profound effect on entire cultures and economies around the world. This can range from artisanal mining, where a few kilos per week extracted from the ground are supporting the livelihoods of thousands of families, to the recipients for whom the physical purchase of gold has been embedded in their life and culture for hundreds of years. Therein lies the challenge.
When you have a supply chain that is so vast it is difficult to know where to start to consider measures to protect all participants whose lives are affected by this yellow metal. Perhaps, it sounds illogical, but I believe the best place to start is… in the middle. That is to say, dore bars, to refinery, to vault and to wholesale distributors is a significant part of the gold supply chain. It is measurable enough to capture. Stakeholders, such as miners, refiners, logistics companies, all make significant investment in the gold industry and therefore have a vested interest to ensure the flow of metal is watertight. With advancement in technology, particularly with the power of blockchain, it has become possible to record the steps in the lifecycle of gold, which has been mined responsibly. This means any product made from that gold can be traced back to its origin. As soon as this linkage can be established, it becomes impossible for gold without “identity” to enter the supply chain. By extension, it means that a discerning buyer of gold, whether for investment or for physical consumption, would be able to prove that his gold did not play a role in money laundering or terrorist financing. Furthermore, the consumer can even know with absolute certainty where the gold came from. Even if that information is more than a consumer or investor needs, there will be value in the knowledge that gold was mined responsibly by industry participants who follow World Gold Council conflict-free standards and LBMA responsible sourcing standards.
The gold consumer market has always been fiercely competitive, and the Indian market is an extreme example of pricing sensitivities. It is only due to advancements in technology that responsibly sourced gold can be made available at a price-point that can be measured in cents, not dollars. While it is unlikely that India will be at the cutting-edge of this drive, it seems inevitable that consumer markets around the world will gravitate towards this higher standard.
According to the Indian Ministry of Commerce and data from Metals Focus, India imported around 840 tons “officially” in 2017 from more than a dozen countries. With such volumes and regional diversity, it is highly likely there is some level of “bad” gold entering the Indian market. It is also a certainty that gold bars from legitimate refineries are being forged or cloned. There is no reason why all inbound gold cannot be recorded onto a blockchain-based supply chain, where chain of custody is known as well as provenance. If this were to become reality, then the domestic gold industry would be able to build on these foundations to extend the provenance all the way through to fabricated products. This would allow consumers to know exactly what they are getting. It would close the door to illegally imported gold whose origins may have had been the subject of a variety of illicit activities.
Indian Official Gold Imports in 2017
Source: Indian Ministry of Commerce, Metals Focus 2018
The further downstream you go into the market, the more difficult it becomes to track the gold. A few years ago, it was unthinkable to record the provenance of a gold ring on a finger. Now, with the power of blockchain as a repository of information that can be shared, along with imaging technology that most of us carry around on our smartphones, it is not unreasonable to think that we are close to developing an ecosystem where gold without “identity” cannot be traded. This scenario will go a long way to stamping out crime and illegal practices associated with the physical gold market, as well as protecting all industry participants, ranging from physical consumers in India, all the way back to the artisanal and small-scale miners in the hills of Peru.
As originally published in Bullion Bulletin June 2018 issue.