In the gold industry, ESG is on everyone’s lips. Behind the abbreviation, lies the endeavor to motivate companies to actively pursue good environmental, social, and governance targets. ESG ratings offer investors and NGOs the opportunity to track progress in this effort and identify the best companies in the industry.
However, it is wrong to limit the concept of sustainability only to these ratings. After all, the ratings only evaluate mining companies, not the precious metals themselves. Gold suffers particularly from this limited view of sustainability. For example, gold mining is usually reported in a negative context. Inhumane working conditions in some mines in Africa, or the environmental threat posed by cyanide contamination, are the focus of this reporting.
The detection of such misconduct is undoubtedly justified and important. However, the fact that such news prevails completely discourages environmentally conscious or socially committed investors from investing in the yellow metal is an exaggerated reaction. It may sound surprising at first glance, but environmentally conscious investors should focus on gold as an investment instrument.
“Anyone turning away from gold is in fact turning away from the world’s most sustainable metal in terms of its CO2 balance sheet, the amount of waste generated, and the amount of resources used.”
Gold is green because:
- When gold is used it’s not consumed
- CO2 emissions are incurred primarily during the mining phase
- Gold “greens” a portfolio
- Gold is versatile in its use
- Fiat currency harms the climate and the environment
1. When gold is used it’s not consumed
In the public debate, truncated representations are currently very much in vogue. Electric cars are considered climate-friendly because, unlike cars with internal combustion engines, their operation does not cause any emissions during use. Any additional emissions and environmental impact caused by electricity production, manufacturing, and scrapping the car are not taken into account. In this context, however, only the overall view over the entire life cycle should be relevant for an ecological assessment. In this view, gold is indeed the most sustainable metal in the world because of its elementary properties, the extraction process, and its stable value.
Gold itself has been mined for more than 7,000 years. During this period, more than 205Kt have been produced, which is equivalent to the size of about three and a half Olympic swimming pools. More than half of this has been mined since the 1950s. Crucial to gold’s sustainability and environmental footprint, is that virtually all the gold ever mined is still in use. With every piece of gold jewellery, every gold coin, every gold bar; there is a chance that some of it has been used for many centuries, perhaps millennia. Unlike consumer goods such as food, commodities, and even real estate; gold is not consumed, but merely used.
Therefore, new gold production is hardly significant in an overall view, as the stock-to-flow ratio demonstrates. The current value of around US$58 means that the amount of gold already in existence is 58 times the amount of the current annual new production. In other words, the annual “inflation rate,” i.e., the growth of the global gold stock compared to the already mined and further used amount, is low and relatively stable. It fluctuates between 1.2% and a maximum of 2.4%.
As a precious metal, gold is characterized by the fact that it does not chemically react with air or its components, such as oxygen, carbon dioxide, and other gases. This protects gold from losing its luster. Gold therefore remains in its purest form forever. This makes it the perfect investment vehicle that can be passed down from generation to generation. The social and environmental costs of gold mining can consequently be spread over an almost infinitely long period of time, making them converge towards zero. The permanence of gold also means that it never has to be disposed of as waste. No one will voluntarily throw gold away, but will want to recycle it for profit.
2. Significant CO2 emissions are incurred primarily during the mining phase
The current focus on curbing CO2 emissions to combat climate change should also lead to a stronger focus on gold among investors. This is because it is a decidedly CO2-friendly metal and investment.
Three different sources are distinguished in the attribution of CO2 emissions: (1) the emissions released within the company itself, (2) the emissions caused by the company’s energy suppliers, and finally (3) those that occur in the upstream and downstream supply chain.
For many products, a proportion of the emissions arises in the upstream and downstream supply chains. However, these emissions of gold mining companies are almost negligible, as a gold bar is very rarely further processed. Furthermore, the remaining emissions per ounce of gold produced are extremely low for large operations.
The comparison with other raw materials makes this clear. The production of aluminum consumes almost 11 times as much CO2 per US dollar of production value, steel more than five and a half times, coal almost three times, and zinc more than two times. Copper is in the region of gold, lead slightly below, while iron ore is much more CO2 friendly, with around two-thirds fewer emissions. However, gold recycling produces 90% fewer CO2 emissions than gold mining, and about 25% of annual gold demand is met by recycling alone.
In addition, gold that has already been mined does not cause any additional emissions, as these are generated exclusively during the mining and refining period. Gold is used and not consumed. Consequently, the possession of physical gold does not produce any emissions. Only the processing of gold into jewellery and the industrial use of gold emits a small amount of additional CO2. Over time, physical gold will therefore continue to reduce the emissions intensity of a portfolio.
3. Gold “greens” a portfolio
Consequently, an increase in the share of gold in an investor’s portfolio significantly reduces the CO2 footprint and the emissions intensity of the overall portfolio. For a portfolio consisting of 70% equities and 30% bonds, a 10% gold allocation reduces emissions intensity by 7%. A 20% gold allocation reduces emissions by 17%, according to calculations by the World Gold Council.
4. Gold is versatile in its use
Gold is also very sustainable due to other properties. Its specific gravity and malleability make gold the perfect currency. It can be used to transport a large amount of value in a confined space, or it can be hammered into paper-thin gold leaf that is less than a micron thick. It was highly prized thousands of years ago and is still the first choice of central banks today. Unlike a paper currency, gold reserves do not need to be replenished to maintain purchasing power, because gold is largely immune to inflation.
5. Fiat currency harms the climate and the environment
Fiat currencies, on the other hand, have a major impact on the environment. There are approximately 1.5T coins in circulation worldwide, with a total weight of an estimated 5.25Mt, consisting mainly of nickel, copper, and steel. Banknotes in circulation in 2018 were around 576B. Every year, around 150B new banknotes are put into circulation. This corresponds to a stock-to-flow ratio of not even four. Or put another way, a banknote has a life expectancy of just four years.
The environmental damage that such enormous quantities of cotton, water, ink and polymers as well as metal continually cause is enormous, especially when compared to the 250Kt of gold that have been mined to date.
This raises the question of whether our current fiat money system can be classified as sustainable in two ways: the ecological compatibility sense and in the economic sense. This is because the negligible marginal costs of paper money production encourage an excessive expansion of the money supply, which causes both ecological and economic distortions.
A closer look reveals beyond a doubt that, contrary to a multitude of reports and prejudices spread by the media, gold can already be classified as a very sustainable investment based on ESG guidelines. The entire industry is making great efforts to eliminate the remaining blemishes.
Beyond the importance of gold for investors and the industry, the undeniable benefits of gold should raise the question of whether the current monetary system can be made more sustainable through greater integration of gold, not only for environmental reasons, but also economic sustainability considerations as well.
Anyone turning away from gold is in fact turning away from the world’s most sustainable metal in terms of its CO2 balance sheet, the amount of waste generated, and the amount of resources used.
Written by Ronald-Peter Stöferle, Fund Management & Research at Incrementum AG. Read the original report here.
Mr. Stöferle is a leading gold market expert based in Liechtenstein. He manages a fund that invests based on the principles of the Austrian School of Economics and is an author of the well-respected annual “In Gold We Trust” report.