Illegal Peruvian gold

Some of the illegal mining information we see leaks into the American press through press releases by environmentalists or other activist groups. As these folks are less concerned about production levels, black gold data tends to be scanty.

An organization named Verite has issued a report on Peruvian slave labor and child labor in the illegal gold mining operations in the Madre de Dios and neighboring departments. Their report contains one data point of note: gold illegally mined in the remotest corner of the Amazon ends up in Switzerland, a refining center.

Thus, the illegal miners have middlemen who must be buying from the bush and then selling on to the Swiss refiners.

Now note that analysts are starting to use gold flows into Switzerland as a proxy indicator for Asian demand. In general terms it means that illegal gold flowing into Switzerland likely moves east. It would not be far fetched to say that major, unknown quantities of illegal gold is helping supply eastern demand. Consider what that means for gold prices.

Let's try a thought experiment here. Imagine the whole amount of illegal Peruvian gold passes through Switzerland. It's a stretch, but let's consider what that means. This story says, "the illegal gold industry is worth roughly $1.8 billion dollars. Cocaine trafficking is worth about $1.2 billion."

Using our trusty calculator, we apply a conservative gold price of $1,300 an ounce to $1.8 billion and work our way backwards to 43.2 short (American) tons (not tonnes) of illegal production per year which converts into 39.25 tonnes. By the way, Peru's declared national gold reserves are 34.7 tonnes. Canada's are 3.4 tonnes.

These numbers are estimates but suggestive. In terms of total official world gold production, 39.25 tonnes may not impress us terribly, especially when other illegal flows are factored in. But consider adding in Tanzania's illegal 20 tonnes. Toss in illegal output from Guyana and Surinam. To paraphrase Everett Dirksen, pretty soon, your talking real money.

We'll try, over time, to build a running list of these estimates country by country. The results should be stunning. But we can't hope to even guess at all the black gold beyond this illegal mining category.

Mainstream concept?

"Monetary reset" gets 3,100,000 results in a Google search.

Types of black gold

It would be a mistake to limit the idea of black gold to what is illegally mined and sold worldwide. We can propose several categories of black gold:

1. Illegally mined gold, quantities unknown
2. Undeclared production in states like China, Russia, Kazakhstan, etc.
3. Missing state hoards (Libyan, Iraqi, etc.)
4. Understated central bank reserves (we tend to focus on overstated, re-hypothecated gold)
5. Gold privately owned in large quantities
6. Disguised holdings (i.e. industrial inventory, museum artifacts. etc.)
7. Small holdings of unknown provenance

The first two categories here are in continuous production, feeding into pools  4-7. Item 3 may be part of some state's item 4.

Consider the effect on world gold supply of a continuous production that is large and unknown and lasts for decades.

There is also a folkloric category or two which critics of black gold tend to focus on:

1. Lost treasure
2. Secret (private) discoveries/mines 

Those ideas gather more scorn than they deserve.

Here is a further more difficult concept: black gold reserves.

Everyone is familiar with the national strategic oil reserves. The U.S. federal government has a stated amount of oil that it owns and holds for emergencies. But what if the stated amount is not the full amount?

Moreover, what if the government holds known undeveloped discoveries under designated parks, test ranges or federal land restricted from mineral development? The feds hold over 60% of Utah and Idaho, to name just two mineral rich states.

We flatter ourselves that we know the levels of international gold production and the amount produced in history. This false knowledge will lead many traders to grief and many political forecasters into expectations that do not correlate to reality.

Black fiat

Mish Shedlock has famously been a deflationist for some time, against our personal experience of the cost of living. In recent interviews, Jim Rickards posed the question, what if deflation and inflation are now contending with each other to produce an overall inflationsit or deflationist effect (or even a wash)? Today, on Keiser Report 507, Antal Fekete characterized the overall environment as profoundly deflationist based on the magnitude of the destruction of productive capital. Now considering the immense effects black gold can have on gold flows and gold pricing, it seems Fekete has developed an interesting fiat counterpoint. For where the river of black gold is a net positive (economically) that can help explain certain gold market phenomena, the black hole of ongoing, accelerating capital destruction explains much in finance and the general economy. The question arises, what if our insane money printing is an effort to replace continuously destroyed capital? Yesterday, Jim Willie told Greg Hunter that the fire consuming capital was a collapsing credit swaps derivatives market. He said that he believed the stated QE figure of a trillion-dollars-per-year was a fraction of the new money supply being created to stave off capital losses among the TBTFs. In other words, there is a river of black fiat being poured onto the fire of new bankster derivative losses. Capital destruction may have elicited black fiat. It's not far fetched.