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.