“The Gold Fix originally took place at the offices of N M Rothschild & Sons, 1919”

London Gold Fix Calls Draw Scrutiny Amid Heavy Trading
by Liam Vaughan, Nicholas Larkin and Suzi Ring / Nov 26, 2013

“Every business day in London, five banks meet to set the price of gold in a ritual that dates back to 1919. Now, dealers and economists say knowledge gleaned on those calls could give some traders an unfair advantage when buying and selling the precious metal. The U.K. Financial Conduct Authority is scrutinizing how prices are set in the $20 trillion gold market, according to a person with knowledge of the review who asked not to be identified because the matter isn’t public. The London fix, the benchmark rate used by mining companies, jewelers and central banks to buy, sell and value the metal, is published twice daily after a telephone call involving Barclays Plc, Deutsche Bank AG, Bank of Nova Scotia, HSBC Holdings Plc and Societe Generale SA. The process, during which gold is bought and sold, can take from a few minutes to more than an hour. The participants also can trade the metal and its derivatives on the spot market and exchanges during the calls. Just after the fixing begins, trading erupts in gold derivatives, according to research published in September. Four traders interviewed by Bloomberg News said that’s because dealers and their clients are using information from the talks to bet on the outcome. “Traders involved in this price-determining process have knowledge which, even for a short time, is superior to other people’s knowledge,” said Thorsten Polleit, chief economist at Frankfurt-based precious-metals broker Degussa Goldhandel GmbH and a former economist at Barclays. “That is the great flaw of the London gold-fixing.”

Gold Capital
The U.K. capital is the biggest center for gold trading in the world, according to the London Bullion Market Association, which said more than $33 billion changed hands there each day in 2012, exceeding the $29 billion of futures traded on Comex, the New York commodities exchange, data compiled by Bloomberg show. Financial instruments including cash-settled swaps and options are priced off the London fix, according to the LBMA website. In private meetings this year, the U.S. Commodity Futures Trading Commission, which regulates derivatives, discussed reviewing how gold prices are set, according to a person with knowledge of the talks. The FCA review is preliminary and not a formal investigation, another person said. The people wouldn’t say what’s being looked at or if regulators suspect wrongdoing. Participants on the London call can tell whether the price of gold is rising or falling within a minute or so, based on whether there are a large number of net buyers or sellers after the first round, according to gold traders, academics and investors interviewed by Bloomberg News. It’s this feature that could allow dealers and others in receipt of the information to bet on the direction of the market with a high degree of certainty minutes before the fix is made public, they said.

‘Trickles Down’
“Information trickles down from the five banks, through to their clients and finally to the broader market,” Andrew Caminschi, a lecturer at the University of Western Australia in Perth and co-author of a Sept. 2 paper on trading spikes around the London gold fix published online in the Journal of Futures Markets, said by phone. “In a world where trading advantage is measured in milliseconds, that has some value.” Pat McFadden, an opposition Labour lawmaker who sits on Parliament’s Treasury Select Committee, said British regulators need to probe any possible abuses by dealers. “The gold market is hugely influential, and there needs to be public trust in the gold price,” McFadden said in an interview. “Question marks have been raised about the benchmark price of gold, and it’s important that regulators investigate.”

Benchmark Probes
Scrutiny of the gold market is taking place as the price of the metal has fallen 26 percent this year, heading for the first annual drop since 2000. Barrick Gold Corp. (ABX), the world’s biggest gold producer, plans to sell, close or curb production at almost half of its mines, and billionaire John Paulson’s PFR Gold Fund lost $630 million since the end of December, according to a person briefed on the returns. The price of gold at today’s London afternoon fix was $1,247.50 an ounce, down from $1,693.75 on Jan. 2. Regulators are looking into how benchmarks are set and governed across the financial system after five firms including Barclays and Royal Bank of Scotland Group Plc were fined a combined $3.7 billion for rigging the London interbank offered rate, or Libor. Investigators from Switzerland to Hong Kong are probing currency markets after Bloomberg News reported in June that traders communicated with each other and timed trades to influence foreign-exchange benchmarks and maximize profits.

‘No Oversight’
There’s no evidence that gold dealers sought to manipulate the London fix or worked together to rig prices, as traders did with Libor. Even so, economists and academics say the way the benchmark is set is outdated, vulnerable to abuse and lacking any direct regulatory oversight. “This is one of the most concerning fixings I have seen,” said Rosa Abrantes-Metz, a professor at New York University’s Stern School of Business whose 2008 paper, “Libor Manipulation?” helped spark a global probe. “It’s controlled by a handful of firms with a direct financial interest in where it’s set, and there is virtually no oversight — and it’s based on information exchanged among them during undisclosed calls.” London Gold Market Fixing Ltd., a company controlled by the five banks that administers the benchmark, has no permanent employees. A call from Bloomberg News was referred to Douglas Beadle, 68, a former Rothschild banker, who acts as a consultant to the company from his home in Caterham, a small commuter town 45 minutes south of London by train. Beadle declined to comment on the benchmark-setting process.

London Bullion
Spokesmen for Barclays, Deutsche Bank, HSBC and Societe Generale declined to comment about the London fix or the regulatory probes, as did Chris Hamilton, a spokesman for the FCA, and Steve Adamske at the CFTC. Joe Konecny, a spokesman for Bank of Nova Scotia, wrote in an e-mail that the Toronto-based company has “a deeply rooted compliance culture and a drive to continually look toward ways to improve our existing processes and practices.” Stewart Murray, chief executive officer of LBMA, which represents the gold and silver markets and publishes the results of the fix on its website, declined to comment, saying the group has “no jurisdiction or responsibility” for the process or its administration. A spokesman for the association, Aelred Connelly, said Nov. 22 that the group is reviewing its own benchmarks to see whether they conform to guidelines set by the International Organization of Securities Commissions in July. Those include making prices based on “observable” deals where possible. The LBMA oversees gold forward offered rates, which reflect bullion borrowing costs for different durations and are used in loan agreements.

Rothschild Office
The fix dates back to September 1919, less than a year after the end of World War I, when representatives from five dealers met at Rothschild’s office on St. Swithin’s Lane in London’s financial district. It was suspended for 15 years, starting in 1939. While Rothschild pulled out in 2004 and the discussions now take place by telephone instead of in a wood-paneled room at the bank, the process remains much the same. At the start of the call, the designated chairman — the job rotates annually among the five banks — gives a figure close to the current spot price in dollars for an ounce of gold. The firms then declare how many bars of the metal they wish to buy or sell at that price, based on orders from clients as well as their own account.

Gold Bars
If there are more buyers than sellers, the starting price is raised and the process begins again. The talks continue until the buy and sell amounts are within 50 bars, or about 620 kilograms, of each other. The procedure is carried out twice a day, at 10:30 a.m. and 3 p.m. in London. Prices are set in dollars, pounds and euros. Similar gauges exist for silver, platinum and palladium. The traders relay shifts in supply and demand to clients during the calls and take fresh orders to buy or sell as the price changes, according to the website of London Gold Market Fixing, which publishes the results of the fix. Bank of Nova Scotia (BNS) provides clients with updates as the fixing proceeds through a page it makes available through Thomson Reuters Corp. terminals. Thomson Reuters itself only receives and publishes the official fixing price after the call has finished, said Kate Reid, a spokeswoman for the company. Konecny, the Nova Scotia spokesman, didn’t provide any details about the bank’s service. Caminschi, the University of Western Australia professor, said the information on Nova Scotia’s feed is delayed and often incomplete. Bloomberg LP, the parent company of Bloomberg News, competes with Reuters in providing news and information as well as currency-trading systems.

‘Very Efficient’
David Govett, head of precious metals at Marex Spectron Group Ltd., a closely held commodity broker in London, said the benchmark gives clients an opportunity to buy or sell large amounts of gold in a single transaction anonymously, without having to turn to the futures market. “The fix is a very efficient way of doing it,” he said. “It’s very open, it’s very transparent and it’s a good thing.” A trader at one of the banks that sets the price defended the process, saying it’s structured to minimize opportunities to exploit the difference between the spot and fixing price of gold. He asked that neither he nor his firm be identified because he wasn’t authorized to speak publicly. Caminschi and Richard Heaney, a professor of accounting and finance at the University of Western Australia, analyzed two of the most widely traded gold derivatives: gold futures on Comex and State Street Corp.’s SPDR Gold Trust, the largest bullion-backed exchange-traded product, from 2007 through 2012.

Trading Surges
At 3:01 p.m., after the start of the call, trading surged to 47.8 percent above the average for the 20-minute period preceding the start of the fix and remained 20 percent higher for the next six minutes, Caminschi and Heaney found. By comparison, trading was 8.7 percent higher than the average a minute after publication of the price. The results showed a similar pattern for the SPDR Gold Trust. “Intuitively, we expect volumes to spike following the introduction of information to the market” when the final result is published, Caminschi and Heaney wrote in “Fixing a Leaky Fixing: Short-Term Market Reactions to the London P.M. Gold Price Fixing.” “What we observe in our analysis is a clustering of trades immediately following the fixing start.” The researchers also assessed how accurate movements in gold derivatives were in predicting the final fix. Between 2:59 p.m. and 3 p.m., the direction of futures contracts matched the direction of the fix about half the time. From 3:01 p.m., the success rate jumped to 69.9 percent, and within five minutes it had climbed to 80 percent, Caminschi and Heaney wrote. On days when the gold price per ounce moved by more than $3, gold futures successfully predicted the outcome in more than nine out of 10 occasions.

Information Dissemination
“Not only are the trades quite accurate in predicting the fixing direction, the more money that is made by way of a larger price change, the more accurate the trade becomes,” Caminschi and Heaney wrote. “This is highly suggestive of information leaking from the fixing to these public markets.” For derivatives traders, the benefits are clear: A dealer who bought 500 gold futures contracts at 3 p.m. and knew the fix was going higher could make $200,000 for his firm if the price moved by $4, the average move in the sample. While the value of 500 contracts totals about $60 million, traders may buy on margin, a process that involves borrowing and requires placing less capital for the bet. On a typical day, about 4,500 futures contracts are traded between 3 p.m. and 3:15 p.m., according to Caminschi and Heaney.

‘Be Amazed’
The trader at a fixing bank said there’s little money to be made from buying and selling gold derivatives during the process because information from the call is disseminated into the wider market so quickly. Arbitrage opportunities also are limited because the chairman will adjust the price during the call if there are moves in the spot and futures markets, he said. Govett, at Marex Spectron, said it’s common for people to try to exploit the difference between the current price of gold derivatives and the final fix. In terms of timing and money available from such arbitrage, “it is quite small, but you’d be amazed at the amount of people who try to do it,” said Govett, a trader for 30 years. Abrantes-Metz, who helped Iosco formulate its guidelines, said the gold fix’s shortcomings may stretch beyond giving firms and clients access to privileged information. “There is a huge incentive for these banks to try and influence where the benchmark is set depending on their trading positions, and there is almost no scrutiny,” she said. Abrantes-Metz said the gold fix should be replaced with a benchmark calculated by taking a snapshot of trading in a market where $19.6 trillion of the precious metal circulated last year, according to CPM Group, a New York-based research company. “There’s no reason why data cannot be collected from actual prices of spot gold based on floor or electronic trading,” she said. “There’s more than enough data.”

Bill Murphy, Chairman of the Gold Anti-Trust Action Committee delivers his testimony about a whistle-blower in the gold price suppression scheme to the Commodity Futures Trading Commission on 3/25/10.

UK regulator launches currency-rigging probe
by Harry Wilson / 16 Oct 2013

“The Financial Conduct Authority (FCA) confirmed it was at the “early stage” of an inquiry into potential rigging of the $5.3 trillion (£3.3 trillion) daily global trade in currencies as part of an international probe into what could be the next scandal to hit the banking industry. In a statement the FCA responded to mounting speculation that it had launched a probe, admitting it had started “gathering information from a wide variety of sources including market participants. Our investigations are at an early stage and it will be some time before we conclude whether there has been any misconduct which will lead to enforcement action,” said a spokesman for the FCA. The statement follows an articles by Bloomberg that highlighted alleged currency manipulation by banks. According to the newswire, British regulators have looked at instant messages written by US investment bank JP Morgan’s chief London-based dealer, Richard Usher. These communications are purported to include details of Mr Usher’s trading positions. Mr Usher, who formerly worked at Royal Bank of Scotland before joining JP Morgan in 2010, has not been accused of any wrongdoing. JP Morgan declined to comment. A spokesman for RBS said: “We can confirm that we were contacted by the FCA on this matter. Our ongoing enquiry into this matter continues and we are cooperating fully with the FCA and our other regulators. We can provide no further comment.” The Wall Street Journal reported that traders held chat discussions in which they dubbed themselves “The Bandits Club” and “The Cartel”.

The investigation is said to be focusing on the so-called “WM/Reuters” rates that are used by investors as a benchmark to work out what they pay for currencies and the day-to-day value of their portfolios. Due to the size of the foreign exchange market, even tiny changes in the recorded rates could affect the value of investment funds, as well as pensions and savings. The US Department of Justice has already confirmed it is investigating potential currency market manipulation, while the European authorities have launched their own antitrust review. If proved, the misconduct would follow a long line of industry scandals uncovered since the financial crisis. Last year, Barclays became the first bank to settle claims over its attempts to rig Libor. Since then RBS, UBS and ICAP have all reached similar settlements. An international investigation is also underway into the potential manipulation of the ISDAfix benchmark that is used to price hundreds of trillions of dollars of derivatives.”

All That Glitters
by Matthew Hart / November 11, 2013

“Where does the desire for gold come from? The oldest gold artifacts date back 6,000 years. Unearthed by accident in 1972 in the town of Varna, Bulgaria, near the Black Sea coast, when a backhoe operator digging a foundation struck a Neolithic tomb, the treasure includes a miniature breastplate, tiny, exquisitely fashioned antelope with curled horns, and a delicately curling helix, like a snippet of gold ribbon. All perfectly useless. Why did people make them? In The Golden Constant, a classic study that tracked gold’s purchasing power through time, the University of California, Berkeley, economist Roy Jastram confessed to a “nagging feeling that something deeper than conscious thought, not an instinct but perhaps a race-memory,” was behind our attachment to gold. In other words, we loved it because we always had.

Two years ago I set off into the gold world, at a time when the gold price was smashing records. Bullion trades were flying around in London like one-ton chunks of hail. Sixty centuries after our distant ancestors had hammered out their ravishing little objects, we, their descendants, staggered through a tempest of assets, a world immeasurably richer than the one glimpsed at Varna. I had written about gold and diamonds on and off for 30 years but had never seen a fever like the one then sending drillers out to ransack the planet for gold. On assignment for Vanity Fair, and to write a book, I set out to take its pulse.

Every weekday morning at 10:30, a bullion dealer in the precious-metals trading room of HSBC Bank in London picks up the phone and punches in to a special line. The dedicated line connects him to four other bankers—the members of a powerful and self-policing group called the London Gold Fixing. They set one of the best-known asset prices on earth: the price of gold. “There are loads of different places in the world to buy gold,” said Jeremy Charles, a trim, tough-looking native Londoner who started out at 19 as a tea boy in the gold rooms of the N. M. Rothschild bank. “But at 10:30 you find things sort of stop, while the whole market watches London.”

Charles would know. From taking care of the tea-things at Rothschild’s, he went on to run HSBC’s global bullion operations. He became chairman of the London Bullion Market Association, the group that oversees the world’s biggest gold market. He saw that market expand in 10 years from a sedate trade, tucked into the tangle of lanes behind the Bank of England, into a hairy, trillion-dollar casino. The only thing that hasn’t changed is its secrecy. Of the five banks that run the fixing (the others are Deutsche Bank, Barclays, Societe Generale, and ScotiaMocatta, the gold-trading arm of Canada’s Bank of Nova Scotia), HSBC was the only one that would even let me in the door.

The fixing starts with the “nomination” of a price by the bank holding the rotating chair. Often, this opening number is midway between the last recorded London buying and selling prices. The chairman asks who would buy and who would sell at the suggested figure. If the numbers of buyers and sellers fail to match, the figure is adjusted up or down, until it hits a point where both are equally enticed into the market. When the banks locate that point of equilibrium—buyers matching sellers—the price is “fixed” and flashed out instantly around the world. They repeat the process in the afternoon.

London has been the world capital of gold since 1671, when Moses Mocatta bought 75 ounces from the East India Company and founded the first bullion bank. Some of the firms dealing gold in London have been doing it for centuries. When Jeremy Charles started in the business, in 1975, Rothschild still banked from its old stone building at 1 King William Street. The daily gold fixing took place in a paneled room hung with portraits of deceased grandees. In those days, a small Union Jack flag lay on its side on the desk in front of each banker. As the fixing got under way, bankers would raise their flags and shout, “Flag!” when they wanted to draw the chairman’s attention to a change in their position. The price was not fixed until all the flags lay on their sides again, signaling that sellers finally matched buyers. Today, most of the banks have moved downriver to the towers of Canary Wharf, yet the bankers still bark, “Flag!” into the phone as the action of the fixing surges to and fro, and the gold they trade in has not changed. Market makers deal only in bars refined to the standard known as London Good Delivery. When central banks and hedge-fund billionaires want gold, that’s the kind they want.

The world’s top gold bazaar hides behind an impenetrable curtain. No outsider is allowed to watch the fixing. When I spoke to Charles, we had our interview in a meeting room on a high floor at the bank, with a view of the Thames flowing past Greenwich and winding out to sea. He had tightly cropped gray hair and an easy manner, sitting there in his charcoal pinstriped suit, pale blue shirt, dark tie, and toe-capped oxfords. He clearly enjoyed describing the vast network of buyers and sellers connected by the fixing: a far-flung web of the bank’s customers and the customers’ customers, linked by phone around the world so that “every man jack and dog who wants to buy gold is on the line.” And as he showed me out, and I thought we’d become a bit chummy, what with the tea-boy reminiscences, I asked if we could stop by the precious-metals trading room so I could peek inside and see what it looked like. “Oh, that’s strictly forbidden,” he said, sucking in his breath and shaking his head. “Jeremy,” I protested, “it’s guys with phones.” “Sorry, mate. Can’t be done.”

The opacity of the fixing has a consequence: it’s impossible to know if the price is being rigged. Because the banks own bullion, it’s fair to wonder about this, and people do. The Commodity Futures Trading Commission, in Washington, D.C., began looking at the fixing early this year. According to The Wall Street Journal, the C.F.T.C. wanted to see if prices were being manipulated. The gold price determines the value of such derivatives as the $198 billion of precious-metals contracts held by U.S. banks last year. The London fixing does not really “fix” the price but, rather, expresses the consensus of bullion players in light of market action. In that way, it supports the market by conferring a sort of senatorial stamp on the proceedings. The market itself immediately sweeps aside the fixing and resumes the business of thrashing the gold price around according to the passions of the moment. For a decade those passions pushed up the price. An ounce of gold cost $271 in 2001. Ten years later it reached $1,896—an increase of almost 700 percent. On the way, it passed through some of the stormiest periods of recent history, when banks collapsed and currencies shivered. The gold price fed on these calamities. In a way, it came to stand for them: it was the re-discovered idol at a time when other gods were falling in a heap of subprime mortgages and credit default swaps and derivative products too complicated to even understand. Against these, gold shone with the placid certainty of received tradition. Honored through the ages, the standard of wealth, the original money, the safe haven. The value of gold was axiomatic. This view depends on a concept of gold as unchanging and unchanged—nature’s hard asset. Yet gold had changed. It was not the same as it had always been. If it was, the price could not have gone up like a rocket. For that to happen, gold would have to be unhooked from its own physicality, from its metallic mass, and its value allowed to surge through the asset world propelled by the fitful winds of human emotion. As it was.

Considered as a single lump, there’s not that much gold in the world. All the gold ever mined in history would cover a tennis court to a depth of 35 feet. At today’s price it would be worth about $6.5 trillion. That doesn’t sound like such a big sum for 6,000 years of hoarding. The world oil market creates that much value every week. But oil eventually gets used up. Gold is never destroyed; it sits there forever in its imaginary block, glowing on the tennis court and growing by a few more inches each year. But while it sits there, people are buying it and selling it and buying it again. Billionaires like George Soros and John Paulson piled into the action, helping to convert the London market from a sleepy trade into a frenzied trillion-dollar bazaar, where a volume of bullion equal to all the gold ever mined in history turned over every three months. There was one main reason for this: buying gold got easy.

Historically, gold has been a cumbersome asset. It’s one of the densest elements. A standard gold bar is the size of a box of Kleenex, but it weighs 27 pounds. Even when ownership changed hands, people didn’t often move the gold, or if they did, not far. In the basement of the Federal Reserve Bank of New York, in lower Manhattan, is the biggest gold stash in the world. It has more bullion than the United States Bullion Depository in Fort Knox, Kentucky, because it contains gold belonging to many countries. When a nation settles up a trade imbalance in gold, the bullion doesn’t leave the Fed. It gets loaded on a trolley and then trundled from one part of the vault to another. But, unless you’re a country, who wants to trundle? Today, stupefying volumes slosh back and forth on the London market. In a single quarter surveyed by the industry, 10.9 billion ounces of gold changed hands—125 times the combined annual output of all the world’s gold mines. The wedge that opened up the market and made such trading possible was a product that appeared for sale in the United States in 2004 and swept away impediments to gold ownership.

Official hostility to private gold went back decades, to one of the first acts of Franklin Roosevelt’s administration. The edict, Executive Order 6102, “forbidding the Hoarding of Gold Coin, Gold Bullion, and Gold Certificates within the continental United States,” made it a crime for anybody to own gold. Roosevelt wanted to protect the government’s reserves, and the order forced owners to sell their bullion to the Treasury. The prohibition against private bullion ownership was not repealed until 1974, three years after President Nixon killed the old gold-standard system by ending the convertibility of the dollar into gold. Still, gold remained an awkward asset to buy and store. Buyers had to negotiate commissions, and find and rent a place to keep it. At the same time, there was more available. New technologies were making gold mines more productive. When George Milling-Stanley, an executive of the World Gold Council, surveyed potential investors to ask why they were not buying, they told him the process was too complicated. They wanted something easy to trade that did not have to be vault-stored, and Milling-Stanley set about inventing it. In the gold world, they always call the product that resulted by an epithet: the Spider.

The Spider is an exchange-traded fund, or E.T.F., an investment composed of a basket of assets that trade with the ease of trading stock. In this case the asset is a single one—gold bullion. The nickname Spider derives from the fund’s full name, SPDR Gold Shares. (The first-ever E.T.F. was called Standard & Poor’s Depositary Receipts—SPDR.) In its way, the Spider has advanced bullion ownership more than any measure since the creation of gold money in the seventh century B.C. Before it could do that, Milling-Stanley had to convince the Securities and Exchange Commission to license it. “They hadn’t a clue how the gold market worked,” he said. “I would go down to Washington with a lawyer and a gold trader and someone who had dealt in E.T.F.’s, and we’d be ushered into a cavernous conference room and sit around an enormous table. We’d start to talk about how the gold market worked, and you’d notice that people were filtering into the room, and at the end I’d be addressing 40 or 50 people. There was a tremendous interest in how this exotic product worked.”

To license the E.T.F. for sale, the S.E.C. had to be convinced that every share would represent real gold bullion in a vault. It took four years to subdue the complicated transactions that accomplish this into a system the regulators could approve. The Spider went on sale in November 2004. For the American gold believer, the warm feeling of bullion ownership was now a phone call away. In four days the Spider took in $1 billion. The idea that gold is a secure store of wealth has survived much evidence to the contrary. Gold has gone up but also plummeted. Toronto’s Barrick Gold Corporation, the largest gold-mining company in the world, grew from a $14 million gold mine in northern Ontario into a $50 billion international colossus under the guidance of a man who understood the futility of trying to outguess a commodity price. With a scheme that sprung from the bitter lessons of his own past, he found a way to circumvent price fluctuations and create a stable revenue stream from which to water his ambitions. He was a silvery, immaculate, dashing, and indefatigable tycoon. He rose from his own ashes, and, more than anyone, he created the scale of the modern gold supply.

Peter Munk was born in 1927, heir to a Hungarian Jewish banking fortune. In 1944, when the Nazis started rounding up Hungary’s Jews for shipment to the death camps, the 16-year-old Munk and his family were among the 1,684 who escaped on the Kasztner train, a transport arranged by the Jewish lawyer and activist Rezso Kasztner in exchange for the payment of a bribe in cash, gold, and diamonds to the death-camp architect Adolph Eichmann. Munk reached safety in Switzerland and later immigrated to Canada. I met Munk at Claridge’s in London, in a fifth-floor corner suite. A spray of white blossoms blazed on the mantel of an orange marble fireplace, and gauzy curtains stirred in the open window. He had silver hair, dark blue eyes, and a hawkish gaze. Munk was 84, but his motions were precise and quick. He paced the little sitting room with rapid steps and spoke about the struggles of his life, including an ill-timed venture into oil in 1980 and his catastrophic losses when the price collapsed. He retreated to his house at Klosters, the Swiss resort where fellow residents included the financier Nathaniel Rothschild, and where Prince Charles likes to ski. It was there that Munk hit upon a business where the underlying commodity price was not rising but falling. The world’s leading supplier of this commodity, South Africa, was in a countdown to political upheaval, and, what’s more, companies that mined this metal held their value even when the underlying metal price was falling.

“Gold, sir,” Munk declared, flashing up a forefinger, “gold! It carried the highest multiples. Gold shares sell at a very high value in relation to their earnings, because a gold share is perceived to be not just a share but an option or a call on gold as well. If you buy Swatch watches, if you buy Nestlé, you buy the earnings. If you buy gold shares, you buy it because—hey! This company has two million ounces of gold, and I think that gold will go up in five years! “We had only a few million dollars left in the kitty [after the oil debacle], not more than $20 million. I said, ‘Guys, let’s find a gold mine.’ ” By “find” Munk meant locating an existing operation that he could improve. This strategy led to such successes as the Goldstrike mine—one of the richest gold mines in history. When Barrick bought the Nevada property in 1987, Goldstrike had defined reserves of 600,000 ounces; by 1995 it had almost 30 million.

From the beginning, Munk anchored Barrick’s growth in North America, stressing to investors the security of the United States against the risk of South Africa. Investors call political uncertainty “country risk,” but another risk also engaged Munk’s thoughts: price. With his previous oil losses in mind, Munk seized on a system that protected Barrick from a falling price and guaranteed the flow of cash the company would use to buy more mines, expand them, and become the biggest gold source in the world. The system is called “forward selling.”

Gold is sold forward when a miner contracts with a commercial bank to deliver an amount of gold at a future date. The commercial bank then borrows that amount of bullion from a central bank and sells it in the market at the spot price. The money then goes into an interest-bearing account. When the miner delivers the promised gold, he gets the money and most of the interest. The commercial bank keeps a share of the interest and returns the gold to the central bank, with a small amount of interest.

Forward selling made Barrick bulletproof to a falling price. Even if the price rose, Barrick could extend the hedge at its own option until the price returned to a favorable level. By the company’s own reckoning, Barrick’s forward selling added $2.2 billion to its profits over 15 years. Other miners also sold forward, but Munk mastered the strategy to an unmatched degree, growing his company into a colossus big enough to withstand what happened next. The forward game went sour.

A single input demolishes the forward seller’s math: a gold price that keeps rising. Finally, the miner must deliver gold for less than it is worth. When that happens, the hedge is said to be “under water.” By 2003, Barrick’s massive hedge—already reduced from 24 million ounces to 16 million—was dragging the company down. In a year that saw the gold price climb 18 percent, Barrick’s share price fell 11 percent. The hedge preoccupied Munk and his managers. “They spent a tremendous amount of time defending the hedging program,” a source close to the company told me. “Investors want exposure to metal prices. Even if Barrick could roll the contracts forward, people were always skeptical.” Four years ago, Barrick bought out its forward contracts for a bruising $5.7 billion. In doing so, it made a different bet: that expensive gold was here to stay.

When the gold price rises, it waves a magic wand over the earth. Ground that was worthless is suddenly transformed. The definition of ore is rock that can be profitably mined. God does not create ore; a rising price creates it. As the gold price rose and the bullion market boomed, and headlines recorded the astonishing hordes of such avid bullion players as the hedge-fund billionaire John Paulson, who had almost $5 billion in a single fund, explorers swept out into the far corners of the world. In the wastes of Mongolia and the deserts of western Mauritania, the air trembled to the sound of drills. Prospectors uncovered staggering deposits, and on a February night in London I boarded a British Airways jet and flew to Uganda on the first leg of a trip to visit a sensational discovery.

I arrived in Uganda late and spent the night at a hotel on the shore of Lake Victoria, battling a relentless cloud of gnats. I had a history of gold with me, and as I leafed through the pages, I spotted a reference to the Queen of Sheba bringing gold to King Solomon. I was on my way to a discovery much richer than the fabled queen’s mines. In the gold world, everyone was talking about Kibali, a breathtaking target in one of the most benighted countries in the world: the Democratic Republic of Congo. Like the country itself, the deposit had a tortured past and a tantalizing future. In the morning, I went back to the airport and squeezed into a single-engine Cessna Caravan stuffed with overheated mining-stock analysts. They had come straight from a grueling tour of gold mines in the Ivory Coast and Mali. And except for a cheerful, fresh-faced young woman from California, they were all damp and grumpy. We took off for El Dorado.

The Kibali gold project lies in the Congo’s northeastern Orientale province, a formerly war-torn region lately pacified by the United Nations. Even so, the Lord’s Resistance Army, a killing machine of drug-addled child soldiers based in Uganda, had been murdering and raping their way through the region. We cleared Congolese formalities at Bunya, an airport bristling with the machine-gun nests of the U.N. force. From Bunya it was a short flight to Kibali. The main ore body sat in a desolate valley scarred by exploration tracks. From a hilltop vantage point beside the cell phone tower we could see the crumbling huts of a village on the far slope. A drill rig rattled on the hillside. The equatorial sun beat down through a layer of thin gray cloud.

Belgians mined the valley in colonial days. At the time of the Congo’s independence they abandoned it. Artisanal miners then worked the site with picks. The people lived on what they got for the gold from itinerant buyers after the pit boss took his cut. In 1998 Ugandan soldiers seized the digs, forcing local miners into servitude. One of the worst outbreaks on record of Marburg hemorrhagic fever followed the arrival of the Ugandans. In the local villages, 95 percent of the children suffered from malaria. Nothing thrived in the valley but misery and goats.

In the U.N. peace that followed the expulsion of the Ugandans, a small exploration company, Moto Goldmines Ltd., optioned the Kibali property and started to drill. “We began to watch them in 2006,” Rod Quick told me. Quick was the head of exploration for Randgold Resources, a Channel Islands–based gold miner largely run by South African gold veterans. “I tracked their data hole by hole,” said Quick. “I plotted it. I visited the site. Each time we got a result from them I’d put it into the mix.” After three years of exploration, Moto had outlined a five-million-ounce deposit, and Randgold moved to capture it. “The first thing we did,” said Mark Bristow, Randgold’s chief executive, “was to get the [Congolese] government to buy in. I told them, ‘If you are not supportive of our bid, we will not go ahead. We promise we’ll build a mine; here are our plans. We are launching a hostile takeover. Are you behind us? We don’t want a fight. We don’t want an auction. We want to kill it.’ ”

Bristow is a burly, 54-year-old South African, with a Ph.D. in geology and a weakness for such diversions as hurling himself out of airplanes for a 30-second free fall before deploying his parachute; shooting Grade 5 rapids on the Zambezi River; and bungee-jumping at Victoria Falls, where you drop 95 feet before you reach the end of the cord. He has homes in London, Johannesburg, Mauritius, and Jackson Hole, but mostly he lives in a succession of airplane seats, crisscrossing Africa to visit his gold mines. In early 2009, with the Congolese government on board for a piece of the action, Randgold began its run at Moto. Then a competitor appeared: Red Back Mining, a Vancouver-based company that had made a discovery in Mauritania and wanted to build a portfolio of reserves.

Red Back made an all-paper offer (its own shares in exchange for Moto stock) that effectively valued Moto at $486 million. But Randgold had already lined up critical support among investors with large blocks of Moto stock. This enabled Randgold to respond to the Red Back offer with a “blocking stake”—a share position that enabled it to block Moto’s board from accepting the Red Back offer. Nevertheless, the ability to stave off Red Back would last only up to a point. That point would be another Red Back offer, tendered quickly, and higher than the one that Randgold’s Bristow was contemplating. At such a level, Randgold’s support would probably dissolve. It was a gold-hungry world, with the gold price streaking upward. A ferocious competition for reserves was driving a feeding frenzy of industry consolidation. To get more gold, big miners swallowed smaller miners. Red Back itself would vanish into the jaws of a larger company not long after the events we are describing. But at the time, the company was still controlled by Lukas Lundin, the scion of a billionaire Swedish mining family, and Bristow had to act fast.

Bristow worked on his counterbid while roaring northward through Africa on a 49-day motorcycle trip from Cape Town to Cairo with three of his best friends and his two sons. “We had a huge intercom system on all the bikes,” said Grant Bristow, a 22-year-old aerospace engineering student at the University of Texas. “The helmets were wired so we could take phone calls individually by satellite. But if you used the intercom to talk to somebody else, you overrode any incoming call. So there were these long periods when Dad was doing business and no one was allowed to talk.”

They were riding high-endurance BMW F800GS bikes with special aftermarket shocks to handle the brutal roads. In spite of this, the potholes and washboard surfaces destroyed the shocks on four of the bikes. On the stretch through northern Kenya they also had to keep an eye out for the Sudanese bandits who were raiding the truck convoys headed for the border. Still, business was business. “Moto’s shareholders were not happy with the Red Back paper,” Mark Bristow said. “It was a time when everybody was shit scared of the Congo. So we launched an offer at a slight premium, and half of it in cash.” By the time Bristow and his party roared into Addis Ababa, they had Kibali in their pocket.

One moonless night in eastern Senegal, I drove into a bamboo forest. We made our way along a twisting track until we reached the fantastic scene where the drill rig hissed and roared. Covered in white rock powder, the Ghanaian drillers looked like ghosts. They wore bandannas to keep from breathing dust. The drill was white and the men were white and the ground was white, and all around was the thick, black night. A quartz bed outcropped there. Gold-bearing veins—“pay veins”—ran through the quartz. One vein was 30 feet thick at its widest. The quartz plunged into the earth at an angle of 50 degrees for about a mile. It also tilted, or “dipped,” as geologists say. Think of an angled plane threaded with gold descending into the ground. The deeper they drilled, the more they found. On the night I was there, the drills had outlined 70,000 ounces. At that night’s gold price, the deposit was worth $100 million. A few months later they had more than doubled the estimated gold to 156,000 ounces. Now it’s 374,000 ounces—more than a half a billion dollars worth of gold.

The Senegalese gold property belonged to Teranga Gold Corporation, a Toronto miner with a 400-square-mile exploration package on the Mali border. The first modern gold discovery in the region came in the late 1980s, on the other side of the frontier, when an explorer looking for the lost gold mines of Mali’s imperial past found one. Other discoveries followed in Mali, and when Senegal changed its mining code in 2004, making the country more attractive to foreign companies, explorers moved across the Faleme River border. They found gold there, too, and, more than that, people who knew how to mine it.

One morning I returned to the bamboo forest with a geologist named Michel Brisebois, a Quebecer who had started out as a lumberjack. He’d developed a taste for roaming the world, and decided that the profession of geology offered the best way to finance his wanderlust. We rode up with a camp employee, a South African army veteran who droned on and on, like a radio that could not be turned off. The subject that morning was Horrible Things that Different Kinds of Ammunition Can Do to Your Body. He dwelled long and lovingly on the holes made by certain bullets—tidy hole at entry, messy hole at exit. Then the program switched to Snakes and Scorpions. In that part of Senegal they have the emperor scorpion and the black-necked spitting cobra. “But the worst is the puff adder,” he said cheerfully as Brisebois and I piled out at our starting point. “The toxin of the puff adder is a cytotoxin. It attacks your cells. People do not always die, but they are never the same again.” He gave us a smile like a bandolier loaded with white bullets. Brisebois shot him a sour look and struck off into the bamboo. His tan vest bristled with pens, and a compass dangled from his neck. The day was fresh, and the woods suffused with a straw-colored light. The smell of woodsmoke lay on the air. Local farmers clear the forest with fire. “The burned area is very efficient because you can walk quickly through it and see the rock,” Brisebois said when we reached a quartzite ridge. He picked up a stone and opened it with a tap of his pick. “You see these boxlike shapes? They are an iron sulfide called pyrite—the fool’s gold that many people recognize. In this deposit, the real gold is associated with the pyrites.”

On the ridge, the bamboo broke the sunlight into splinters. A drill roared nearby. A trench excavated with a backhoe had exposed a slot in the hill we were exploring. At the bottom of the trench gaped a deeper hole, about a yard square, but this one had been dug by hand. A well-made buttressing of logs protected it from collapse. The shaft penetrated too far down to see the bottom. The people who made this deeper hole were descendants of miners who had been digging in the region for a thousand years. They saw the backhoe trench as a free head start. Also, they reasoned that if the geologists thought there might be something there, it was worth a look. Sometimes the reverse happens, and the explorers sample where the local people have been digging. In the trench, human history has narrowed to this single quest.

Gold is its own country. One morning, on the bank of the Faleme River, I watched a motorcycle buzz into view from the bush on the Mali side. The rider descended the muddy slope, bounced across the shallows, and tore off into Senegal, headed for the sprawling artisanal mine site at Soreto. Miners commute to it from Mali every day, citizens of an entity that supersedes the boundary: the Commonwealth of Gold.

The mine itself was a fairground of men and women, laborers and vendors, miners, children, dogs. The women and girls blazed with gold earrings. People greeted us with shouts. “Bonjour! Ça va?” A woman sipping from a glass of yellow liquid raised it to us in a toast and scorched us with her smile.

They were mining a strike that ran for half a mile. They had trenched the length and screened it with bamboo shades. From the floor of the trench, shafts went down to the mining galleries. Some of the shafts reached depths of 100 feet. Sometimes they hit water, and the miners clubbed together to rent pumps. On a rough head count, about 300 people were working in the mine. Many more supported it.

Mechanics serviced the pumps and blacksmiths made tools. The smiths pumped their bellows with one foot while hammering at iron implements on their anvils. Vendors sold ice pops and water, cigarettes and candy. A small solar array powered a battery-charging station for cell phones. Masses of bicycles and Chinese motorcycles leaned together under a thorn tree. A man with an air pump between his knees sat in the scanty shade repairing tires.

The whole site, and others like it, belonged to the village of Diabougou on the Faleme River. The chief levied “license fees” on miners who were not native to the village, which was most of them. The hamlet had swelled from a population of 1,000 to about 10,000—a rapid influx of outsiders drawn by the gold boom. Diabougou was a boomtown. In stalls along the widest thoroughfare you could buy shoes and shirts, blankets and mattresses, plastic toys, vegetables, fish, televisions. Two cell phone dealers competed head-to-head across the street. On one side of the town stood the old village of round mud houses with thatched roofs; on the other, dwellings bashed together out of anything at hand—mud, tin, planks, cardboard, vinyl sheets. Scooters buzzed through a labyrinth of lanes, and boys toiled up from the river with handcarts loaded with plastic water jugs.

Inexorably, the gold rush was erasing an old way of life. On the way to the town, we’d met a large herd of goats filling the road. The goatherd was a young man in outlandish costume. He wore a round black hat with a narrow brim and a loose, ragged skirt almost to his ankles. Tall and thin, he looked at us with profound astonishment. He emitted a series of short, low whistles, like a sentence of code, and the goats surged off the road. He stopped in the grass and gaped at us in bafflement as we went by. I was told these herders have roamed immemorially through Mali and Senegal, following the grass, and are now disappearing. They mine gold instead.

On the flats beside the river stood a line of sluices fed by water pumps. To recover gold, the miners directed water down a sluice and shoveled ore in at the top. The water carried the ore over strips of carpet nailed to the bottom of the channel. Light soils flowed away while the heavier, gold-bearing gravels snagged in the carpet. They would use mercury to concentrate the gold, handling the toxic substance with bare hands. According to Moussa Bathily, a Teranga geologist, Friday was the day reserved for this gold recovery. No one would work at the mine site on Friday. I asked him if that had anything to do with Friday being the Muslim holy day. “Oh, no,” he said. “They leave the mine because they say that Friday is the day the devil comes to put back the gold.”

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