Gold

by Matthew Hart

  Barrick was enlarging the deposit by the day. “We were finding the equivalent of a small gold mine every week,” said Hill. They needed miners immediately. Hill knew where to find them, but where would they live? Elko was a small town with little surplus housing. Moreover, the prospective employees would bring problems of their own. “We wanted experienced people,” said Hill, “and a lot of them came from mining towns that had gone bust. Those people had houses and mortgages that they’d had to walk away from. So they didn’t have good credit.”

  Barrick created a plan to encourage banks to offer mortgages. The company bought land north of the Interstate in Elko, and subdivided it. A contractor in Salt Lake City agreed to build a standard three-bedroom house for $50,000. The cost of each lot to Barrick was $12,500, for a total cost per house of $62,500. Barrick would lend the $12,500 land cost to a miner on the understanding that if he stayed with the company three years, Barrick would forgive the sum. With secure employment and 20 percent down payments in their pockets, the miners got mortgages. In five years the value of a Barrick house climbed to $80,000, and the forgivable contribution to $20,000. The subdivision grew to 700 homes.

  In less than a decade Barrick outlined 30 million ounces. Goldstrike powered the company into the ranks of the world’s biggest gold producers. More than a million ounces a year came out of the mine, and still does. A year after the discovery of the Goldstrike deep zone, the gold price had climbed from $380 an ounce to $500. Yet Munk did not grow Barrick into a colossus by betting on the gold price: he bet against it. He was already offering investors protection from country risk. Now he would protect them from another menace, one that had wrecked his plans before—the whim of price.

  IN BARRICK’S EARLY YEARS THE gold price ranged widely. It started 1985 at $300 an ounce, hit $500 an ounce in 1987, and sank to $360 in 1989. It clawed back to above $400 by the start of 1990, but three years later had subsided to $330. Nearly ruined by his earlier brushes with the oil price, Munk evolved a system that protected Barrick from the roller coaster of price, guaranteed the company’s returns, and provided the steady flow of cash that Barrick used to buy more mines and expand them. He sold forward.

  In forward selling, a miner contracts with a commercial bank to deliver a certain amount of gold at a specified future date. The commercial bank then borrows that amount of bullion from a central bank, sells it in the market, and deposits the money to the miner’s credit in a trust account earning interest. When the miner delivers the promised gold to the commercial bank, the miner collects the money in the account, and most of the interest. The commercial bank returns the gold that it receives from the miner to the central bank, with a small amount of interest. The commercial bank makes money on its share of the interest from the trust account, less what it pays the central bank. Everybody wins. The commercial bank profits from a low-risk transaction; the central bank earns interest that it would not otherwise have earned on its reserves; the miner protects itself from a price drop because the price it gets is the price at the time it made the deal, and it was making interest all along on a product that it hadn’t yet produced. Forward selling made Barrick bulletproof to a falling price.

  A single input can demolish the forward seller’s math—a rising gold price. Let’s say a forward contract calls for delivery in five years at $800 an ounce. If the spot price is lower, fine: that’s what you were hedging against. But if the spot price is $1,400, the forward seller has “lost” $600 an ounce. Such a trap snapped shut on Barrick.

  By 2009 Barrick had a massive forward hedge, trailing far behind the real value of the metal. This forward position dragged on the company’s share price like an anchor. As practiced at Barrick, forward selling gave the miner the option to roll the contract forward when it came due. In other words, Barrick could delay the reckoning to give the spot price time to come back down. The price did not come down. It rose. Munk’s board faced the inevitable in 2009, taking advantage of a price dip to buy out the forward contracts for a bruising $5.6 billion. In doing so they acknowledged what the rising price was saying. New buyers had arrived in the market, changing it forever.

  THE GOLD PRICE HAD STARTED climbing long before the banking crisis gave it orbital velocity. Two important factors drove it. One was the appearance of a class of new gold investments that made it easier to buy bullion. The other factor was the rapid opening of a market. It was a market that wanted and bought everything—BMWs, French wine, iPods, hamburgers, diamonds, an aircraft carrier, and inevitably, gold. It was the dream market. It was China.

  7

  LINGLONG

  To become the biggest gold producer, China had to subdue the natural animosity of communist ideology to a substance so quintessentially the stuff of private wealth.

  IN A TEN-YEAR EXPLORATION BINGE, China grew from an insignificant gold producer into the world’s biggest, replacing South Africa in 2007. They were buying gold too. In 2012 Thomson Reuters GFMS, the world’s leading precious metals consultants, predicted that Chinese private and government buying would amount to almost a thousand tons of gold that year, a rate of consumption that would make it a bigger gold buyer than the traditional leader—India. The story of Chinese gold tells the story of the Chinese state—its transformation from an inward-looking, xenophobic, technologically backward country into a money mill.

  They have 10,000 gold mines, or maybe 60,000. I was told both. No one seems to know the number. Chinese gold is as much a frenzy as an industry. Some mines are no more than a single family with gold pans and a stretch of river; others exploit large deposits from Burma (now Myanmar) to the Mongolian border. All together, they produce more than 300 tons of gold a year. I wanted to see these mines, especially the fabled Linglong mine, and flew to Yantai on the Yellow Sea.

  The night I arrived, Tropical Storm Meari came ashore and battered the Shandong Peninsula. Rain poured through faulty seals around the windows. The lights went out. I stood at my thirty-eighth-floor window and peered out. I could see taillights crawling on the coastal road, that was all.

  In the morning everything sparkled and glittered in the fresh, cool air. Packs of black clouds charged across a bright sky, dragging trails of rain. Happy at the prospect of visiting the ancient goldfield, I devoured breakfast in my room, put the tray aside, and turned to my prize—a big yellow book on the gold mines of Shandong. My attention settled on a picture of an imperial minister setting out for Linglong in 1007. He rides a white horse, his gold cape trailing behind him. The emperor watches him depart. A retinue of miners, loaded with spades and baskets and carrying sacks of tools, trudges through a forest. At ten o’clock my cell phone rang and I went down to meet my guides.

  They arrived in a tiny purple car, dodging a pile of storm detritus in front of the hotel and pulling to a halt across two parking slots. A large and cheerful woman named Pang Min beamed at me from the wheel. The backseat was stuffed with children’s toys. Wedged among them was Feng Tao, a solemn gold geologist who had flown in from Beijing to be my interpreter. Feng had come to me through an introduction, and had already made me understand, with some firmness, that without such introduction all of China would be shut against me, and certainly that part of it that contained the splendid and chaotic Shandong gold industry. Pang Min herself was the fruit of this same process. And, so Feng made clear, her sizable daily fee was a trifle to be swallowed without complaint.

  “Fine,” I said as I folded myself into the front seat, “but we need a bigger car.”

  “Yes,” said Feng. “She has agreed to change it.”

  We shot away from the hotel with every sign of purpose. There followed half an hour of spirited navigation among the abandoned streets that surrounded the hotel. Buoyant with gold revenues, and anticipating growth, the local government had filled an enormous tract with eight-lane thoroughfares, a riverside park, two stadiums, and a convention center. The parking lots were empty. Nothing was going on inside the stadiums. Streets ran for miles through empty scrub. Happily t
here was no traffic, so that when Pang Min coasted to a puzzled stop in the middle of this concrete prairie, we were not in anybody’s way. At last we found our way out, got a bigger car, and set off westward through the sodden countryside to see the celebrated Linglong mine.

  Linglong gold mine lies in the jumbled granite of the Shandong Peninsula, China’s storied goldfield. Probably a hundred other gold mines thread the nearby hills with narrow, dangerous tunnels. Many are centuries old, and small. China produces more than 300 tons of gold a year yet does not have a single large mine. The story of Chinese gold production is a parable of China’s transformation. To become the biggest gold producer, it had to subdue the natural animosity of communist ideology to a substance so quintessentially the stuff of private wealth. Linglong’s story is a tale of changing hopes and fortunes driven by the evolution of the Chinese state. As the state changed, so did its posture to gold mining. From suspicion of gold as a symbol of private wealth threatening the communist ideal, China has concluded, as its growing bullion holdings show, that gold might be a useful hedge in a shaky-dollar world.

  All morning the rain came and went, sweeping in from the sea in thick black packages of weather that drummed on the car roof and promptly blew away. There were torn-up trees along the road. We left the main route and climbed through a slot in the hills. Pine trees cloaked the hillside. The storm abated. The tops of the pink granite slopes vanished into a mist. We drove past a line of pale yellow houses and arrived at the famous mine. A cantonment of white buildings stood against the mountain. We parked the car and climbed out and Pang Min pointed up the hillside to the place where the main tunnel entered the rock. The scene looked less like an industrial site than like a Chinese landscape brushed onto a scroll.

  IN ANCIENT TIMES, THE LEGEND says, a river flowed into the sky from the peach orchard of the Grand Old Lady of the West to a peak in the Linglong hills. The river fed streams that plunged back down the mountain and collected in a basin. One day a hunter discovered the pool teeming with gold fish. They swarmed through caves and leapt from the surface spewing streams of golden liquid. News of this pool reached the imperial court. A court official who arrived in Shandong to report on the fish was so overcome by the sight that he flung himself into the pool and disappeared. A second emissary arrived to find the pool dry. Terrified of returning to the Forbidden City with such news, he drafted 10,000 peasants to dig in the mountain for the fish. They found the Linglong gold.

  The Chinese were mining gold by 1300 BC. They had systematic ways to prospect for it. In the seventh century an official wrote, “If the upper soil contains cinnabar, the lower will contain gold.” They had also discovered that plants could point to precious minerals. “If in the mountain grow spring shallots, there will be silver under the ground; if leek in the mountain, gold.” They may have been right. Plants do take up minerals from the soil. In 1980 researchers at the University of London found plants that could take up gold and accumulate it in their tissue. A 1998 article in Nature described an experiment where plants absorbed gold from polluted ore. In 2004 a New Zealand researcher proposed a system of “phyto-remediation” in which plants would harvest metals from toxic gold mine waste. The payoff—two pounds of gold per acre. And a paper published at the 19th World Congress of Soil Science, in 2010, said that even today some prospectors “use plant species as bioindicators of the presence of gold in soil.” The Chinese noticed such relationships in ancient times.

  They had novel ways of refining gold, such as feeding it to ducks. First, they removed as many impurities as they could from panned gold, mixed what was left with chaff, and stuffed it into the ducks. Later they collected the droppings, panned out the gold a second time, mixed the refined material into another batch of chaff, and down the hatch. They did this three times, put the recovered gold aside, then fed the ducks a final batch of chaff—pure chaff, this time—to scrape out any gold bits left behind.

  At the beginning of the first millennium China’s rulers owned gold reserves of 200 tons, about the same as the Roman Empire’s gold stock at the time. Then the mining collapsed to a pitiful trickle. When the Mongols came to power in the thirteenth century they tried to turn the gold mines around. They suppressed bandits and put down petty tyrants who were robbing the mines, and warned their own generals not to steal gold. To revive the industry, one Mongol emperor ordered 4,000 households in Shandong to pan for gold.

  In the seventeenth century Linglong came into the hands of the famous eunuch Wei Zhongxian. Originally a criminal and a hopeless gambler, Wei had traded in his testicles for a post in the imperial household. By tradition, many domestic positions in the court could only be filled by eunuchs. Wei’s creditors would not be allowed to pursue him into the Forbidden City. Once in the palace, he befriended the nurse who cared for the crown prince. When the boy became emperor at the age of fifteen, Wei began his climb to power.

  Wei murdered opponents, built shrines and statues to himself, and adopted the title Nine Thousand Years, almost equal in dignity to the emperor, known by custom as Ten Thousand Years. The emperor gave Wei the Linglong mine in 1621. He ran it for six years, and the country’s gold production increased to 40,000 ounces a year. When the emperor died, Wei’s enemies strangled and disemboweled him. Seventeen years later the dynasty collapsed, and so did Linglong.

  The new Manchu rulers hated gold mining. They believed that gold veins were dragons’ veins, and digging them up would disrupt feng shui, the system of laws that governed spatial harmony. More importantly the Manchu feared unrest among the people they had conquered, and precious metals could finance an insurrection. They decreed an end to gold mining. They executed those they caught disobeying the law. Without new production, the imperial treasury wasted away.

  The last gold bars were sucked from the Chinese treasury in 1842, in reparation payments to the foreign occupying powers—Russia, Germany, France, Britain, and Japan. Desperate for cash, the ruling Dowager Empress repealed the gold mining prohibition. Annual production rebounded. By 1888 China was producing 700,000 ounces a year, ranking it fifth in world production.

  Plainly, miners had never stopped mining. They just went elsewhere for the market. A British colonial official in Burma, writing when the Chinese ban on gold mining was still in effect, noted that “by far the larger portion of all the gold used [in Burma] is brought from China. It is imported in the form of thin leaves of gold, made up into little packets, each packet weighing about one viss.” A viss equaled 3.6 pounds, a lot of gold in any century. And that was just one packet. Gold had leaked out of China along the Himalayan smuggling routes. When the gold mining prohibition ended, the gold simply headed to the nearest market, the domestic one.

  Such shifts in the official attitude to gold have been repeated in modern times. Communist China’s posture toward private gold has changed from approval to disapproval and back again, in time to the convulsions of the day. Yet Linglong should have had an honored place in the Chinese government’s mythology. They captured it from a hated enemy, the Japanese, who had seized it at the start of World War II.

  In constructing my account of Linglong, and for much else on Chinese gold, I relied on a remarkable book, The Gold Mining History of Zhaoyuan with a Review of the Gold Industry in the P.R. [People’s Republic of] China, a meticulous chronicle in English and Chinese. Written by Gong Runtan, a thirty-three-year veteran of the Shandong gold industry, and Zhu Fengsan, the cosmopolitan mastermind who helped propel China to the forefront of world gold production, the book supplies, to my knowledge, the fullest account of Chinese gold available in English. From the use of gold in pills to promote immortality to a review of the Ninth Five-Year Plan, the volume has it all. It also has a gripping style, as in the story of Linglong’s wartime fate, when Japan captured the mine.

  “The accumulated snow on Mount Linglong had not yet melted. The biting wind sent withered branches and leaves flying across the sky, producing shrill howling.

  “Early in the morning a grou
p of confused farmers, bringing along both the old and the young, swarmed out of their home[s] and ran off into Mount Linglong. The crack of guns came near, bullets swept above the crowd, thick smoke columns rose in the village in the distance and curled up on the [dirt] road.”

  Seven hundred Japanese soldiers, supported by bombers, marched into the hills and occupied the mine. They fortified the mountain with blockhouses and rings of electrified fence. They built machine gun nests and patrolled the mine with what the Chinese called “wolf dogs.” They brutalized civilians: the bodies of massacred Chinese, eviscerated by bayonet, hung from telephone poles around the mine.

  “Linglong under the iron heel of the Japanese invaders,” Gong wrote, “became a hell on earth with demons and monsters . . . and evil spirits running amok, and an exceedingly brutal concentration camp. The miners led the tragic life of the vanquished.”

  In six and a half years Japan took 290,000 ounces from the Linglong mine. The pages that describe it shake with Gong’s indignation. I wanted to meet him, and since he was Pang Min’s father-in-law, she knew where to look. At two o’clock on a sweltering afternoon we drove into the courtyard of a gray apartment complex in the heart of Zhaoyuan, and trooped upstairs.

  Gong was then seventy-five. He showed me to a seat in front of a low table set with a platter of sliced watermelon. The apartment was small, but the ceiling was high and a breeze stirred through the cool, terrazzoed rooms. A mass of plastic flowers bloomed madly on a wall. Gong sat straight, with his hands on his knees. His skin was yellow, and he looked hot. He wore his iron-gray hair in a crew cut. He wore frosted lenses that concealed his eyes.