Obama's financial reform bill could lead to supply bottlenecks in the gold market

2011-MAR-02

Roman Baudzus writes --

Tanzania's Chamber for Minerals and Energy (TCME) warned the World Gold Council (WGC) on Monday that new regulations in the latest US financial reform bill will have disastrous effects on their domestic gold mining industry. The US bill classifies Tanzania, as well as nine other African countries, as sources of conflict minerals, which are mined in conditions of armed conflict and human rights abuses. In addition, rumours that the Egyptian mining company Centamin has been told by local authorities to stop gold exports from its Sukari Mine have raised the possibility of increased supply constraints.

New regulations in the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was passed by Congress in July 2010, could put the supply of gold under severe pressure in the near future. In order to increase transparency in regard to global mining activities, a passage was included in the bill that named war zones such as the Democratic Republic of Congo, and warned against mineral imports from such countries. Companies who flout this new rule risk fines, court orders and adverse publicity. According to experts, a black list of sorts had been created which names the different countries where conflict minerals are being mined.

Bizarrely, this list includes the peaceful East African country Tanzania, whose government is appalled at this decision. Tanzanians are wondering why the US administration puts their country, which has been peaceful for decades, on the same level as the Democratic Republic of Congo, with Tanzania's embassy in the United States decrying the stigmatisation of the country's gold production. The architects of the financial reform bill, which was signed by President Obama last July, would probably not have deliberately aimed to bring down the Tanzanian mining industry. For this reason Tanzania's embassy has requested that the United States amend the law wherever necessary.

As officials at TCME further disclosed, the bill would likely lead to a drastic reduction in foreign direct investment in Tanzania. For this reason they would have been forced to warn the WGC about a foreseeable significant reduction of the country's gold exports. According to their own calculations, this set back could result in gold export losses of up to US$75 million per year, and up to 2,000 jobs in the domestic mining industry could be lost. A demand reduction for Tanzanian gold of about 10 per cent could lead to US$200 million of lost foreign investment.

Many market participants are concerned that the global gold supply will decrease significantly in the course of this year, and the Tanzanian situation could contribute to further price rises in the yellow metal. The Dodd-Frank bill names metals which are mined in ten neighboring countries of the Democratic Republic of Congo. These include gold, tungsten, tin, and coltan. However, the metals are urgently needed in the production of mobile phones, computers, flat-screen TVs and jet engines.

A further supply constraint relates to Egyptian miner Centamin, who have allegedly been ordered by the new Egyptian government to freeze all gold exports for four months, in order to stop Mubarak loyalists shifting wealth out of the country. According to Centamin's own forecasts, the company intended to mine between 250,000 and 290,000 ounces of gold this year.