In today’s Exponential Investor

  • Which safe haven asset has jumped back into the spotlight?
  • But is it sustainable?
  • What technologies and companies are leading the way forward?

Yesterday, Sam suggested that gold is a garbage investment.

This was obviously somewhat tongue in cheek (even our resident crypto-evangelist recognises that gold is good at holding its value in real (after inflation) terms) but what Sam was saying is that there is always an opportunity cost to holding a “safe haven” (meaning that it tends to keep its value when stocks and bonds plummet) asset like gold.

The last year has shown this. After storming higher in 2020 as investors rightly anticipated the inflation that was to come in 2021, it has since had a mild year and pulled back for around 18 months. In that time, stocks of all kinds, cryptos and other assets have outperformed it.

This is shown in the chart below, with gold (in gold), the tech-heavy Nasdaq (blue), the FTSE 100 (purple) and an exchange-traded fund (ETF) with a portfolio of financial stocks (orange).

Source: Koyfin 

But something recently has given gold a burst of life. The Ukraine crisis.  

Looking at the chart below, you can see fans of the yellow metal (including Nick Hubble, who is Southbank Investment Research’s resident gold guru and editor of Gold Stock Fortunes) have been getting excited about – a so-called “breakout”, where the price has jumped outwards, out of the narrowing “pennant” or “flag” formation in which it had been consolidating since its highs in 2020:

Source: Koyfin 

And with inflation continuing to break higher in the UK, the United States and Europe, with many stock markets still wildly overvalued, gold has never been more relevant…

Producing gold produces garbage

But… there’s one problem.

The sustainability minded investors among you might be worried about the environmental and ecological damage of the world’s gold mining industry.

According to one website, Earthworks:

It can displace communities, contaminate drinking water, hurt workers, and destroy pristine environments. It pollutes water and land with mercury and cyanide, endangering the health of people and ecosystems.

And most incredibly, it claims that:

Producing gold for one wedding ring alone generates 20 tons of waste.

Meanwhile, the European Union’s study on gold’s sustainability criteria found that for an average ore grade (metal content) of 3.5 grams per tonne of ore, the production of one tonne of gold used about 200,000 gigajoules (GJ) of energy and 260,000 tonnes of water.

It also produced 18,000 tonnes of greenhouse gases (CO2 equivalent) and 1,270,000 tonnes of waste solids.

And bear in mind that cyanide – yes, cyanide – is seen as an essential part of the extraction process.

Unsurprisingly, this can lead to some pretty bad accidents. Here are just two examples:

  • In Kyrgyzstan, at the Kumtor Gold Mine, in 1998: a truck carrying 2 tonnes of sodium cyanide crashed into the Barskoon river, resulting in more than 2,000 people seeking medical care.
  • In Romania, in 2000: a tailings dam ruptured, spilling 3.5 million cubic feet of cyanide-contaminated waste into the Tisza and Danube rivers, killing fish and poisoning water supplies as far as 250 miles downriver in Hungary and Yugoslavia.

That pretty much confirms it – gold is not a sustainable investment, from an environmental or an ecological standpoint.

Cleaning up their act

But wait…

… every cloud has a silver lining or, in this instance, a golden one.

The smartest gold mining companies can see an opportunity.

They are now using technology in order to operate more sustainably. It’s early days, and there aren’t many options available for them to decarbonise right now, but they are moving in the right direction.

Take Newmont, for example. It’s one of the biggest miners in the space. It regularly ranks as one of the most sustainable miners in the world.

For example, it has a net zero target for 2050 and has followed this up with an interim target to reduce carbon dioxide (and equivalent) emissions 30% by 2030. Crucially, it has had these targets verified by the Science Based Targets Initiative, which works with companies to make sure they aren’t greenwashing – saying they’ll change but doing nothing in reality.

The main routes for decarbonisation are the sourcing of renewable power for operations, plus use of electric vehicles (EVs) for logistics and transportation, and that’s where Newmont is strong.

But other companies are trialling more unusual options.

For example, Agnico Eagle is implementing an innovative and environmentally friendly process to increase soil quality, promote plant growth and decrease rain erosion on slopes in one of the waste zones of its projects.

With a goal of providing natural environmental restoration in collaboration with the local community, their plan was to leverage an agricultural technique called “ultra-high-density grazing” (UHDG) – a system that combines scientific principles and local knowledge to manage herds of cattle such that their grazing habits have a positive influence on the ecosystem.

In a book called Defending Beef, which oddly enough I have read, UHDG is regularly cited as a way in which the nuances of grazing management can be used to aid both ecological recovery and carbon sequestration within ecosystems.

Re-thinking our approach to the natural environment is crucial, but not yet adopted by the mainstream business community. This means that Agnico is leading from the front in this area, and it’s great to see.

Even base metals can shine

Good things are also happening in other parts of the global mining industry, and I’ll likely talk more about that in the coming days and weeks.

The bottom line is that sustainability is here to stay.

Companies can and do set themselves apart from the competition by their dedication to sustainability.

Needless to say, Sam Volkering has some firm ideas on what technologies are set to benefit in the coming years. To find out more, click here.

All the best,

Kit Winder
Co-editor, Exponential Investor