The economics of gold mining in the Land of Gold

Economy May 19, 2016 01:00


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SUVARNABHUMI or the Land of |Gold is the name given to Thailand simply because gold can be found in several provinces throughout the country.

The only areas in Thailand where gold deposits are not reported are the Northeast Plateau and the Lower Chao Phraya Basin.
In 2001, goldmining by Akara Mining, known today as Akara Resources, began at Chatree in|Phichit. To date, about 60 tonnes |have been produced valued at Bt56 billion. 
However, owing to concerns over environmental contamination and the possible impacts on public health, the government came to the decision on May 11 to cease Akara’s goldmine |operation.
The goldmining operation in Phichit claims to generate several economic benefits for society. 
Of the Bt56 billion of gold mined, Bt39.6 billion circulates within the Thai economy in the form of municipality benefits of Bt4 billion, tax concessionary of Bt3.2 billion and domestic business and contracts of Bt32.4 billion. 
Akara also generates 1,000 jobs. 
Although these benefits may seem substantial, the figures do not provide adequate information for the government to decide whether Thailand should engage in gold mining.
 Gold is not the same as ordinary goods and services where the decision to produce today has little relationship with future production. 
Gold is a non-renewable resource. When gold reserves are finite, its extraction today depletes resource availability in the future. 
Therefore, in order to mine gold, its benefits today must be compared to the foregone future value. 
Based on the optimal non-renewable resource extraction concept known as the Hotellings Rule, the economic decision on whether to mine gold depends on two key factors – the future price of gold and the return on investment. The economic rationale argues that the goldmining decision will depend on whether the future value of gold when it is deposited underground – not mined today – will be higher or lower than the return on investment. 
If the future price of gold is expected to grow at a fast rate, society is better off by not mining the gold today and waiting for a much higher value in the future. 
However, if the future price of gold is expected to grow at a slow rate, it is then better to mine the gold now, turn it into monetary value in the gold market and let this money grow in the economy at the rate of return on investment.
A calculation based on the 41-year growth rate of the gold price and compared with the rate of return on risk-free investment – government long-term bonds – shows an interesting result. 
In 2000, when the goldmining concession was granted to Akara Mining, the rate of return of gold in the ground to enjoy future value averaged 6.95 per cent per year, while the rate of return on risk-free investment averaged 10.43 per cent per year. 
So, at that time, the government rightly awarded the goldmining concession in Thailand, because the gold price was rising at a rate lower than that of risk-free investment. 
However, after 2001, the price of gold grew at a higher rate while the return on investment declined. 
This year, the rate of return if gold is kept in the ground to enjoy its future value rose to 7.69 per cent per year while the rate of return on risk-free investment dropped to 7.88 per cent per year. 
Since the growth value of gold is at a similar rate to that of risk-free investment, there is no economic reason for Thailand to mine gold today. 
In other words, keeping gold in the ground now will enable Thailand to enjoy its future value similar to mining gold today and investing the money in the economy.
Although Bt56 billion worth of gold exports may seem substantial, it does not in any way indicate the economic benefits of goldmining and this figure cannot be used for policy decisions.
Dr. Adis Israngkura is Asst Professor, School of Development Economics at the Institute of Development Administration.