Philippines black market yields gold for China

Up to 90 percent of small-scale Philippine gold production is being smuggled out of the Southeast Asian country, with much of it going to China, Reuters learned on a visit to this mining region in Mindanao, combined with interviews with miners, traders, and officials as well as a review of gold trade data.

The potential revenue being lost is considerable: The Philippines is the world's 18th largest gold producer, according to precious metals consultancy Thomson Reuters GFMS. It produced just over 1 million troy ounces of gold in 2011 – worth $1.6 billion US dollars at current prices – and about 56 percent of that came from small-scale miners.

While production did not slow down, the volume of legal purchases plummeted.

This year, the amount of gold sold by small-scale miners and traders to the central bank in the second quarter fell 98 percent from a year earlier

The Mines and Geosciences Bureau, which regulates mining activities in the country, could only come up with one conclusion.

"The same amount of gold, but they went to underground. Our suspicion is that it' either black market or smuggled out of the country. So 80 percent of gold lost," said Leo Jasareno, director of the Mines and Geosciences Bureau.

Jasareno said miners were telling them that traders sell the gold to foreign buyers.

"There are unconfirmed reports, that gold is going to – this is unconfirmed – is going to Hong Kong, Malaysia, and China," Jasareno said.

He added that they would look into the involvement of organized crime groups in the loss of gold from the legal market, estimated to reach about 24 tons.

Traders and officials say the biggest factor behind the spike in the gold smuggling trend the past year are newly imposed taxes. Since 2011, every sale of gold has been subject to a 2 percent excise tax, and a 5 percent withholding tax, usually borne by traders.

Opposing the tax, many traders have turned to the black market, officials say.

Arthur Uy, who looks after Mount Diwata as governor of Compostela Valley province in southern Philippines, the top small-scale gold mining province in the Philippines, said the black market in gold is mainly based in the capital, Manila.

"The black market now is flourishing, so they would send their produce now to the black market; because the businessmen doing those black market activities, they would only impose, let's say less 2 or 3 percent only," Uy said.

Uy, a two-term governor whose family of Chinese descent partly owns one of the four most productive small-scale mines on Mount Diwata, said 90 percent of gold produced is going to the black market and mostly ends up smuggled to Hong Kong.

If the 1991 small-scale mining law were being followed, all the gold produced by miners in the Philippines would be sold to the central bank, which buys it at around world market prices.

Small-scale gold mines, accounting for more than two-thirds of the Philippines' total output, are the main source of the central bank's gold reserves, which hit a record high of $10.4 billion US dollars early this year

With most of the gold production from these mines now illegally exiting the country, the Philippine central bank is losing its cheapest source of gold reserves.

The problem extends beyond gold to other minerals, which are being smuggled out of the porous and inadequately policed borders of this archipelago of more than 7,100 islands.

The Philippines is believed to hold reserves of gold, copper, nickel, chromite, manganese, silver and iron worth a total of around $1 trillion.

Traders and officials say it looks like much of the gold is going instead to Hong Kong, the main conduit for gold flows into China.

A discrepancy between statistics between Hong Kong's and Philippines has left officials stumped.

Hong Kong's top source of gold imports from 2005 to 2010 was the Philippines, official data from the Chinese territory shows. Philippines gold shipments to Hong Kong hit a peak of 81,471 kilograms in 2010, way above imports of just 11 kilos nine years earlier, and were steady at 81,192 kilos in 2011.

But official statistics in the Philippines, reflecting legal exports, show gold exports to Hong Kong in 2010 and 2011 at just around 3 percent of the total volume recorded by Hong Kong authorities.

The Philippine customs data represent only shipments by big mining firms with supply contracts, as exports of gold from small-scale mines are banned.

Gold prices, which have been trending at or near historic highs for several years, have spurred illegal gold mining around the world. Illegal mining now accounts for up to 15 percent of the global gold output, according to Canada-based Artisanal Gold Council.

Reuters