Bloomberg News

Gold Eclipses Cocaine as Rebels Tap Colombian Mining Wealth

October 12, 2011

(Closes gold price in sixth paragraph.)

Oct. 12 (Bloomberg) -- Colombia, the world’s largest cocaine producer, said illegal gold mining is becoming the “next major threat” to security as government efforts to crack down on drug crops prompt rebels to seek new revenue sources.

Unlike cocaine, gold can easily be sold into the economy and be used to finance terrorist groups, Mines and Energy Minister Mauricio Cardenas said in an interview.

“It’s something that has been growing fast, and in some ways it’s Colombia’s next major threat from the point of view of illegal groups,” Cardenas, 49, said Oct. 10 at his office in Bogota. “We have to combat this very effectively, very fast. We cannot let this problem grow.”

Colombian gold deposits, which enriched Spanish conquistadors more than four centuries ago, have attracted investment from billionaire Eike Batista and AngloGold Ashanti Ltd. Guerrilla and paramilitary groups, whose suppression has been the cornerstone of government efforts to boost security and lure investments, also have been drawn to mining for the precious metal as gold trades near record levels.

Gold’s rally has made illegal mining “a lot more profitable,” threatening to bring “reinvigorated strength” to terrorist groups, according to Cardenas.

Gold futures for December delivery rose 1.3 percent to settle at $1,682.60 an ounce at 1:41 p.m. on the Comex in New York. Earlier, the metal reached $1,693.90, the highest for a most-active contract since Sept 23. Gold has surged 25 percent in the past year.

‘Terrible Effect’

“A stronger guerrilla would recruit better, make it easier to extort people and companies, and attack infrastructure and the military,” Alfredo Rangel, a former member of Colombia’s Security Council, said yesterday by phone. “All of which would have a terrible effect on security and investment expectations and be very negative for economic growth.”

Kidnappings, including by guerrilla groups, slumped to 282 people last year from 2,882 in 2002, while murder and attacks by illegal groups against police, infrastructure and citizens also fell, according to government figures.

Improved security has helped President Juan Manuel Santos to draw international investment in mines, oil fields and coal projects. Foreign direct investment may rise to a record $12 billion this year, according to the finance ministry, more than quadruple levels a decade ago.

Batista’s AUX Canada Acquisition Inc. purchased control of Ventana Gold Corp. this year to gain gold deposits in Colombia, while AngloGold Ashanti, the gold producer whose largest shareholder is billionaire John Paulson, is developing the La Colosa gold mine.

Drug-Fueled Violence

Guerrilla groups and organized crime gangs are also tapping the deposits as a way to expand beyond drug trafficking, fund weapons purchases and manpower, Vice President Angelino Garzon said in an interview last month. He estimates a “high” amount of output from illegal gold mining.

“It’s a diversification of revenue,” Garzon said.

The government has increased arrests and seizures of equipment at illegal mines this year, Cardenas said. Colombia is studying additional steps to combat the operations, such as tracking raw materials used to extract gold.

Guerrilla and paramilitary groups thrived on drug revenue in the 1990s, fueling violence that led investors to shun the Andean nation. Since then, cocaine output in Colombia, still the world’s largest producer of the drug processed from coca leaves, has plunged amid government eradication and anti-trafficking efforts, according to United Nations figures.

Colombian production shrank to 350 metric tons in 2010 from 410 tons in 2009, the UN said. Declining output means Peru may be on track to become the world’s top supplier of cocaine, the International Narcotics Control Board said in March.

Weakened FARC

Eradicating coca production over the past decade has weakened the Revolutionary Armed Forces of Colombia, or FARC, Latin America’s oldest guerrilla group, as well as the smaller ELN and paramilitary groups that purchase weapons and secure manpower with drug money, kidnappings and extortion.

As cocaine production fell, gold output climbed to a record 53.6 metric tons last year, according to Colombian government figures. Output has more than tripled from 15.5 tons in 2007. The government doesn’t have an estimate on how much gold is mined illegally because, like coca cultivation, it often takes place in isolated areas with few roadways and steep terrain, Cardenas said.

Guerrillas already long present in some mining areas are now bringing in heavy equipment and consolidating to increase output in provinces in central and southwestern Colombia, Rangel said.

Unlike drugs, “illegal gold mining is easy to legalize once you have a gram of gold in your hands, because then you can sell it anywhere,” Cardenas said. “It’s something you have to control” at the mine site.

--Editors: Jessica Brice, Dale Crofts

To contact the reporter on this story: Heather Walsh at hlwalsh@bloomberg.net

To contact the editor responsible for this story: Dale Crofts at dcrofts@bloomberg.net


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