Why the Gold Discovery claim in Sonbhadra was always suspect
In today's newsletter we talk about the short lived gold rush in Uttar Pradesh and all the things we learnt during this brief spell of ecstasy.
The Story
On Friday, a district mining officer from Sonbhadra claimed that state officials had discovered close to 3,000 tonnes of gold reserves close by. A day later, however, the Geological Survey of India denied the claim made by the district mining officer and said there was only about 160 kgs worth of recoverable gold on the site.
Now before we dig into this story, a confession. When I first heard the news of this discovery, I was extremely sceptical. Not because I happened to have deep insights on Sonbhadra’s mining reserves. But because 3,000 tonnes is a lot of gold. So with my spidey sense tingling, I wanted to see if there was any merit to the claim. The first order of business was to figure out the likelihood of such a fortuitous event ever materializing. And within seconds, I struck “gold”. A key piece of evidence came from a Mckinsey report on the gold mining industry. Here’s a snippet to drive home the point.
The 1970s, 1980s, and 1990s were exciting times for gold exploration as several major goldfields were discovered, developed, and mined. During this period, the gold industry found at least one 50+ MOZ (Million ounces) gold deposit and at least ten 30+ MOZ deposits. Since 2000, the industry has failed to find any 50 MOZ or 30 MOZ deposits, and very few 15 MOZ deposits
Now, 50 MOZ roughly translates to about 1400 tonnes. Meaning, during the past 50 years of digging and exploring, we’ve found one site that’s purported to hold more than 1400 tonnes of gold since. ONE!!!!
Now I know that past events don’t necessarily influence future outcomes. But considering large corporates have spent billions of dollars trying to discover large gold deposits, and come up with nought, the likelihood of GSI stumbling upon 3,000 tonnes of gold seems bleak at best. We call this Bayesian thinking.
Consider, for instance, a meteor strike. If I were to ask you — “What’s the likelihood of Meteorite wiping half the population off our planet’s surface in the next 5 minutes”, you’d probably be inclined to say that it's very tiny. But that’s because you know the last time it happened (66 million years ago), dinosaurs were still a thing. Ergo, while past events don’t predict future outcomes, they do offer us credible insights and we ought to ignore them at our own peril.
Anyway, let's keep this discussion alive for a while. Let’s assume that this event somehow did in fact materialize, what then would be the most likely outcome? Well, it’s hard to say. Because you see, finding gold reserves does not necessarily mean, you can extract them. For instance, the largest gold deposit we’ve uncovered so far (~3000 tonnes) rests deep inside the earth’s crust in Southwestern Alaska (Pebble Mine). But because the project requires a gargantuan upfront investment, mining here was recently deemed commercially unviable. Meaning despite holding untold riches, Pebble turned out to be a dud.
Also, the size of a deposit is not necessarily a good indication of the total output of a mine. For instance, disclosed resources at Barrick Gold’s Goldstrike Mine in Nevada (which is one of only a handful of mines where annual output regularly tops 1 Million ounces) is half that of the world’s 20th largest deposit. So while large deposits do give us some idea about potential, it does not reflect actual output.
But I know what you are thinking — “If you knew all this, why did you put that infographic out? Clearly, you are making this stuff up on the back of the GSI clarification. You are frauds, charlatans of the highest order”
Well, fair enough, You could make that assessment. But, our scepticism should have been evident considering we appended a small disclaimer alongside the post.
Since GSI says it’s discovered gold deposits to the tune of 3300 tonnes, we wanted to provide a visual comparison of how much this actually means. So, will we suddenly be gold-rich, now? Unlikely. But for a full explainer, you’ll have to wait for the Monday Edition of Finshots
Second, it’s a cool infographic regardless of the Sonbhadra error. Look at the amount of gold stashed in Indian Households. That’s a story in itself. Considering we haven’t had many avenues to invest our savings, we’ve often turned to gold. But it’s also meant we’ve had to import a lot of this gold from outside India, thus throwing our trading equation off balance. The point is, despite this whole episode being a massive fail, there is still a lot to learn — about gold reserves, about bayesian thinking and the fact regular Indians seem to believe a lot in gold.
And if it weren’t for the faux pas from the mining officer, we wouldn’t have known about any of this. Wouldn’t that have been a terrible travesty?
Anyway, we will see you tomorrow. Until then, Godspeed.