Who Regulates the Gold Industry?

For an industry as old as gold, it’s almost amazing that there is not a global oversight committee or group in charge of its regulation. There is no World Health Organization or United Nations Human Rights Council for gold.

Instead, each country has its own (highly variable) set of rules regarding how gold is mined, minted, brokered, and sold. This has huge ramifications within today’s global economy, where gold is traded on international exchanges yet mining companies operate sites all around the world. There are various layers of local compliance that have to be factored into business, alongside variable levels of quality enforcement and consumer protection.

To understand how this loose confederate system of gold regulation currently operates, we need to look at what the rules and regulations look like in various places. From there, we need to see how they interact with one another.

The U.S. Leads in Gold Mining Regulation

The regulation of the gold mining industry hasn’t changed much since the General Mining Act of 1872, a 148-year-old American law that remains the authority on mining regulations today.

The law was a response to a post-Civil War fight between eastern and western states. Eastern states wanted to help pay for the war through gold and mineral discoveries in the West. But discoverers and prospectors in the West didn’t want to lose their existing claims to mine on federal lands.

The resulting agreement saw prospectors paying licensing fees of $5 per acre to the federal government, which hasn’t changed in the century-and-a-half since Ulysses S. Grant signed the law into effect. In the United States, through today, you still pay a $5 per acre fee to the federal government in order to mine on federal lands.

Since the 1872 Act was passed, environmental laws have been partially added on and further rules have been added on to prevent conflict and armed trading. According to the World Gold Council—which is itself more of an advocate for gold than any kind of international overseer—“the Dodd-Frank Act and the EU Conflict Free Minerals regulations require due diligence within the supply chain in order to ensure that mining and production of gold does not fund conflict.”

The acts mentioned thus far do set standards that reverberate to some extent throughout the global gold industry. However, there is no single global authority or central international agreement that formally regulates the mining industry as a whole.

For mining companies, it takes teams of lawyers familiar with regional and foreign laws to set up shop anywhere in the world. That also means cumbersome and inconsistent regulatory approval for environmental concerns, which end up being somewhat dicey to navigate.

According to Devon Coquillard of the American Exploration & Mining Association in Inside the Gold Industry, “It takes 7 to 10 years to obtain the necessary permits to begin mine operations in the U.S.” and claims that it takes just two years in Canada and Australia, despite similar environmental laws.

Of course, mining is only one part of this regulatory discussion. Once those mines open up and start producing, how does the gold itself get regulated without international regulation?

Gold Market Infrastructure

We’ve already touched into some financial regulation when we mentioned the Dodd-Frank Act, which was intended to protect consumers as well as the integrity of the financial industry. Financial regulation plays the most important role in overseeing gold after it leaves the ground.

Gold is traded twenty-four hours a day around the world, which is unlike almost every other commodity and most asset classes. Major gold markets include New York, London, and Hong Kong, which means that there is always someone somewhere who is ready and able to buy and sell gold with you.

Financial institutions—particularly large banks with operations running around the world—are what make this twenty-four-hour trading work, and also how markets are able to deal with liquidity differences. These banks operate both on major exchanges as well as over-the-counter trading, which allows gold to flow around the clock.

Of course, that also means that these institutions are regulated by the countries in which they are operating. Trade in New York, for instance, is done through pricing on the New York Mercantile Exchange (NYMEX). That, in turn, is regulated by the U.S. Commodity Futures Trading Commission.

As you can see, the details of who has regulatory oversight can quickly get messy and complicated when dealing with just one country. But for gold, which is traded around the world, it gets worse.

The financial intermediaries, including bullion banks and other players, are in charge of the trades themselves, as well as delivery and clearing of the physical metal itself. That means they can come under other government regulatory agencies’ purviews.

Here’s just a short list of regulatory agencies overseeing various parts of the gold industry in the United States. Similar groups oversee these aspects in other countries as well.

  • Commodity Futures Trading Commission (CFTC) — oversees trade of gold futures in New York.
  • Securities and Exchange Commission (SEC) — oversees publicly traded mining and gold related companies in the U.S.
  • Federal Trade Commission (FTC) — oversees the marketing of gold products to U.S. consumers.
  • Bureau of Land Management (BLM) — oversees the rules set out in the General Mining Act of 1972 and other niche mining laws.
  • Environmental Protection Agency (EPA) — oversees the enactment of environmental rules regarding mining waste and recovery.
  • Internal Revenue Service (IRS) — oversees taxation of gold investments.

The above agencies are just in charge of gold in the United States. Other countries face their own alphabet of agencies in charge of gold mining and trade.

Trade between countries is also subject to special oversight and regulations in varying ways around the world. China, for instance had been holding up and in some cases not approving import quotas from the U.S. as tariffs were being negotiated in 2019.

According to Reuters, those tensions began easing up late in that year; but navigating tricky U.S.-China relations remains tenuous, and can at any point lead to changes that may impact the gold market.

This is how the world currently stands in terms of gold regulations and international trade; but just because few laws have changed that in the past 148 years doesn’t mean that the role of regulation can’t improve. There are a number of trends to keep on your radar.

As the Dodd-Frank Act shows, there has been an increase in demand over how gold is sourced. While you likely have heard of “blood diamonds,” “conflict gold” is just as much a concern for modern governments and investors.

One trend that might be gaining some traction is to use new technology to ensure safe mining and source-to-destination, or “mine-to-consumer” methodology. According to the World Gold Council, blockchain technology “holds promise in offering a more robust, operationally and cost efficient mechanism for facilitating the settlement of gold transactions.” The built-in track and accountability features that blockchain implementation could bring may help stamp out illegal smuggling of conflict gold.

Other changes could be coming to this centuries-old gold trading system. Again, according to the World Gold Council, a greater shift is taking place from over-the-counter trading of gold onto exchanges. This too is intended to increase transparency on gold trading, but it might also lower overall costs faced by intermediaries and, in the end, consumers as well.

As for an overhaul or replacement to the General Mining Act of 1872, that might not come anytime soon. But bills have been introduced to update parts of it, including S.1317 - American Mineral Security Act. It aims to speed up the development time of opening a new mine in the U.S. to compete with the rest of the world.

States too could play a larger role in gold regulation, particularly on the mining side. Minnesota has already taken action to double check the federal regulators’ work on various mines, including some copper-nickel mines. Other states like Nevada and California with larger gold content could easily follow suit.

Taxation

No discussion of gold regulation would be complete without a note about how taxes are regulated on the metal. In some places, like Germany and Sweden, gold is not subject to a value-added tax or VAT—but silver is.

In the U.S., the IRS has taken a very different approach. Gold is seen as a collectible for tax purposes, which means that profits from the sale of gold are taxed at long-term capital gains rates up to 28% for top income brackets.

Only certain forms of gold, however, are allowed by the IRS inside of tax-advantaged accounts like self-directed IRAs. With the exception of American Eagles, only specific coins of particular purities are allowed, and all transactions must be through a custodian and then stored in an approved depository. But gold held in an IRA works the same way as any other retirement asset, including in terms of the tax benefits associated.

As with any tax, the rules are of course subject to change. As far as how those taxes are regulated, the IRS has been trying to maintain transparency with the public. One of way of trying to achieve this is through explanations for the public, that clarify how it views precious metals.

Conclusion

Regulations on gold vary around the world, with each part of the industry facing different sets of regulators. Miners deal with old 19th century laws and environmental oversight. Dealers and banks deal with financial rules and marketing regulators.

But there are some hints at clearer rules going forward. The introduction of some kind of “mine-to-consumer” oversight could be a large improvement. Whether that comes from blockchain technology or not, it is one trend to watch. Environmental rules are also going to continue changing and adapting.

While buying gold as an investment or just for peace of mind is relatively easy these days, the regulation that oversees it remains complex. In the coming years, it will be exciting to see how this regulation evolves.

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