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Brazil Gold Production

Written By Brian Hicks

Posted June 1, 2009

Gold is changing the face of Brazil once again.

Amid a mining investment surge the country hasn’t seen in three centuries, Brazil’s leadership is using new economic strength to turn away from the U.S. dollar.

We’ll look at these twin trends here, and what investors stand to gain.

Following the discovery of glittering riverbed resources in the 1690s, hundreds of thousands of wildcatters poured into the then-Portuguese colony, and the influx of men and money into the Sao Francisco Valley helped the colonial power base from the northeastern city of Bahia, southwest to Rio de Janeiro.

It was a hundred years before the limits of contemporary surveying and mining technology brought Brazilian gold production to a virtual halt.

Today, there are again hordes of prospectors sweeping into new parts of the country’s interior. As was the case in the gold craze 300 years back—the biggest mining frenzy the world would see until the 1849 California Gold Rush—rumor spreads quicker than fortune.

But unlike in colonial times, Brazil is now an independent and rapidly rising country, free to set its own terms for investment and exploration.

The Sao Paulo Geological Institute’s Helio Shimada says Brazil’s gold production potential is up to 200 tons per year, and foreign firms like Barrick Gold [NYSE: ABX] and Anglo American [NASDAQ: AAUK] are working to ramp up output.

The government wants those companies to work with the Ministry of Mines and Energy to keep the nearly 400,000 wildcatters thought to be scattered throughout the Amazon region from doing major environmental damage and scarring the landscape with crude exploration pits.

Informal gold exploration activity steadily declined during the secular gold bear market of 1988-2000, but government-sanctioned mining and alluvial deposit collection led formal output to increase through most of that time.

Since expenses for wildcatters are more difficult to defer without massive credit lines large companies have, so is the risk, and so small-scale speculators fold up their tents more quickly when prices drop.

As prices rose again recently, knee-jerk wildcatters headed into the hinterlands again. The government wants them out.

So international miners are pumping money into Brazil. Already the top emerging market in Latin America, brazil just logged a 30% jump in foreign direct investment (FDI) over the previous record from 2007.

And as the leadership brings in more and more money inflows, there’s another bullish gold trend in the works down there.

Brazil’s new Gold Century is also contributing to the dollar’s decline.

That’s because President Luiz Inacio Lula da Silva is pushing for Brazil to settle more of its international business in the local currency.

Brazil Leads De-Dollarization of Global Trade

Lula has railed against “blue-eyed bankers” for causing the worldwide recession, even while he managed to keep Brazil in good shape. The latest figures show that Brazil turned in a current-account surplus in April, and the country was raised last year to investment-grade status by S&P.

Brazil is in a position of strength, and Lula knows it. Now, instead of doing deals in dollars, Lula wants transactions between Brazilian and Chinese firms to dodge the greenback.

Steven Barrow of South Africa’s Standard Bank says such a move could start the “creeping de-dollarization” of international trade. And as the U.S. currency sheds its arbitrary value, gold stands to gain.

Brazil is positioned to benefit both from the local currency boost, and from a surge in gold exploration and FDI.

Make sure the mining stocks in your portfolio have exposure to Brazil. Also, check out NYSE:EWZ, the iShares MSCI Brazil Index ETF. That exchange-traded fund is heavy on materials, with a 26% allocation to companies like mining giant Rio (NYSE:RIO).

We’ll keep you up to date with the latest developments in Brazil’s gold production progress.


Sam Hopkins

P.S. With a gold resource worth 63 times more than its market cap, this junior gold stock is getting ready to pay off big time. This tiny $0.34 stock could make it’s first move over $2.00 in short order. The whole story is laid out for you here.