President Joko Widodo in his keynote speech at the Annual Financial Services Industry Meeting (PTIJK) in Jakarta on February 6, 2023, reiterated the importance of promoting the domestic value-added by developing the country’s mining commodities, particularly gold, following the successful promotion of nickel in 2020.
The Indonesian government plans to continue the promotion of the mining industry, including gold, and developing Bullion Banks in the country. Bullion Banks have been established in various countries, including India, which is the world’s largest gold jewellery market. The banking system that supports gold trading is considered one of the solutions to overcome the challenges and develop India’s position in the global gold market.
Furthermore, Australia is the world’s sixth-largest gold exporter, and its Perth Mint is considered a proxy gold market and one of the largest gold refineries in the world, having a membership in the London Bullion Market Association (LBMA). China also initiated a push into bullion banking after lifting the ban on individual ownership of gold and launching gold deposit and savings products.
Gold has been a valuable commodity for Indonesia, as the 20th largest gold exporter in the world, has the potential to further develop its gold industry and create more benefits for its people and economy. One way to do this is through the establishment of a bullion bank, which can provide various services related to gold trading, financing, and gold storage. In this article, we will explore the opportunities and challenges of bullion banking in Indonesia.
What is a Bullion Bank?
A bullion bank is a financial institution that specializes in trading precious metals, such as gold and silver, and providing related services to clients, including individuals, corporations, and governments. Unlike traditional banks, which primarily deal with fiat money, bullion banks hold and trade physical gold bars or coins as assets. They can also offer paper or digital instruments that represent gold ownership, such as certificates, exchange-traded funds (ETFs), or futures contracts.
Benefits of Bullion Banking
Establishing a bullion bank in Indonesia can have several benefits for different stakeholders. First, it can increase the country’s foreign exchange earnings by expanding the gold export market and reducing the import of gold-related products. In 2020, Indonesia exported gold worth USD6.31 billion, but it imported more than twice that amount.
Second, it can promote financial inclusion by offering new investment and financing options to the public. Bullion banks can provide various products and services that cater to different risk preferences, from low-risk savings accounts that earn interest in gold to high-risk margin trading that allows investors to speculate on gold price movements. Bullion banks can also offer collateralized loans to small and medium-sized enterprises (SMEs) that use gold as collateral, which can help them access funding at lower costs than traditional loans.
Third, it can stimulate economic growth by supporting the gold industry and creating new jobs. Bullion banks can provide liquidity to gold miners and refiners by buying their products at competitive prices and financing their operations. Bullion banks can also employ a wide range of professionals, such as traders, analysts, auditors, and security personnel, who can contribute to the development of financial and human capital in Indonesia.
Challenges of Bullion Banking
However, establishing a bullion bank in Indonesia also poses several challenges that need to be addressed. First, it requires a significant amount of capital, both for initial setup and ongoing operations. Bullion banks need to acquire and store large quantities of physical gold, which can be costly and risky if not managed properly. They also need to comply with various regulations and standards related to anti-money laundering (AML), know-your-customer (KYC), and safety and security.
Second, it requires a supportive legal and regulatory environment that recognizes the unique nature and risks of bullion banking. While there is no specific law or regulation that prohibits bullion banking in Indonesia, there are also no specific provisions that facilitate its establishment and operation. Bullion banks may face legal or administrative obstacles, such as taxes, permits, or licensing, that can delay or hinder their operations. Moreover, the public perception of gold and its role in the economy and society may affect the demand.
Indonesia Illegal Mining
Indonesia is home to vast mineral resources, with gold deposits being particularly abundant. However, illegal mining practices are prevalent, with many small-scale operations and community mines operating without the necessary permits. The impact of these practices is significant, with environmental damage, social and economic issues, and risks to the health and safety of miners and nearby communities.
Environmental Impact
Illegal mining often involves the use of hazardous chemicals such as mercury, which is used to extract gold from ore. This can lead to water and soil pollution, and harm the health of both humans and wildlife. Furthermore, illegal mining practices often involve deforestation, which contributes to climate change and loss of biodiversity. Despite a ban mercury is still being used to extract gold in remote parts of Indonesia as is Cyanide which ultimately effects the locals health and ecosystem and continues to get into the international gold system.
Social and Economic Impact
Illegal mining can have a significant impact on local communities, particularly those in rural areas. Many miners come from poor backgrounds and lack alternative employment options, making illegal mining an attractive option. However, these individuals are often at risk of exploitation, with low wages, poor working conditions, and risks to their health and safety. Moreover, the lack of regulation in illegal mining can lead to conflicts between communities, with disputes over land ownership and resource use.
Even during the worst haze situation gold was transported down from the mountains of places like Kalimantan to local consolidators before being refined and turned into jewellery for export.
Indonesia Gold Smuggling
Investigation of Alleged Gold Bullion Smuggling Scheme Urged by Indonesian Law Commission
The Houses Law Commission of the Indonesian Democratic Party of Struggle (PDIP) Faction is urging the Attorney Generals Office (AGO) to investigate an alleged gold bullion smuggling scheme from Singapore to Indonesia through Soekarno-Hatta Airport. The alleged scheme, if true, could have a significant impact on the Indonesian economy and the global gold market. In this article, we will delve into the issue and provide a comprehensive analysis of the situation.
Overview of Alleged Gold Bullion Smuggling Scheme
According to Arteria Dahlan, a member of the Houses Law Commission of the PDIP Faction, the alleged gold bullion smuggling scheme from Singapore to Indonesia through Soekarno-Hatta Airport is suspected to involve a massive amount of gold. The exact amount of gold involved has not been disclosed, but it is believed to be a significant amount.
The alleged smuggling scheme is a serious concern for the Indonesian government, as it could have a detrimental effect on the economy. Indonesia is a significant gold producer and exporter, with the mining sector contributing significantly to the country’s economy. If the alleged smuggling scheme is true, it could lead to a decrease in the demand for locally mined gold, which could impact the economy.
Possible Consequences of Alleged Smuggling Scheme
The impact of the alleged gold bullion smuggling scheme could extend beyond the Indonesian economy to the global gold market and will have a negative impact on not only the local but the global gold market whose reputation is already questionable as it is.
Steps Needed to Address the Alleged Smuggling Scheme
To address the alleged gold bullion smuggling scheme, the Indonesian government needs to take swift action. The AGO needs to investigate the matter thoroughly and take appropriate action against those involved if the allegations are found to be true.
It is essential to ensure that the gold market remains transparent and fair to prevent any negative impacts on the Indonesian economy and the global gold market. As such, the Indonesian government needs to take necessary measures to tighten the control over the entry and exit of gold to and from the country.
Gold from Singapore to Indonesia
The alleged gold bullion smuggling scheme from Singapore to Indonesia through Soekarno-Hatta Airport is a matter of serious concern for the Indonesian government and the global gold market. It could have significant implications on the Indonesian economy and global gold market. It is crucial that the Indonesian government takes swift action to investigate the matter and take necessary steps to prevent any future smuggling schemes.
For years tons of gold have been exported to Singapore and other countries in the form of what is referred to as jungle jewellery, milled bangles (each bangle weighs approx. 1kg in the picture to the right) that only a few days before were in the form of dore that then ultimately ends up in LBMA Good Delivery Refineries! As the exporters have a jewellery export license its totally legit but definitely a grey area.
The gold industry turns a blind eye to the jungle jewellery story as it’s been layered enough for them to ignore it, they are all bloody hypocrites if you ask me!
Indonesian Corruption
Many people are aware of certain countries in SE Asia being synonymous with bribery and corruption, that includes Singapore where any bribery overseas a listed company merely gets a stern warning apparently! So its rife out here and you need to steer clear especially in the gold sector.
Then there’s the ongoing case of possible corruption, the Attorney General’s Office has investigated allegations of corruption in the management of gold commodity business activities at PT Aneka Tambang (Antam) that needs to be resolved. With PT Aneka Tambang Tbk (ANTAM), being member of Mining Industry Indonesia (MIND ID) – the State-Owned Enterprise of the Holding of the Mining Industry it needs to clear these allegations and through due process.
Indonesia Gold and the Bullion Bank Conclusion
As a gold producer and exporter, Indonesia plays a crucial role in the global gold market. It is, therefore, essential to ensure that the country’s gold market remains transparent and that all of these negative issues are addressed as part of the establishment of an Indonesian Bullion Bank. One way to deal with this is by getting security companies like Brinks that accounts for a large amount of import and export of gold into Indonesia to provide the gold shipment data to the regulatory agencies covering the gold sector!
I would advise excluding the International Bullion Banks from establishing a foothold locally as many have a checkered past especially when it comes to manipulation of the precious metals markets and would only be look to take advantage of the Indonesian gold sector (not that its not already doing that from a far.
Spencer Campbell
Director SE Asia Consulting - Precious Metals Consultant
