Peru is burning a hole in its pocket

A girl I know is out shopping for a new TV with her mom right this very moment. The mother recently “came into a bit of money” as they say and she’s been keen to splurge on some nice things for herself and her family. Fair enough, particularly because the mom happens to be a retired schoolteacher who in years past certainly didn’t have all the luxuries I’ve enjoyed throughout my life.

In macro context the picture is a bit more complicated. Consumer spending and consumer credit in Peru are growing rapidly even while the economy as a whole has been slowing. If you think that might be a risky combination, I suspect you belong to a dwindling group of people who possess what was once known as common sense.

Peru’s economy and foreign currency inflows are heavily dependent on mining but there are relatively few “slam dunk” mining projects in the near future pipeline. Forget what the stuffed suits in Lima might say, I’ve talked to quite a few out-of-work mining engineers here in Cusco who are moonlighting as taxi drivers until they get called up for their next project and from what I hear, the pipeline is not particularly hot.

There’s probably a defensible argument to be made that if there is a bubble, we’re still in the early stages. If you feel like you can time these sorts of things and can stomach the risk, there’s still time for money to be made if you invest in the right places and get out at the right time.

However, I’m not interested in investing or buying stuff. I have 3 kids that for the moment are still growing up in Peru and I’m interested in the things that affect a deeper quality of life, the stuff that really matters beyond consumer goods. I’d like to see nicer parks, better hospitals, better schools, safer roads. I’d like to breathe cleaner air and have less potholes too. I wish there were much better residential neighborhoods, zoning, urban planning. A lick of paint wouldn’t hurt 95% of homes in Cusco. Speaking of homes, I wish there existed an acceptable system of recording titles and ownership in Peru so fools like me who pay taxes can actually take out a mortgage. I wish there were a sound financial system so people who carry around wads of cash are held accountable for the way they made those riches and if legitimately earned, pay a small slice of taxes so that all of the foregoing is actually possible, presuming there were a non-corrupt and competent public sector.

It’s a shame that all of the macro economic growth that Peru has enjoyed in the past 2 decades has only generated consumption and done little or nothing to affect true quality of life. Surely this isn’t a unique Peru problem but now that the economy is slowing down it will be interesting to see how the powers that be choose to address the challenge, more trickle down economics or make the hard decision to pursue real reform in the public sector, judiciary, the financial system, education, etc?

Look for the blue rock

I got together with a couple of guys who are in mining a few days ago. Mining is a big part of the economy here in Peru: copper, gold, zinc, you name it. I don’t know much about mining, my father worked in the coal mines in Belgium when he was young but those mines are long gone now. As you might expect, since we’re talking Peru, a good bit of the mining here is informal and badly organized. Peru tends to be that way in many respects, the economy in general is very informal and with poor or little organization. Outside of a few foreign companies (LAN, Telefonica, Saga Falabella, …) the only large and well organized organizations are the police, military and churches, that’s just part of the culture here I guess.

Cuzco is the nearest somewhat big city to the region of Madre de Dios, where a lot of the informal mining takes place. “Informal” is the politically correct term for illegal mines, small mines that have no license and no environmental controls.

My accountant has quite a few informal mining customers and he regularly tries to get me involved with them. Cuzco is one of the most traditional areas of Peru and there is still this weird idea out here that foreigners (so called first world people) are all-knowing and can do anything Peruvians can’t. In the case of my accountant, his “informal” mining customers are always looking for ways to sell their illegal gold. So they ask me if I can make a trip a month to Switzerland with a case full of gold and sell their gold to the Swiss banks. Seriously, just because I’m tall and white they think I can do that, and that it would be OK if I did that. I don’t know what they get in towns like Puerto Maldonado for their illegal gold but I’m sure it’s much below the market price. It’s sad really, because I don’t think those people fully realize the damage they’re doing to the environment but on the other hand, how can you expect somebody who would otherwise be living on $200 a month to turn down a chance to make $30,000 a month?

Anyway, the guys I had a beer with are stand-up people, they’re the guys that do apply for environmental permits and all that good jazz. But I forgot to tell them a secret I got from these local “informal” miners: if you want to find the gold, all you have to do is look at the color of the rock. The blue rock is where the gold is.

I don’t know diddly about geology and drill holes and mineral resource classification but just look for the blue rock if you want to find the gold. So say the locals.

River Madre De Dios

Looking for gold? Nah, just waiting for the boat on the river Madre de Dios.

Priceless jungle Peru

Priceless jungle

$1202

The current price of gold, one of Peru’s 2 main exports (the other is copper).

Here in the Empire of blood and gold the effects of the run-up in gold prices are decidedly mixed. While gold certainly has been good for Peru’s macro-economic numbers, the current gold rush in places such as the pristine jungle of Madre-de-Dios has undeniably had a significant environmental and social impact.

Gold mining in the jungle of Madre-de-Dios, Peru

Gold mining in the jungle of Madre-de-Dios, Peru

On the purely financial aspect, I tend to agree that gold will likely do no better than protect your purchasing power in the long run. Gold has no intrinsic value and I’d say the current run-up is largely due to lack of faith in paper currencies, since central banks are printing them up like Monopoly(tm) money, but you can’t expect artisan miners in Peru or the suits at the TSX to give 2 hoots about that.

Here’s to Peru’s Ministerio de Energia y Minas.