Gold is a hard to find precious metal with chemical and physical properties that makes it unique. It has been treasured around the world through history because of its scarcity and durability. Today, gold stands above all other commodities as a long-term store of wealth because the supply of gold can’t be increased by “printing” more, like paper money. Therefore, gold remains as the most effective tradeable metal against market uncertainty.
But, what is so special about gold that makes it unique?
Technical Background
Gold is coherently distributed throughout the surface of the Earth in average concentrations of 0.004 grams of gold per metric ton of rock. During complex geological ore forming processes, gold is concentrated at certain locations in the form of mineral deposits, which are the focus of exploration for mining companies today.
Although different mineral deposits are grouped into “models” with similar characteristics, each deposit is certainly unique due to its intrinsic complexity. As geologists increase their knowledge about the mineralizing processes, their ability to find gold increases.
As mines become depleted, finding economic concentrations of gold becomes harder every year. Most modern gold mines contain at least 100 to 1000 times greater than the average concentration of gold in the earth crust, for example, 0.4 to 4 grams of gold per ton of rock mined or greater. Some mines, however, have gold grades as high as 30 grams per ton, and can exceed several hundred grams per ton in exceptionally concentrated parts of these deposits, known as “bonanzas” or “mother lode”.
Gold Physical and Chemical Properties
The chemical symbol of gold, “Au”, is derived from the Latin word “aurum”. It is a relatively soft metal (about the same hardness as a penny). Gold in its most pure state is sun-yellow, and has a metallic luster. Natural alloys of gold with other metals, such as silver, copper, nickel, platinum, palladium, tellurium, and iron, create various colour hues ranging from silvery white to orangish red.
Gold has an electron configuration which endows it a very strong resistance to oxidation, and for this reason it has been called a “noble” metal (an alchemistic term). Additionally, gold has very weak bonding, mostly covalent with most anionic elements, granting it outstanding ductility and malleability. In fact, gold is the most malleable and ductile of all metals.
Gold is chemically inactive, which means that is highly resistant to react with other elements such as oxygen or water. For this reason, we find gold nuggets without a trace of oxidation under conditions that would easily rust other metals. For this reason, a statue build out of gold will look identical today as it will in 1000 years, whereas a statue build out of brass or copper will rust and degrade over time. In fact, gold coins and jewelry found submerged in shipwrecks have been recovered perfectly preserved.
Gold is also highly resistant to most acids and therefore does not corrode easily, although it will dissolve in “aqua regia”, a mixture of hydrochloric and nitric acids, as well as in sodium or potassium cyanide. Potassium cyanide is the basis for the cyanidation process used to recover gold from low-grade ores.
Gold has a very high density: 19.3 g/cm3, compared with 11.4 g/cm3 for lead and 1.0 g/cm3 for water. That means that even a small volume of gold is very heavy. For example, a solid piece of gold the size of a soccer ball would weight 107 kg!!!
Gold is extremely resistant to weathering and, when freed from enclosing rocks, it is carried downstream as particles of dust, flakes, grains, scales, nuggets, and crystals of native gold. Gold crystals are typically alloyed with silver and iron, and to a lesser degree, with over 24 other metals such as mercury, bismuth, antimony, tellurium, selenium, copper, and sulfur. In addition, quartz and/or chalcedony (hydrated fine grained quartz) are intimately associated with gold in many kinds of ores.
The Value of Gold Through History
Gold was initially recovered from creeks and channels in the form of alluvial nuggets. Unlike other metals such as copper which required complicated metallurgical extraction from the ore, gold was easily recovered in free state. Archaeologists have estimated that the gold recovered by ancient civilizations was typically 80 to 85% pure gold, and 20 to 15% silver.
Because gold is so malleable and ductile, it was easily worked into complicated ornaments and adornment items, as well as very thin sheets and wires which could be woven into chains. The result was of unrivaled quality impossible to replicate with any other metal. Goldsmiths of Sumerian, Minoan, Mycenaean, Egyptian, Etruscan, and other Mediterranean ancient civilizations mastered the art of turning gold nuggets into impressive jewelry.
Gold became rapidly acknowledge as a universal sign of wealth, and it began to be used as money in the form of gold coins. Some jewelry was melted to create gold coins, and conversely, in times of crisis such as wars, gold jewelry was traded as money.
For over 5000 years, and well into the 20th century, gold coins and jewelry were the only uses of gold. The invention of crude forms of gold as money/jewelry is dated back to the origin of the first Mesopotamian and Sumerian cities in today’s southern Iraq. About 4000 B.C., the Egyptians were already using gold bars of a set weight as a medium of exchange. The first gold coins known in history date back to 650 B.C. in Lydia, now western Turkey.
Gold coins coexisted with silver coins and other base metal coins such as copper. The value of gold to silver, known as the “gold to silver ratio”, has fluctuated through history and across different civilizations. Throughout thousands of years, the gold to silver ratio remained approximately 9:1 to 16:1 (that is, the value of gold was 9 to 16 times higher than silver).
Gold in Ancient History
In the beginning, many civilizations worshipped the sun, and because of the characteristic bright yellow “sun-like” colour of gold, it was used in religious ornaments and idols.
Gold was recovered as nuggets and flakes from streambed gravels and Asia during 4000 B.C. At about the same time, the Egyptians recovered gold along the Nile river and Nubia (Sudan) and from plateaus near the Red Sea. Gold from the plateaus were first extracted from oxidised surface rocks and later from underground mines that extended as deep as 100 m below the surface. It is believed that the Egyptians also mined gold elsewhere in Africa and the Arabian Peninsula.
The Egyptian gold accounted for most of the gold in the ancient cultures that developed around the Mediterranean. The Egyptians recognised that gold was highly ductile and malleable, which means it can be drawn into wires and beaten into thin sheets. They began making use of gold for decorative purposes, and developed the art of beating gold into thin sheets about 3000 B.C. These gold sheets were then used to cover funerary masks and tombs that we see today in museums and history books.
Later, the Greeks improved traditional methods of gold prospecting developed by the Egyptians by diverting streams to obtain adequate water flow for washing gold gravels. The Greeks also began using fire setting/quenching to break up hard ore and rock.
The Romans further improved gold prospecting and mining methods developed by the Egyptians and the Greek. They improved underground structures and devised improved the methods to pump underground water. Additionally, the Romans improved sluices, and developed high-pressure water cannons used to blast gold-bearing gravel terraces. By the start of the Christian era, the Roman Empire’s production of gold was nearly 8000 kg of gold per year!
During the Migration Period (also known as the Dark Ages or Early Middle Ages, which lasted from the fall of the Roman Empire to about the year 1000), the majority of known placer deposits were exhausted, and the inability of most miners to control ground water table limited the depth of underground workings. Consequently, it has been estimated that gold mining and prospecting declined during this period to total production of approximately 3100 kg of gold per year.
By the 14th century, major gold discoveries in Europe brought production up to about 7800 kg per year. During the 15th century, the Portuguese began mining in Africa, particularly from Guinea and Ghana.
After the Americas were discovered in the 16th century, the looting of gold from South American gold treasures increased “production” to nearly 8000 kg of gold per year. It is believed that the Aztec and Inca treasuries of Mexico and Peru was obtained mainly from Colombia.
By 1550, Spain alone was receiving over 4000 kg of gold per year from the established colonies in Mexico and South America. It is estimated that the amount of gold brought to Spain during the 16th century by its American colonies was somewhere between 154000 kg and 311000 kg of gold. Most of the treasure brought to Spain from the New World was melted and cast into coins and gold bars.
Gold production during the 17th century was dominantly derived from the Americas, approximately 8000 kg of gold per year. By the end of the century, a gold rush in Brazil increased production to nearly 11000 kg of gold per year.
During the 18th century, gold production doubled, mainly derived from Brazil and the Ural Mountains in Russia. By the mid- 18th century, world production was approximately 23000 to 25000 kg of gold per year.
The Era of Gold Rushes
The 19th century was an era of numerous gold rushes around the world and was the most exciting in terms of exploration and discoveries.
During the second half of the 19th century and until 1971, most of the world adopted gold as the standard sign of wealth in the form of monetary reference metal, and silver was largely demonetized in comparison to gold. Consequently, the U.S. dollar was defined in terms of a specified amount of one of the reference metals such as gold.
As gold was adopted as standard monetary reference metal worldwide, most countries began stockpiling gold in the 19th century. After 1934, the U.S. began buying all the gold offered to it at $35 per ounce, and the U.S. stock reached almost 22,000 t of gold by 1949.
This was reversed in 1971, when the convertibility of gold into dollars was suspended, and the U.S. stock declined to about 9000 t of gold. The European stocks, however, had increased to over 20,000 t. World monetary stocks changed little thereafter, and by 1999, there were 33,000 t in the world monetary stock, which accounts for 24% of all gold ever mined.
Gold exploration during the 19th and 20th centuries was sustained via a strong demand of gold coins by worldwide nations using the gold standard. Simultaneously, important improvements in mining and metallurgical methods improved production significantly.
The first gold rush occurred in Russia after the Tsar encouraged gold exploration within the nation. In 1848, gold was discovered at Sutter’s Mill, California, sparking the gold rush of 1849-1850. Hundreds of mining camps were settled as new deposits were discovered, including the Mother Lode and Grass Valley districts in California and the Comstock Lode in Nevada during the 1860s.
Soon after the California gold rush, the Australian gold rush began in New South Wales and Victoria in 1851. In 1886, gold was discovered in Witwatersrand in South Africa, which to this day dwarfs all other gold discoveries (total production to date within the Witwatersrand district exceeds 45% of world production).
In 1893, gold was discovered in Kalgoorlie, Western Australia. Placer gold was discovered in 1896 in the Yukon Territory, Canada, leading to the Klondike rush. Simultaneously, gold was discovered in Nome, Alaska.
In sum, gold production during the second half of the 19th century more than doubled all the gold mined across the world since the discovery of the Americas.
During the 20th century, world gold mine production increased to levels unimaginable in early times. The 69% increase of gold in 1934 was a critical factor leading to worldwide boom in gold mining lasting until the World War II and marked a critical moment in history that helps us understand the value of gold today.
It is estimated that over 80% of all gold mined through history was mined in the 20th century. The introduction of open-pit mining methods, widespread adoption of froth flotation and the development of cyanide heap-leaching processes for low-grade ores were critical factors leading the increase in production by being able to process high-tonnage, low-grade mines.
During unstable times such as wars and economic crisis, gold proved to be a fragile reference metal. During World War II, the International Monetary Fund (IMF) was established, and in 1946, nations members of the IMF set the exchange rate for its currency against the U.S. dollar and against gold at $35 per ounce. Thus, the U.S. dollar became the substitute for gold in international transactions.
During the 1960s and 1970s, the U.S. experienced severe currency inflation, and in 1971, the U.S. ended the convertibility of dollars into gold. In 1974, the IMF broke the link between international currencies and gold, and between 1975 and 1980, the U.S. auctioned about 1,262 t of bullion gold on the open market, as a way of de-emphasizing the role of gold in monetary affairs.
After 1971, the price of gold increased markedly, briefly reaching over $800 per ounce in 1980. This encouraged mining and exploration companies as well as prospectors to resume the search for gold. However, from the end of World War II through 1983, domestic mine production of gold remained below 2 million ounces annually. Since 1985, annual production of gold has steadily increased by 1-1.5 million ounces every year. The total cumulative output of gold in the US during the period 1792-1989 reached 363 million ounces.
The Value of Gold Today
Although total world production of gold through history is estimated to be about 3.4 billion troy ounces, gold has become increasingly difficult to find and produce every year, which reinforces the value of gold. As high-grade gold mines are depleted, production costs of low-grade gold mines rise.
Hence, gold is a classic example of a low supply, high demand product. As the supply of gold can’t be increased by “printing” more, like paper money, gold remains today as the most effective tradeable metal against market uncertainty. Because of this, gold quite often performs best when the markets are low.
Another advantage of using gold as an investment is that physical gold retains and/or increases its purchasing power over long periods of time, unlike most currencies which have a history of lowering in value while in circulation. For these reasons, many people choose to invest in gold as a way of diversifying their portfolio.
The most common way to invest in gold is via buying gold bullion and coins. Buying physical gold assets means there are no 3rd parties involved and no hidden fees, which is an added value on its own.
A common alternative to purchasing physical gold is buying gold-backed ETFs (“Exchange-Traded Funds”). These are traded just like stocks and offer a much better liquidity (ability to sell it) than physical gold. Another advantage of gold-backed ETFs compared to physical gold is that it can be bought and sold in very small quantities.