Gold – this little word (from the old English geolo, or yellow) means big things to many people.

By Dave Phillips.

Images: Pixabay

It was one of the first metals available to man, mainly because it can be found in its elemental state, no need for messy smelting or complicated chemistry to purify it. It comes ready to run from mother nature. Unfortunately it is also one of the least useful metals, being too soft for a tool and too rare for any large scale applications. But this hasn’t meant that gold has not been highly prized, as an ornament and as a store of wealth.

Warning

This article gets a bit technical. If you are at all numerate then please carry on reading; if you are not, then you can skip straight through the text, maybe pausing to admire the photos of lovely gold objects, and go to the end (and if you are not numerate then ask yourself why are you reading this magazine at all).

 

Three things I bet you didn’t know about gold

There might be a lot you know about this popular metal. It’s dense – 50% more dense than lead, melts a bit above 1000°C, shiny and can be beaten out into incredibly thin foils, much thinner than the aluminium foil used in the kitchen. But here’s some things you probably don’t know, but maybe should if you want to impress your golden friends:

1. Because gold is used as a food additive it has its own EU recognised code – E175. But it’s also one of the rarest food additives, being sprinkled on sparingly as a decoration for exotic dishes and cocktails. It has no taste.
2. Enough gold has been mined since the start of human history for there to be about an ounce for every man, woman and child alive today, if it were shared out equally. That would be four gold sovereigns each.
3. There is about 100 times more gold dissolved in seawater than has been mined from deposits on land. Clever German chemists thought they might be able to extract some of this to pay off crippling reparations after WW1. They couldn’t.

What’s a karat?

Confusingly, jewellers use two similar words to mean two different things. For the gold enthusiast, karat refers to the purity of the metal expressed in terms of the weight of gold present in an alloy. 24 karat gold is nominally 100% pure; 18 karat is 75% pure, and so on. It comes from the Greek word for the carob seed, which was once used as a unit of weight. For the diamond geezer, carat is a unit of weight equal to 0.2gm. It has the same origin in carob seeds. The largest ever cut diamond, the Cullinan 1 or Great Star of Africa, weighs in at 530 carats. This 106gm diamond is part of the British crown jewels, and has an estimated value of $500 million. At current prices this would be the equivalent of a nearly 20 tons of gold. No wonder smugglers prefer diamonds.

‘…It’s one of the heavy elements formed in ancient stellar explosions, and collected in vanishingly small amounts by swirling clouds of interstellar gas…’

Incidentally, Olympic gold medals are mostly made of silver but are required to contain at least 6gm of gold, worth about $200.

Where does gold come from?

It’s one of the heavy elements formed in ancient stellar explosions, and collected in vanishingly small amounts by swirling clouds of interstellar gas – before being gathered up by planet earth. Most of the earth’s mass is in the lighter elements but luckily there’s just enough of the heavier (bigger nuclei than iron) to make our technocracies viable. Even luckier, natural processes such as mountain building concentrate it into gold rich mineral veins, which can even contain the pure metal. It’s this which eventually washes out to the ground water and then into rivers where it can be found amongst the sandy deposits on the river bed as alluvial gold. This was for most of human history the only source of gold but as mining and extraction technologies got better it became possible to get at the mother lode and mine gold on an industrial scale This has led to modern levels of production – getting on for three thousand tons annually – which dwarf those of the pre-industrial era.

Who owns all the gold?

Gold is not shared out equally. Today, ownership is spread out between national banks and individuals. About half of all the gold today is in the form of jewellery, and about a fifth is held in private hands as an investment in coins or ingots. A similar amount is held as part of the reserves of national banks (including the IMF) while about a tenth finds its way into various industrial uses, mainly because of its excellent properties as a conductor of electricity and heat.

If you have a mobile phone then you might be pleased to find that it contains some gold – abut one fortieth of  a gram.  That’s not a lot but is at a much higher concentration than economically attractive gold ores where 1gm per ton is worth mining.

The ownership  distribution changes over time, as banks have become less interested in having piles of gold bars stashed away in their vaults (but beware of Gordon Brown’s mistake) and Indian housewives seek the security of gold as a hedge against an uncertain future. Have you got your fair share?

Gold and personal wealth

The earliest (inflation adjusted, and who wouldn’t be?) gold billionaire was King Croesus of Lydia, who minted coins from the alluvial gold found in the river Pactolus and controlled much of the east-west trade between Europe and Asia before 550 BCE. His name lives on today through the phrase “as rich as Croesus”. But his personal wealth paled into insignificance when compared with the richest individual of all time. This was the Roman general and politician Crassus who, through ownership of land, slave trading and general corruption ended up in 50BCE worth an estimated 2 trillion dollars in todays’ values. Although inflation adjustment over two thousand years and between different civilisations is problematic to say the least.

Gold and the New World

In medieval Europe land was the basis of wealth, both as a store of value and a source of income and power. Gold and silver, both in short supply, were the means of exchange. When Spanish and Portuguese explorers found almost unimaginable amounts of both metals in the Andean regions of central and south America, both flooded in to Iberia and eventually the rest of Europe. By the sixteenth century about a ton of gold was being sent back every year. The main effect was inflationary, ruining many of the aristocratic landed gentry. The secondary effect was to enrich some people and to add liquidity to the market, to create demand for goods and commodities and opening up opportunities for a new middle class. European economies boomed. In total some 200 tons of New World gold (and far more silver) was taken, worth getting on for $10 million in todays’ money. This was of course not such good news from the indigenous New Worlder’s who not only lost precious ornaments but in most cases also their lives, through disease spread by the marauding Europeans.

 

Gold as currency: the gold standard

Man has always traded to survive and soon came to realise that bartering, the exchange of goods of agreed equal worth, was inefficient. Better by far to have a a more portable surrogate store of value in the form of a currency of general acceptability. Many kinds of objects have been used as currency, such as conch shells (the shells of medium to large sized sea snails), natural pearls, gemstones, and pieces of precious metal such as silver and gold. All these objects have characteristics in common: they are durable, portable, in short supply and have little intrinsic worth but hold a great attraction for many. No self-respecting south sea islander would be without his stash of conch shells, and get pleasure from counting them every night.

Unlike in China, where banknotes have been in circulation for over a thousand years, in post renaissance Europe money that wasn’t in the form of gold or silver was viewed with deep suspicion. But governments and individuals saw the merit of increased liquidity beyond that which the limited supply of these metals could provide. The answer was for bankers to issue promissory notes backed by a guaranteed convertibility into gold or silver. Since most people didn’t need to cash in their notes most of the time, this ploy multiplied available liquidity and at a stroke made possible a great expansion of the economy and trade. This was underpinned by the assured exchange rate between the paper value of the notes (banknotes) and, usually, a specified amount of gold. This assurance became known as being on “the gold standard”, and from then on no worthwhile currency was on any other.

US practice was typical, with early attempts in the eighteenth century to produce a dollar currency suffering repeated failure and galloping inflation because of greed and lack of central control. This was followed by federal regulation that required all payments to be made in gold or silver, and in the 19^th century the US dollar was officially pegged to 1.5gm weight of gold. Then the US currency effectively became on the gold standard, and officially so by 1900 where it remained until 1971 when it became clear that even for the mighty USA the market could no longer be manipulated to keep the dollar value up to match an increasingly expensive amount of gold. The $35 dollars per ounce official ratio was at last abandoned.

Gold robberies

In the Red Headed League, Sherlock Holmes thwarted a robbery of 30,000 Napoleons (French gold coins weighing in total almost 200kg) from a London Bank: elementary, my dear Watson.

Perhaps the biggest and best known actual gold robbery in more recent years was the Brinks-Mat heist of 1983 when £26 million (nearly treble that in todays’ value) worth of gold bars was taken from a warehouse near Heathrow airport. But that theft is dwarfed by the systematic plunder of European central banks and private individuals (including their teeth) by the Nazis during WW2 when hundreds of tons of bullion was requisitioned to help finance the German war effort. (The British were so worried that the same might happen to them if there were a successful German invasion that, in 1940, in the secret military operation “Fish”, most of Britain’s gold reserves was shipped across the Atlantic to Canada. About one thousand tons of gold was transferred without loss to specially constructed vaults beneath the Sun Life building in Montreal. This was the largest ever gold shipment in history.)

 

Is gold a wise investment?

In the long term the value of gold as expressed in terms on convertible currencies has increased, very roughly keeping pace with inflation. Gold producers try to keep their market on an even keel by controlling the supply to match demand. But this is not easy. Overall demand increases while the total supply is finite, and demand can vary wildly in response to economic and political upheaval. In the three years following the banking crisis in 2008, the price of gold nearly trebled.

In the short term the price of gold fluctuates, typically within a narrow band of a few percentage points, and on an hourly basis, or even faster. You can buy and sell into this market, principally through the London Metal Exchange. But current well-meant advice is that in the short-term gold, as with any traded commodity, is a risky investment. Better to invest in gold shares, in companies which make their living from mining gold. Better still, to avoid being over dependent on one sector, invest in a portfolio of shares to spread the risk and ensure some return through dividends.  But where’s the fun in that?

And in the long term we are of course all dead. Commodity speculators eventually know this and so generate mathematical models to help them predict future gold prices more quickly. They should (and perhaps do) take note of the major oil companies. They have long since given up trying to understand the market in which they operate and have abandoned trying to forecast the unknowable.

National ownership of gold production

Nature has not shared out these gold deposits fairly.  Most countries can lay claim to some gold, but mostly in only small quantities. The big productions and big reserves are in a relatively few. In 2016 the top five producing countries were (in order) China, Australia, USA, Russia and South Africa, responsible between them for about 40% of global output.

The worlds smallest gold producer in 2016 was probably Scotland. Its newly opened Cononish mine auctioned off its first output for £46,000, 11 ounces of gold in the form of medallions.

There’s gold in them thar hills!

Can you make gold?

Medieval chemists manged to convince enough wealthy patrons to fund their alchemy, some of which was intended to turn base metals into gold. A good recipe was for a mix of unpleasant organic ingredients and a base metal or two. The most popular base metal for this exercise in chemical ignorance was lead, suitably heavy and was relatively inexpensive. It’s not clear how much effort was put into this European experiment and what beneficial spin-offs there might have been. A comparison with the Large Hadron Collider is unjust since the latter has had success in meeting its aims.  Alchemy never could, and of course didn’t.

Paradoxically, in the post atomic period, we now know that base metals can be turned into gold. For example, if you were to irradiate mercury with gamma rays, you get an unstable mercury isotope which then slowly decays into gold and an electron. All you need for this modern day alchemy is a nuclear reactor and deep pockets ,because it takes a long time to get a measurable quantity of gold by this atom-by-atom process. Much better to stand in a river with a shallow pan, and swish the river bed deposits around. Especially if you pick the right river.

The end

All good things must come to an end, as someone even more pessimistic than me once said.  And so has this.

But for those who want a proper conclusion, how about this?  Gold is just a traded commodity but unlike some (cocoa, wheat) its supply is finite and not subject to the vagaries of the weather. Iit is not consumed  (as is oil) but constantly recycled (mostly). It has little intrinsic value but still provides a valued hedge against the whims of politicians and failures of bankers. And the demand for it seems insatiable.