Course:EOSC311/2020/The Value of Gold in the Global Economy

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Introduction – Why Gold?

Figure 1: Top 5 Gold Producers

Gold is one of the most valuable assets in the world. In commerce, gold is regarded as a currency and an investment. What is the intrinsic value of gold? Why is it thought to be a store of wealth? How and where is it mined? What are its properties and how do they add to its intense appeal to all cultures? Why is gold seen as something to have in tough times? These are the questions that have intrigued me. I am also curious as to why the gold price is currently going up, while all other stocks are experiencing a downturn, due to the Covid-19 pandemic. On the business side, certain stocks have negative betas and gold is one such commodity. It will be interesting to see how gold will respond during this time of economic turmoil.

Figure 2: A 1902 map of the different gold fields for the Witwatersrand Basin in Johannesburg, South Africa.

For a more personal connection, I’m originally from Johannesburg, South Africa and both the city and country play a significant role in the discovery of gold deposits, mining and the production of gold. The Witwatersrand Basin is thought to be the largest gold deposit in history[1]. Approximately 50% of the global total of gold mined has its origins in the Witwatersrand[1]. South African gold production reached its peak in 1970, and even with its decline in gold production, no other country has reached that peak[2]! Both the biggest gold mine (in terms of gold reserves- with 32.8 million ounces or 930 tonnes, at the end of 2018[3]) and the deepest mine (4.27km below the surface[4]) are in South Africa. The value of gold is part of the country’s history. The gold rush in 1886 in South Africa established Johannesburg as a city, and in the Sotho language it is known as ‘egoli’ which means "Place of Gold".

Gold's History as a Precious Metal

History and Importance of Gold

Gold has quite a long history and is thought to be one of the first precious metals discovered by mankind. With this honour, many cultures aspired to obtain the metal and it became a symbol of royalty and glamour[5], a reputation that gold still holds today. The history of exploring for gold begins in Egypt around 3600 BC[5], with slaves and criminals made to work the early mines in search of this commodity. At this time there was no value or significance for the metal but was rather sought after because of its desirability.

Figure 3: Tutankhamen burial mask was primarily made of gold.

By 2600 BC gold had been molded into jewellery by the ancient Mesopotamians[5] and the famous tomb and mask of Tutankhamen were made mostly from gold. Gold was also made into coins with silver[6], which was seen as a unit of measurement for the Egyptians. In 50 BC the Romans made their own gold coins, creating the concept of money and currency[6]. This concept of gold as something of monetary value continues to the present day, with gold seen as a “safe haven” of wealth, especially when there are downturns in the economy.

Since the beginning of gold’s history, it has been sought after and this insatiable desire for the commodity has not died down over time. This precious metal is still synonymous with power, purity and beauty.

Gold in Geological Terms

Gold is not only known for its beauty and wealth; it also has some unique properties that make it useful and desirable, including its conductivity, resistance to tarnish and oxidization, and its malleability[7]. These attributes, and its rarity, allow gold’s price to be higher[7] than most other metals.

Figure 4: The different uses of gold

Gold has many uses, other than a store of wealth or jewellery. It is also used in medicine, electronics and aerospace[8]. Gold also has an anti-inflammatory property and is therefore sometimes used to treat rheumatoid arthritis[8]. In almost every electronic device there is a small amount of gold, used because of its conductivity[8]. Finally, it is also used as a thin film to reflect radiation allowing the temperature of the aircrafts to remain stable, instead of absorbing the heat. These special properties, its rarity, and its esteemed value are what makes gold such a precious metal for all cultures around the world.

Gold Production

Formation

Figure 5: The formation of gold.

Gold is found on nearly every continent of the world and is found as a pure, native metal in gold bearing minerals, with Sylvanite and Calaverite being common minerals[9]. It is usually found in hydrothermal veins[7]. The rainwater that precipitates into the ground is drawn into areas that are heated by the magma. This drives the water upward and dissolves metals from the volcanic and sedimentary rock in the fractures[10]. Once the water cools in shallow depths the metals within the water form veins or bodies of gold and other minerals, including quartz[9]. Because of this gold is often found with quartz or embedded in quartz veins[11].

Figure 6: A gold nugget from a placer deposit.

Gold is found in two types of deposits: lode and placer[11]. Lode deposits are the primary gold source and are found in rock formations from the precipitate from the cooled mineral bearing water[10]. The gold found in lode deposits is almost always in its pure state[12]. Usually these formations are veins or fractures containing the metals and if there is enough gold these become mines. The secondary source of gold are placer deposits which are either small waterways or eroded concentrations of gold[11]. The waterways run through the rocks and mineral formations carrying pieces of gold, sometimes called nuggets[12] . Some pieces or flakes may settle on the water beds or floors and are covered by the gravel and sand. Panning for gold in streams uncovers these tiny flakes of gold[11]. If lode deposits are eroded over time concentrations of gold may also form as placer deposits[11].

Mining Methods

Placer Mining

The placer method involves extracting gold from a placer deposit which are composed of loose material[13]. Since tunneling is quite difficult in the deposits the different placer methods mostly involve water[14].

Figure 7: Panning for gold.
  • Panning is used for small scale mines or tourist attractions that were once mines since it is an easy and quick technique to search for gold[15]. The heavy manual labour associated with panning makes it less viable for larger deposits[15]. Shallow pans are filled with sand and gravel that contain gold. When the pan is submerged and shaken under the water the denser gold settles to the bottom, separating the gold from the other materials. Panning is sometimes used to identify areas of placer deposits before larger extraction methods begin[13].
  • Sluicing is a common practice for prospecting mines[15]. The technique uses a man-made channel with riffles at the bottom called a sluice box. These riffles created a dead zone in the water current that allows the gold to drop out of suspension. The gold settles in the riffles while the other material flows out of the box as tailings[13].
  • Rocker box is comparable to sluicing, since it also uses riffles to trap gold[13]. It does use less water than sluicing and thus is often used in areas of
    Figure 8: A sluice Box used for gold mining.
    limited water supply[15]. The box is rocked back and forth providing the water the movement needed to separate the gold material due to gravity.

Hard Rock Mining

Hard rock mining extracts gold from rock instead of loose sediment and produces most of the gold in the world. The mines are either open pit or underground[14]. Fort Knox Mine in central Alaska is an example of an open pit mine[13]. Underground mining involves many tunnels and shafts to extract the gold ore deep in the earth’s ground. Some of the deepest hard rock mines are found in South Africa, such as the Mponeng Gold Mine[4] located near the town of Carletonville, with an operating depth of 4.27km below the surface. (https://www.mining-technology.com/features/feature-top-ten-deepest-mines-world-south-africa/)

By-Product Mining

By-product mining is also either open pit or underground, like hard rock mining[12]. The main difference is that gold is the secondary find from the mine, the primary purpose is to find copper, sand, gravel or other products[14]. The Grasberg mine in Papua, Indonesia is one of the largest gold mines in the world, but primarily mines for copper[13]. There is a significant amount of gold that exists from washing operations to make this mining method as profitable as a gold option.

By-Processing Ore Mining

By-processing ore mining extracts the gold metal through chemical processes (with cyanide being the most common). This mining method is quite controversial since the environmental and operational costs significantly outweigh the benefit of gold yield[13]. Cyanide processing[15] involves a solution of sodium cyanide mixed with the finely ground rock containing gold. The gold is separated from the rock as gold cyanide, the addition of zinc precipitates the residual gold and is then removed by sulfuric acid. The resulting gold sludge is smelted into a gold block to be refined into 99.99% pure gold metal[15]. This chemical method involves many environmental effects due to cyanides’ high toxicity[15].

Where and When

Figure 10: Countries currently producing gold (2018).
Figure 9: Gold producing countries.

Gold mining is a global business with mines on every continent except Antarctica. As of 2018, the total global production was 3,322 tonnes. The top three countries producing gold are shown in figure 9 as China, Australia and Russia, with percent of total production at 37%, 12%, and 9% respectively.

Figure 11: Gold mine production worldwide from 2005 to 2019.

Supply

Figure 12: Gold discoveries over the past 25 years.

Since gold is a non-renewable resource there is only a finite supply, even though it has been used since the dawn of time and mining is still occurring. The supply of gold is quite large with almost all continents have an operating gold mine[16], the best estimate is that “197,576 tonnes [1 tonne = ~35000 ounces] of gold has been mined throughout history” [17], with two-thirds of that has been mined since 1950[17]. Through gold mining another 2,500-3,000 tonnes of gold is added to the gold bullion annually, this is only a ~1.6% increase per year[18]. Although with gold being indestructible there is a vast amount of gold above ground and if all the mined gold was placed next to each other the resulting cube would measure 21 meters on each side[17]. The two main stocks of gold: jewellery and investments, account for 68% of the total gold supply.

Although gold production has been rising steadily over time[16], it is likely to flatten in the coming years as much of the gold production comes from older mines that have been exploited for decades. Mining companies estimate how much gold remains at each mine in two categories: reserves and resources[17]. Reserves are gold that can be economically mined at the current gold price while resources are gold that has the potential to be mined at a different price level or undergo investigation. Peak gold is the point at which global production reaches its highest point historically[1]; this is forecasted to either occur within the next decade while others say we have surpassed it, with a gradual decline of gold output from now on.

The main concern for the gold supply is the decline in new gold discoveries over the last two decades. Finding a large or “world class” deposit[19] (a deposit with over 140 tonnes of gold reserves) is becoming increasingly rare, as shown in figure 12[19]. There has also been decreasing investment from companies into vein exploration, which halts the discovery of new gold deposits. Figure 13 shows the forecasted decline in gold production to 2029. Through extrapolating (by author) the declining straight line there is an indication that additions to gold supply is estimated to be zero by 2036.

Figure 13: Forecasted decline of global gold production.

The saving grace for gold is that unlike other limited natural resources it is indestructible and so can be recycled into new gold[1]. With this option the world won’t run out of gold, there just won't be new gold, instead, the above ground gold supply will be recirculated.

Future Gold Mining Prospects

Mining Evolution

As the supply of gold starts to decline gold mining needs to undergo transformations[20] that are driven by the needs of the government, society and environment as well as advancements in technology. There are six main changes that are forecasted to happen as the mining industry changes[20]. Firstly, as more land will be used for farming and other uses, an aversion for open pit mines will create more of a focus on underground mining. Harmful chemicals will be eliminated due to the hazards for the environment, and the gold industry will see a spike in decyanidation. With underground explosives replaced by mechanical cutting, the cutting methods will advance allowing extremely hard rocks to be cut and mined. As automation becomes the norm, gold production will have to embrace it and replace dangerous or redundant manual labour activities with machines. Another pivot to environmentally friendly alternatives will be to leverage renewable energy, such as the sun, to reduce fossil fuel use. Finally, since most (2/3rd) of the earth’s surface is covered by ocean water, marine based projects will start to search for gold deposits beneath the sea.

Gold Recycling

With the gold supply declining in the coming decades many companies are looking for ways to either extend their reserves or use the above ground stocks that have already been mined[21]. Recycling gold is a cost-effective alternative[22] that can separate the gold from other materials, and it is incredible where recoverable or usable traces of gold can be found. Sources of gold include coins, jewellery, dental fillings and other work, and electronics[22]. Jewellery and coins can be recycled through store dealers or mail-in programs that pay those who have unwanted gold. Dental work is often sent to recycler by the dentists once collected. Finally, companies have started efforts to recycle the gold used in electronics and collect wasted electronics from landfills or other waste dumps. Recycling will have to become considerably more efficient if it is to meet to needs and demands of the global gold market[1], and through these new efforts to recover gold the impact on the environment will lessen considerably[21].

The Economies' Effect on Gold

Cyclical and Non-Cyclical Stocks and Betas

When investing assets, such as stocks, shares and investments, they are either classified as cyclical or non-cyclical[23]. This is the correlation of the stock’s price and the fluctuations in the economy. Cyclical assets have a direct relationship with the economy while non-cyclical assets have an inverse relationship[23]. Another determinant of assets is their betas. Beta measures the volatility of the stock compared to the market as a whole[24], and the market’s beta is 1. An increase in beta means the asset’s price is more sensitive to news and information. There is also an increase in the risk and reward from higher betas[24]. Negative beta investments move in the opposite direction to the market, when the market rises the stock falls and vice versa.

Gold in the Economy

Figure 14: Historic curve of market price (blue) vs gold price (orange).

Since gold is seen as a secure store of value, it has intrinsic value, it is a non-cyclical asset and has a negative beta[25]. Gold stocks usually do better when the economy is in a recession or declining and when the economy grows gold prices fall; gold stocks are counter cyclical to the strength in the economy. The price is tied more to the interest rate movements and the status of the economy instead of consumer consumption[25]. Gold has an increased value during times of market turbulence and therefore is seen as a safe haven and a store of wealth.

In a market downturn, investors will therefore sell their stocks and buy gold or cash, which have a negative and zero beta respectively. Negative betas still have risk though[24]; if the market does well then negative beta assets are losing money, but they are seen as a hedge for when the market fails.

Supply and Demand of Gold

The supply and demand of gold are different from most commodities since the demand and price is tied to the economic status. The price of gold stocks increases in economic turmoil as it is seen as a store of wealth, and the price decreases in good times since consumers move to other investment options[24][25]. With the supply of new gold declining and demand fluctuating by the economy, gold's price is very dependent on the overall “health” of the economy.

Figure 15: The production curve of gold (orange bars) compared to the price of gold (black line).

This is shown in figure 16, where the gold price remained constantly depressed as production increased from 1967 to 2005 with no global economic “shocks”[18]. With the market collapse in 2008 the gold price rose from $250 to $1700 (an increase of 700%!). Markets then improved and production increased leading to a decline in the gold price from $1700 to $1100 (35% decline).

Conclusion

Since its discovery and use in ancient times gold has been seen as something of value for society. In modern cultures it is still desired for its beauty, but its value has grown to be more than that – it is now perceived as a store of wealth.  But as the global supply of gold from new resources begins to steadily decline, new methods of mining and preserving the already mined gold need to be introduced. Since the above ground stock of gold is a non-perishable resource it still remains to this day and can be recycled from jewellery and other sources of gold into new usable gold. With gold stocks having a negative beta to the global markets, it will continue to be seen as a safe haven for investors in times of economic turmoil.

References

  1. ↑ 1.0 1.1 1.2 1.3 1.4 "How Much Gold is Left in the World?". Provident Metals. September 15, 2019. Retrieved June 17, 2020.
  2. ↑ "List of countries by gold production". Wikipedia. March 28, 2020. Retrieved June 17, 2020.
  3. ↑ "Top ten biggest gold mines in the world". Mining Technology. January 30, 2020. Retrieved June 17, 2020.
  4. ↑ 4.0 4.1 "The top ten deepest mines in the world". Mining Technology. June 11, 2019. Retrieved June 17, 2020.
  5. ↑ 5.0 5.1 5.2 "The History of Gold | Chapter 1". Gold Price. August 24, 2018. Retrieved June 17, 2020.
  6. ↑ 6.0 6.1 Dowd, Brian (April 26, 2016). "Gold: The Most Precious of Metals". Focus Economics. Retrieved June 17, 2020.
  7. ↑ 7.0 7.1 7.2 "Gold". Geology. Retrieved June 17, 2020.
  8. ↑ 8.0 8.1 8.2 King, Hobart M. "The Many Uses of Gold". Geology. Retrieved June 17, 2020.
  9. ↑ 9.0 9.1 "Gold". Minerals Education Coalition. Retrieved June 17, 2020.
  10. ↑ 10.0 10.1 "Gold | Geoscience Australia". Australian Government Geoscience Australia. Retrieved June 17, 2020.
  11. ↑ 11.0 11.1 11.2 11.3 11.4 Kirkemo, Harold; et al. (January 7, 2017). "The Geology of Gold". Prospector's Paradise. Retrieved June 17, 2020. Explicit use of et al. in: |last2= (help)
  12. ↑ 12.0 12.1 12.2 "Where is gold found in the world?". Gold Traders. Retrieved June 17, 2020.
  13. ↑ 13.0 13.1 13.2 13.3 13.4 13.5 13.6 "Methods of Gold Mining". Geology In. January 1, 1970. Retrieved June 17, 2020.
  14. ↑ 14.0 14.1 14.2 "How is gold mined?". Gold Traders. Retrieved June 17, 2020.
  15. ↑ 15.0 15.1 15.2 15.3 15.4 15.5 15.6 "Mining : What Is Gold Mining? How Is Gold Mined?". Geology Page. April 16, 2019. Retrieved June 17, 2020.
  16. ↑ 16.0 16.1 "Gold Mining | Mine Production". World Gold Council. December 14, 2017. Retrieved June 17, 2020.
  17. ↑ 17.0 17.1 17.2 17.3 "How much gold has been mined?". World Gold Council. December 14, 2017. Retrieved June 17, 2020.
  18. ↑ 18.0 18.1 Nieuwenhuijs, Jan (December 11, 2019). "The Essence Of Gold Supply And Demand Dynamics". Seeking Alpha. Retrieved June 17, 2020.
  19. ↑ 19.0 19.1 Pandey, Ashutosh (March 19, 2019). "Is the world running out of gold?". DW. Retrieved June 17, 2020.
  20. ↑ 20.0 20.1 "The future of gold mining". My Gold Guide. February 18, 2020. Retrieved June 17, 2020.
  21. ↑ 21.0 21.1 "Gold Recycling – the Environmentally-Friendly Alternative". Gold. Retrieved June 17, 2020.
  22. ↑ 22.0 22.1 Becker, Andrea (April 25, 2017). "How Gold Is Recycled". Sciencing. Retrieved June 17, 2020.
  23. ↑ 23.0 23.1 Staff, Investopedia (October 14, 2019). "Cyclical vs. Non-Cyclical Stocks: What's the Difference?". Investopedia. Retrieved June 17, 2020.
  24. ↑ 24.0 24.1 24.2 24.3 Streissguth, Tom (March 31, 2019). "Is a Negative Beta Coefficient More Risky Than a Positive in the Stock Market?". Finance Zacks. Retrieved June 17, 2020.
  25. ↑ 25.0 25.1 25.2 Nath, Trevir (October 27, 2015). "Why Is Gold a Counter Cyclical Asset?". Investopedia. Retrieved June 17, 2020.
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