You Don't have to Mine for Gold

Gold has occupied a unique social status for millennia. It has a long history as a valuable metal and its history is far from over.

The first firm evidence we have of human interaction with gold occurred in ancient Egypt around 3,000 B.C. Gold played an important role in ancient Egyptian mythology and was prized by pharaohs and temple priests. It was so important, in fact, that the capstones on the Pyramids of Giza were made from solid gold.

The Egyptians also produced the first known currency exchange ratio which mandated the correct ratio of gold to silver: one piece of gold is equal to two and a half parts of silver. This is also the first recorded measurement of the lower value of silver in comparison to gold.

The Egyptians also produced gold maps – some of which survive to this day. These gold maps described where to find gold mines and various gold deposits around the Egyptian kingdom.

As much as the Egyptians loved gold, they never used it as a bartering tool. Instead, most Egyptians used agricultural products like barley as a de-facto form of money. The first known civilization to use gold as a form of currency was the Kingdom of Lydia, an ancient civilization centered in western Turkey.

In 1792, the United States Congress made a decision that would change the modern history of gold. Congress passed the Mint and Coinage Act. This Act established a fixed price of gold in terms of U.S. dollars. Gold and silver coins became legal tender in the United States, as did the Spanish Real (a silver coin of the Spanish Empire).

At the time, gold was worth approximately 15 times more than silver. Silver was used for small denomination purchases while gold was used for large denominations. The U.S. mint was legally required to buy and sell gold and silver at a rate of 15 parts silver to 1 part gold. As a result, the market rate for gold rarely varied beyond 15.5 to 1 or 16 to 1.

That ratio would change after the Civil War. During the Civil War, the U.S. was unable to pay off all its debts using gold or silver. In 1862, paper money was declared to be legal tender, marking the first time a fiat currency (not convertible on demand at a fixed rate) was used as an official currency in the United States.

Just a few years later, silver was officially removed from the U.S. Mint’s fixed rate system in a bill called the Coinage act of 1873 (and criticized by American citizens as the Crime of ’73). This removed the silver dollar from circulation, although coins worth less than $1 still contained silver.

The United States would never use silver dollars again. Throughout the late 1800s, the issue remained an important political topic. In 1900, the gold dollar was declared to be the standard unit of account in the United States and paper dollars were issued to represent the country’s gold reserves.

Gold has mesmerized humanity for thousands of years but the metal's surge to a record $1,900 an ounce in 2011 sent miners to ever-riskier places. Enter Kibali. Randgold Resources and AngloGold Ashanti bought the deposit deep in the jungle of northeastern Democratic Republic of Congo in 2009 as the country recovered from Africa's worst-ever civil war, which killed at least 3.1 million people. With pioneering hydropower and social cohesion plans, the companies have built one of Africa's biggest and most profitable gold mines.

Kibali will produce about 600,000 ounces year for the next decade.

The operation first produced gold in 2013. An underground mine is currently being developed to access deeper gold and is scheduled for commissioning next year.

The mine, processing plant and power generating units cost Randgold and AngloGold about $2.5 billion to build.

Each year the mine's plant can process 7.2 million tons of rock, which contains about 3.5 grams of gold for every ton of ore.

The mine is situated in the extreme northeast of DRC, near the border with Uganda and 1,800 kilometers (1,120 miles) from the Kenyan port of Mombasa.

Over the past two decades, gold has gone through a number of major changes. August 1999 was a landmark moment in the price of gold as it dropped to a price of $251.70. This occurred after central banks around the world were rumored to be reducing their gold bullion reserves and at the same time, mining companies were selling gold in forward markets.

By February 2003, outlook on gold had reversed. Many viewed gold as a safe-haven after the U.S. invasion of Iraq in 2003.

Geopolitical tensions between 2003 and 2008 continued to elevate the price of gold. And in 2008, the global economic crisis increased the price of gold even further. After reaching a high of over $1,900 per ounce in 2011, gold has fallen to between $1,050 to $1,400 in recent years.

As of 2014, no countries in the world use a gold standard. In other words, no currency in the world is backed by gold.

The last major currency to use a gold standard was the Swiss Franc, which used a 40% gold reserve until the year 2000.

Of course, that doesn’t mean that countries have sold all their gold or that their currencies are based on nothing. Most countries in the world maintain large gold reserves in order to defend their currency against possible future emergencies.

America’s gold reserves are famously held at Fort Knox, Kentucky. The heavily-defended location holds an unknown amount of gold, as the amount is officially classified by the United States government. However, it’s widely accepted that the United States holds more gold bullion than any other country in the world (approximately 1.3 times as much gold as the next leading country, Germany).

As with anything labeled “classified” in the United States, there are plenty of conspiracy theorists who argue that Fort Knox is actually empty and that the gold is held in some secret location or does not exist at all. You’ll have to figure that out on your own.

Gold has been seen as a smart investment for millennia. However, the use of gold as an investment became hugely popular after the end of the Bretton Woods system in 1971.

Since the 1970s, the price of gold has steadily increased. In 1970, gold was pegged at $35 per ounce. In August 2011, that number had risen to nearly $2000 per ounce. However, the years in between were not a smooth upward slope and gold – like any other investment – has gone through a number of ups and downs over the past few decades.

When looking at gold investment charts, it’s important to recognize inflation. Some charts show the price of gold as virtually a straight line from the bottom left corner of the graph to the top right corner.

However, the price of gold has experienced two major spikes since the 1970s: once in 1980 and the other in 2011.

Furthermore, due to inflation, paying $35 for an ounce of gold in 1970 wasn’t the same as paying $35 for an ounce of gold today. Judging by the Purchasing Power Calculator – which looks at how CPI has changed over the last few decades in the United States – $35 in 1970 would be worth approximately $200 today.

By carefully weighing all of this information and current trends, you can build an accurate view of the present value and future value of gold.

Some of the biggest names in finance are fighting for control of the London gold market — a $5 trillion, three-century-old trading hub that is being forced to adapt to a digital age.

As the London Bullion Market Association revamps over-the-counter trades that are the market’s major pricing benchmark, new ways of buying and selling precious metals are set to start next year from CME Group Inc., Intercontinental Exchange Inc. and the London Metal Exchange. Some big banks have stakes in the outcome, including Goldman Sachs Group Inc., HSBC Holdings Plc and JPMorgan Chase and Co.

“There are four weddings, and we have to dance at all of them, because we don’t know which marriage will last,” said Adrien Biondi, the global head of precious metals at Commerzbank AG in Luxembourg. “Only one will win.”

 

Almost half the world’s known gold trading occurs in London. OTC transactions are sealed by virtual handshakes, leaving default risk with buyers and sellers rather than relying on clearinghouses, which use collateral to manage and offset risk. But since the financial crisis, all markets have been reevaluating how they do business and manage risk as regulators step up scrutiny. That’s particularly true for major price-setting exchanges, after it was discovered in 2012 that banks were manipulating a key benchmark for global interest rates.

A push for fewer risks and more disclosure has forced the LBMA to seek changes that would make it more transparent and secure for customers. The association, which counts HSBC and JPMorgan among its members, will introduce trade reporting for its members and a new trading platform in the first half of next year. That’s also when competitors plan to unveil new precious-metals derivatives built around the clearinghouse models.

Gold remains one of the world’s most-popular commodities and a core reserve for central banks around the world. While prices slumped for three straight years through 2015, demand has since rebounded. Holdings by exchange-traded funds are up 30 percent this year, and investors have poured a net $25.5 billion into precious metals funds, data compiled by Bloomberg show.

That’s helped boost the business of buying and selling gold. In October 2016, LBMA reported gold trading rose to a daily average of 18.6 million ounces. That’s about $23.5 billion, based on the average value of bullion for the month. The LME, the world’s largest base-metals exchange, found so much promise in precious metals that it announced in August 2017 eventually, it will add platinum and palladium. The exchange had the backing of a group of five banks including Goldman Sachs, ICBC Standard Bank Plc and Societe Generale SA, as well as the World Gold Council, a group backed by the mining industry that seeks to develop markets for the metal.

ICE, which owns commodity and financial exchanges, already runs the daily London gold auction on behalf of the LBMA among 13 authorized participants who set the daily price. In October 2016, the Atlanta-based company said it would start its own gold contract in February 2017 that would involve bullion held in London and traded on its New York exchange.

Chicago-based CME Group, owner of the Chicago Board of Trade and the world’s largest futures exchange operator, sought an even earlier entree into the London marketplace. In November 2016 during LME Week, CME said it would start London gold and silver contracts January 2017 that offer a spread between spot prices and benchmark U.S. futures.

“We’re going to see five years of turmoil in this market before things settle down,” Tony Dobra, an executive director at the U.K.’s biggest gold refiner, Baird & Co., said by phone from London on December 2016 . “The good old London OTC market will keep soldiering on until we see some sort of consensus.”

Senior traders, including Biondi and Simon Grenfell, global co-head of commodities at Natixis SA, an LBMA member bank which offers trading and risk management services, said the change is both necessary and inevitable.

The development “reduces credit risk in the system and makes it easier to trade,” Grenfell said by e-mail from London. “While the overhaul to gold markets may reduce credit margins on client business, improving transparency is a welcome change.”

 Opinion remains split on who will come out on top. Dobra, Biondi and founding member Raj Kumar, head of precious metals business development at ICBC Standard Bank, all said the LME offers the best solution for the market. Brad Yates, trading head for Dallas-based refiner Elemetal LLC, said the CME would best fit his business needs. And participation on ICE’s benchmark, which underlies its contract, keeps growing, with trading house INTL FCStone Inc. the latest to join the process.

“There will always be an OTC market in London, but much of what currently takes place here will shift to the exchanges,” said Kumar, who works at a unit of Industrial & Commercial Bank of China (Asia) Ltd., the world’s biggest bank. “Participating in any new contract incurs set-up costs, and so firms will need to prioritize which venues they are likely to trade.”

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