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Gold: A True Store of Value

Video Transcript

All throughout recorded history, one metal that has continuously played a prominent role in the formation and advancement of human civilization is gold.

The yellow metal has been seen as a representation of the sun, of the gods, and of true value, a form of real money without counterparty risks, and it stores within it the freedom to transact and save wealth outside of the system.

Jewelry made from gold has been used to denote status in society, as an expression of wealth that is more than a gaudy ornament, but an actual store of value recognized by all nations, cultures and political factions.

Governments hoard it in central bank vaults to hedge against economic instability, while religions of all kinds adorn their temples and churches with it to represent the essence of the divine.

As if all of this wasn’t impressive enough, gold also contains an industrial component, being an essential ingredient for many electronic devices, and is a key piece of the space race puzzle, which is only fitting, because its origins are out of this world.

On today’s episode, we seek to dig deep and uncover the mystery,  the allure, and the political intrigue that have surrounded a commodity the Incas referred to as the Tears of the Sun, it’s Gold, on Commodity Culture.

What is Gold?

Gold, like most elements on earth, has its origin written in the stars and came to be through the merger of neutron stars, the same as uranium and silver, among many others. When these stars merge, they explode catastrophically and this causes gold to form via something called the rapid neutron capture process, or r-process for short. According to the Berkeley Lab:

“The r-process occurs in high-entropy environments in which extremely high neutron fluxes result in extremely rapid, successive neutron captures, driving the populated isotopic distribution toward very large neutron numbers.”

Ok it’s complicated, but space is a complicated place and gold’s incredible origins only add to its allure.

From an elemental perspective, gold is classified as a transition metal with a density of 19 grams per cubic centimeter, an atomic mass of 196 and a melting point of 1064 degrees Celsius.

In terms of its practical uses back here on planet earth, gold is undoubtedly first and foremost, a monetary metal and has been used as a form of money by humanity for thousands of years. We’ll get to that in a minute but let’s first take a look at its industrial uses, and there’s more of them than you might think.

Gold’s Industrial Uses

Much like its cousin silver, gold is used extensively in the manufacturing of electronics. In fact, the smart phone in your pocket is made partially from gold but before you go dismantling it in an attempt to strike it rich, it contains 0.034 grams, or around US$2 worth.

Gold is a very efficient conductor of electricity, with a knack for carrying tiny currents while also being immune to corrosion and much like silver, is both extremely malleable and practically indestructible. For this reason, it’s used in soldered joints, connectors, switch and relay contacts, and connection strips. This means it is used in practically all large electronics, including computers and televisions.

Because gold is also non-allergenic, it sees a lot of use in dentistry. Fillings, crowns, bridges, and orthodontic appliances all make use of the precious metal, for both practical and aesthetic purposes.

Finally, gold came from the stars and we’ve found ways to send it right back in the form of spacecraft, which use gold in a variety of ways. Because making repairs and performing routine maintenance can be very difficult, if not impossible, once in orbit, the dependability of gold and it’s resistance to corrosion make it a key ingredient to mankind’s journey into the unknown reaches of outer space.

Gold is an Ideal Money

Now that’s all well and good but I can already hear you shouting “show me the money”, and that is perfectly natural, as gold has provided humanity with a reliable form of currency for generations and we’re hardwired to recognize it as such.

Gold holds all of the characteristics of an ideal money. It is scarce, decentralized and outside of any third-party control, and it is fungible, meaning it can be divided into different sized units to facilitate transactions. In addition, it is portable, even more so than silver, as it packs a ton of value into a tiny package, with a single ounce of gold currently being worth around $2000 U.S. dollars.

To the ancient Egyptians, gold represented the sun, and the flesh and bones of the gods. To the pharaohs and priests who controlled Egypt, gold represented power and marked them as living representatives of the gods.

Although it began mostly for jewelry for the priest class and to craft idols for worship, Egypt eventually established it as a form of currency, when they created the Shekel, weighing at around 11 grams. This early money was not entirely gold but was actually electrum, which was comprised of two-thirds gold and one-third silver.

The first know pure gold coins were minted in Lydia, a part of modern-day Turkey, by the decree of King Croesus around 550 BC.

Around 50 BC, the Romans minted their first gold coins, dubbed the Aureus, and around a millennium later in 1284, Great Britain minted its first gold coin, the Florin, while Italy followed suit with the gold Ducat, which went on a five-century run at being the most popular gold currency in the world.1 

Gold has a long and storied history as a form of money but how is it extracted from the earth? Let’s take a look.

How is Gold Mined?

There have been a variety of gold mining methods employed throughout the ages, from the panning methods that most people consider when they think of all the great historical gold rushes, to burrowing tunnels deep beneath the earth and using explosives.

The most ancient known gold artifacts were found in Bulgaria in a necropolis estimated to have been built sometime 4700 and 4200 BC and the oldest gold mine discovered was in Georgia, with the archeologists who dug it up it placing its origin around the 3rd or 4th millennium BC so humans have been mining for gold for a very long time.

Some of the first extensive historical records of gold mining date back to the Roman Empire, where they used the ancient method of hushing, which employed powerful floods of water to reveal gold veins, along with placer mining, which involved the mining of stream beds to extract loose sediment deposits of the precious metal.2

Panning is, believe it or not, a legitimate method of collecting gold and some enthusiasts still use it today, though more as a hobby than as a means of making money because it is incredibly time consuming and yields very little ore.

Gold is heavier than most minerals, and so by using a pan to collect rocks, you can then shake the pan which allows any potential gold particles to rest on the bottom for easy identification and extraction by pouring out the water and the lighter minerals that have been collected. The problem these days is, the amount of gold you are likely to get from a full day’s work would likely barely pay for your meals that day.

In modern mining, before any particular method is chosen, an area first needs to be prospected to see if there is a reasonable enough quantity of gold to economically justify extraction. This is done by geologists who take surveys and lab samples of minerals from the area in consideration to accurately estimate if the discovery of load deposits, or larger chunks of ore, is a likely possibility.

There used to be a lot of load deposits closer to the earth’s surface, but over the course of humanity’s history, most of those easier-to-extract deposits have been exhausted. However, near surface deposits do still exist and open pit mining is used to extract them.

This involves drilling holes around the identified ore deposits and using explosives to blast the rocks into smaller pieces, which are then collected and hauled off by trucks to be processed.

These days, load deposits are mostly found deep within the earth. In this case, access shafts are dug at a diagonal angle into the rock and all along these shafts, vertical shafts, called stopes, are also dug to a depth of around 30 to 50 feet into the rock.

Explosives are then placed along the length of the stopes and detonated, sending the chunks of rock to the bottom, which are hauled up and put into trucks as with the open pit methodology.

In both of these cases, the trucks transport the ore to a mill facility for processing, where the rocks are crushed into a fine dust and mixed with water to create slurry. Oxygen and cyanide are added to the slurry, which react together and separate the gold from the rock. This process is known as leeching.

The next stage is smelting, which involves placing the extracted gold into a furnace at around 1,200 degrees Celsius with a chemical mixture called Flux, which assists in removing even more non-gold materials from the ore.

The molten gold is then poured into solid bars, which are then transported to refineries where they are able to remove any remaining impurities and the final product is those absolutely gorgeous gold bars and coins that investors, collectors and speculators seem to have an obsession with. And I mean, I get it, just look at these beauties, mankind has been coveting and adoring gold since the day it was discovered.

Interestingly, the majority of the world’s gold today actually rests on the ocean floor but at present time, we don’t have a cost effective or environmentally sound method of extracting it.

Humanity’s desire to enrich itself in the form of gold is a constant that we’ve seen throughout history, and sometimes, that desire can take an interesting path.

A History of Gold

The California Gold Rush of the 1840s

When it comes to the history of gold, one can’t help but think of the rugged prospectors who left everything behind, with shovel and pick axe in hand, to venture to California in the hopes of staking a claim that would make their fortunes and change their lives forever.

I’m talking, of course, about the great California gold rush of the 1840s. Where saloons were thick with the smell of whiskey and tobacco as bar brawls broke out.

If this all sounds overly nostalgic, trust me, these were anything but fun-loving times and the darkness at the heart of humanity was revealed for all to see.

Those who staked their claim early benefited greatly by discovering an abundance of gold near the earth’s surface in the California region. These early adopters often got in, focused on working hard and obtaining the maximum yield of gold, with not a lot of competition, and then got out with their fortunes.

Records exist of men easily removing massive nuggets of gold that were practically lying out in the open, with minimal effort required and incredible reward to be reaped. In those early days it wasn’t uncommon for someone to pull up enough gold to buy one hundred horses in only a few days' time.

1848 was a year of massive success for so many who arrived early to the party, and tales of their incredible fortunes drove others to relocate to San Francisco in the hopes of striking it rich, but like a modern millennial investor following the herd into chasing the latest hot investment all the way to the bottom, those tales of early success would prove elusive to prospectors who weren’t willing or able to take initiative before anyone really knew what was out there.

Many people with stable jobs and established families were nonetheless enticed by the possibility of making a fortune in a short amount of time, and so set off on what was a life-altering journey, only to find that the work was absolutely grueling and the payoff was not anywhere near the tall tales they’d heard in the papers and from rumor mongers about town.

There was a great misconception that if you went to California, and were willing to work hard, you could have your fill of gold and would be able to go back home with great riches. As most discovered, this was more often than not, nothing more than a pipe dream. Men would toil all day long, suffering persistent injuries, as well as contracting scurvy and other illnesses, and would dig up practically nothing at all. As reality set in for many, they grew angry and depressed.

In addition, the land itself proved harsh and unforgiving, particularly on the journey to California for many settlers. Livestock were lost to famine and disease, and grass for the horses, along with clean drinking water became scarce, causing diseases like cholera to take their terrible toll.

The native Indian population also found itself an unwilling casualty of the stream of prospectors who now competed with them for resources. Before the Rush, the California region was home to a sparse 170,000 inhabitants, the vast majority being indigenous to the area. As the pioneers marched forward, their consumption of the Indians’ food supply, land and water, created a burden for their population that threatened their survival.

Attempts to push out “foreigners” from the rush began around 1850. There were approximately 80,000 European-American immigrant miners in California and competition was at its peak. Many of these men had utterly failed in their quest for riches and, as is often human nature, they looked for something outside of themselves to blame for their misfortunes.

As gold became scarcer and the number of prospectors grew, white Americans started to band together and threaten Mexicans, Chileans and other so-called foreigners, even those who were originally born in the area. The rule of these gangs was, if you weren’t American, you didn’t have any claim to the gold. They used threats of violence, sometimes backed up by lynching, to enforce mob rule.

Some of the best miners came from Latin America, as that region already had a storied mining history and many of these men had previous experience. This caused a lot of jealousy and resentment. So much so, that the white American miners ended up convincing the recently formed California government to levy a “foreign miners” tax on non-white workers. This tax was so prohibitive that Latin American miners ended up leaving in droves, as it ate too much into their profits to make the endeavor worthwhile.

Others were not so easily turned away however, and formed roaming gangs on horseback that sequestered themselves in the hills and raided Anglo-American mining camps, stealing everything in sight, often with deadly force. As so often happens in times of turmoil, violence creates a cycle that feeds on itself until nothing is left but the ashes.

Nixon and Gold 1971   

“The strength of a nation's currency is based on the strength of that nation's economy--and the American economy is by far the strongest in the world. Accordingly, I have directed the Secretary of the Treasury to take the action necessary to defend the dollar against the speculators.

"I have directed Secretary Connally to suspend temporarily the convertibility of the dollar into gold or other reserve assets, except in amounts and conditions determined to be in the interest of monetary stability and in the best interests of the United States.” Nixon’s August 15, 1971, Address to the Nation Outlining a New Economic Policy: "The Challenge of Peace."

That broadcast was from August 15th, 1971 and in it, then President Richard Nixon gave an order that would alter the fate of the U.S. dollar forever. And of course, it wasn’t temporary.

Today, in 2022, inflation is rising at record rates and consumers in America and many parts of the world are really feeling the pinch when they go to the grocery store, fill up on gas, or look to buy a home.

As mentioned earlier in the program, gold is real money. It takes effort and energy to extract from the earth and is scarce, and it used to be tied to the U.S. dollar. In other words, U.S. dollars were not necessarily a currency within themselves but more like a promissory note that could be exchanged for a certain amount of physical gold, should the holder so choose.

But in terms of the U.S. paying off its debts and funding the war effort in Vietnam at the time, having the dollar tied to a real hard asset was an inconvenience that stopped them from just printing up more. The details of why the U.S. was in a position where they desperately needed greater liquidity are very complex, and entire books have been written about it, but suffice to say, Nixon found himself with his back against the wall and the government looked like it was going to default on its debt obligations, which would have been catastrophic in the short term.

Nixon shot liquidity into the system by removing the limitations of gold backing. This action precipitated wealth inequality that continues to grow over time. The truth is the pieces of paper in your wallet and the digits in your bank balance might not retain their purchase power throughout time.

But gold will still hold its value, and that’s why it remains as relevant as ever today.

The Future of Gold

When it comes to hard money, gold, along with silver, is about as good as it gets, although recent innovations have brought forth a slew of cryptocurrencies trying to compete. Bitcoin, the original and the only truly decentralized cryptocurrency, does potentially pose a threat to gold’s dominance as the hardest money around. Debates are frequently sparked online about which is superior over the long run but in my view, precious metals and cryptocurrencies are complementary, and not adversarial assets.

In addition to this, the space race is only accelerating, with corporate titans seemingly determined to make space travel a reality for more people around the world. Seeing as it is also essential for many electronics, gold’s demand as an industrial component, though no match for its sibling silver, still looks very bright in the years ahead.

From adorning the tombs of the great pharaohs to powering spacecraft that may extend the horizons of humanity’s domain, gold has proven to be an incredible resource that will continue to shine as civilization advances.

Jesse Day is not an employee or an affiliate of Sprott Asset Management LP. The opinions, estimates and projections ("information") contained within this content are solely those of the presenter and are subject to change without notice. Sprott Asset Management LP makes every effort to ensure that the information has been derived from sources believed to be reliable and accurate. However, Sprott Asset Management LP assumes no responsibility for any losses or damages, whether direct or indirect, which arise out of the use of this information. Sprott Asset Management LP is not under any obligation to update or keep current the information contained herein. The information should not be regarded by recipients as a substitute for the exercise of their own judgment. Please contact your own personal advisor on your particular circumstances. Views expressed regarding a particular company, security, industry or market sector should not be considered an indication of trading intent of any investment funds managed by Sprott Asset Management LP. These views are not to be considered as investment advice nor should they be considered a recommendation to buy or sell.

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1 Source: https://www.focus-economics.com/blog/gold-the-most-precious-of-metals
2 Source: https://en.wikipedia.org/wiki/Gold_mining

Jesse Day is not an employee or an affiliate of Sprott Asset Management LP. The opinions, estimates and projections ("information") contained within this content are solely those of the presenter and are subject to change without notice. Sprott Asset Management LP makes every effort to ensure that the information has been derived from sources believed to be reliable and accurate. However, Sprott Asset Management LP assumes no responsibility for any losses or damages, whether direct or indirect, which arise out of the use of this information. Sprott Asset Management LP is not under any obligation to update or keep current the information contained herein. The information should not be regarded by recipients as a substitute for the exercise of their own judgment. Please contact your own personal advisor on your particular circumstances. Views expressed regarding a particular company, security, industry or market sector should not be considered an indication of trading intent of any investment funds managed by Sprott Asset Management LP. These views are not to be considered as investment advice nor should they be considered a recommendation to buy or sell.

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