Precious Metals: Gold

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Gold was produced as long as five thousand years ago, when the Sumerians used it for the creation of ornaments, jewelry and pieces of weaponry. However, some historians think that the discovery and knowledge of the yellow metal can be traced much further back, to between 8000 and 9000 B.C. They believe that the oldest items were melted down and used over and over by succeeding generations. We also know that, in ancient times, gold had magical significance.

Priceless artifacts made of gold were used in religious ceremonies and have since been found buried beside the bodies of pharaohs and kings.

Inevitably, gold gained in economic and political importance as well. As early as 3100 B.C., the Egyptian treasury used bullion in the form of bars and wafers as a store of wealth. During the next six hundred years, the metal became increasingly popular in international trade. Hieroglyphic accounts of a trade voyage to the mysterious land of “Punt” depict the glorious return of vessels loaded with large quantities of gold bars and rings, as well as other valuables of the era, such as leopards, monkeys, throwing sticks, ebony, ivory and incense.


In ancient Egypt a skillful gold beater could hammer gold bullion to such fine consistency that it would have taken 250,000 sheets to produce a layer one inch thick. Today, one single ounce of gold can be drawn into a fine wire 50 miles long.

Around 550 B.C. the first gold coin was struck. King Croesus of Lydia, in today’s western Turkey, ordered his own image to be stamped on each gold piece, thereby creating a medium of exchange whose value was guaranteed by the ruler. Because Croesus was overthrown by the neighboring Persians shortly thereafter, his guarantee became irrelevant, but the practical implications of his idea were to live on. A sound basis for the monetary transactions of thousands of years to come had been established.

Less than two hundred years later, the world lay at the feet of Alexander the Great. Not only had he conquered the largest territory any man had ever controlled, but he had also amassed most of the world’s gold. In addition to the riches of Egypt, he had all of Persia’s gold as well. When Alexander sacked the royal treasure at Susa, two million pounds of gold and silver bullion and 500,000 pounds of gold coin were his for the taking.

The next major episode in the history of gold came with colonialism. The Spaniards came to the New World in search of spices, but when they saw the vast treasures of Aztec gold, they quickly forgot about the former. In their lust to steal the yellow hoard, they massacred over 50,000 Indians.

Thus, the yellow metal fuelled man’s drive to discovery and pushed him beyond the then-known geographical limits. In Peru, Pizarro found even greater treasures than Cortez had encountered in Mexico. The Incas referred to gold as “the tears wept by the sun”, which they worshipped as their god. When Pizarro saw the immense supplies of bullion and the golden ornaments which adorned their temples, he decided to capture Atahualpa, the king of the Incas. As a ransom for his release, he demanded that the king’s quarters be filled with gold nine feet high, but when this was done he deceived the Incas by killing their leader and by plundering an estimated thirteen tons of gold artifacts. In order to facilitate the transport back, each item was melted down and lost to the world forever.

Although many corners of the Earth lay still unexplored, it was not until pioneers arrived in the North American West that more gold was discovered. These finds were so large that, in the first the… more gold was produced in California than Spain had collected in a hundred years It all started with the arrival of John August Sutter, who escaped numerous creditors, his wife and his three children in Switzerland by trading his bankrupt business for a steamship ticket to North America. Sutter made his way to the west coast where, with the help of ISO slaves, he tried to farm a property of more than a hundred square miles in the Sacramento Valley. In 1845, he was joined by James Marshall, a carpenter, whom he commissioned with the building of a sawmill.

Three years later, when working on a ditch which was to bring water to the new mill, Marshall discovered some small yellow pebbles amidst the accumulated gravel: it was gold!

Marshall galloped back to Sutter’s farmhouse and the two of them decided to keep it a secret, but it was already too late. Word of the discovery had instantly spread among the other workers. During James Marshall’s absence, they had found more gold and had rushed to Sam Brannan’s nearby store to convert it into goods.

Now, Sam Brannan was a very shrewd man. Knowing that everyone looking for gold had to come past his store, he immediately left for San Francisco to spread the word about the new discoveries, but not before ordering massive supplies of picks, shovels and other equipment which could be sold to the prospectors. After Brannan’s electrifying news was carried by the city press, hundreds and thousands took off for the Sacramento Valley. Urged on by the talk of gold and riches, soldiers deserted their units, and workers left their factories. Once they arrived at the hastily put together mining settlements, however, they were usually bitterly disappointed. Supplies were so scarce that an egg cost almost ten dollars, a loaf of bread was often sold for $25 and the fortunate few who could afford to sleep in a bed paid $500 a month for the privilege! Sam Brannan was rich.

Later that year, the news reached the eastern part of the United States and in early 1849 it spread beyond America’s national borders.

Over 40.000 speculators came from as far away as Australia, the Far East, and Europe. By 1858, 24 million ounces of the yellow metal had been extracted and many a prospector had become a millionaire.

Ironically, John August Sutter was not one of them. Sutter’s dream of starting over again by building a farming operation in a peaceful and distant valley had crumbled under the onslaught of thousands of noisy strangers driven by greed. Even his own workers took to the hills to dig for gold and left a fortune in wheat and hides to rot in Sutter’s barns. He traveled to Washington to assert his claims in court but, once again, was out of luck. Disillusioned and impoverished, he finally died on the steps of the Capitol.

Thus, the Great Gold Rush broke some men, while it made the fortunes of others. But largely overlooked is the fact that it also made cities and that, when the prospectors settled down, it made



Gold is found in a variety of colors: silver and platinum impurities make gold white, traces of copper give the metal a reddish colour and iron produces varying shades of green. One of the rarest forms is black gold, which contains traces of bismuth.

In 1859, the “ Comstock Lode” was discovered. Impoverished Irish miners had found gold near Virginia City, Nevada, and sold their claim to a man called Harry Comstock. His claim was soon to become the United States’ primary source of gold for the next twenty years, producing over $130 million worth of bullion. A few years later, South Dakota became a new target for prospectors. The largest gold mine in North America. the Homestake, had been found. With an output of more than 300,000 ounces of gold annually, Homestake is still the largest u.s. producer today.

Gold fever lived on throughout the 19th century, and the next episode took on even more massive proportions. This time, 60,000 men fought their way to the most unfriendly territory imaginable:

The Klondike. Large portions of Alaska and Canada’s north were developed in the process and over 4,000 men struck gold.

But, in the meantime, major discoveries were also being made outside of North America. An unsuccessful “49-er”, Edward Hargraves, had returned to his native Australia in 1851. For some reason, he decided to continue his search for gold and his first find created the largest influx of prospectors in history. Australia’s population grew from 400,000 to 1,200,000 in a decade.


the largest gold nugget was found in Australia in 1872: it weighed almost 3,000 troy ounces or over 200 pounds and was named “Welcome Stranger” by its lucky finder.

In South Africa, the Witwatersrand Reef was discovered in 1886. Nearly 300 miles long, it could not be mined using the technology of the time. It took almost fifty years, and extraordinary amounts of operating capital, before the Reefs potential could begin to be exploited. Today, the South African gold mining companies produce approximately 700 metric tons of gold a year. But, in order to obtain one single ounce of fine gold, an average of three tons of ore must be extracted and processed! From Ancient Egypt, where gold was mined laboriously by hand, production has advanced to a complicated system using subterranean pumps, turbines, drills and even locomotives.

But the past two centuries have not only brought fundamental changes in the supply and production of gold. As technology moved on, new uses and applications were constantly found, making gold an invaluable industrial commodity. Yet gold never lost its mystique:

the metal that is the first element to be mentioned in Genesis also accompanied the first human on his walk in outer space. covering the umbilical cord which linked him to his craft.

Equally little has changed in the public perception of gold as the basis for a sound monetary system. When soldiers in Ancient Rome and Greece wanted to be paid in gold or silver coin and not in some other metal whose supply was unlimited, they basically distrusted the rulers of their time. Today, such suspicion still exists, although for different reasons.

Fine Gold Production Through the Ages

16th century

17th century

18th century

19th century

20th century (to 1983)

Metric tons






A brief glimpse into recent British and American monetary history will illustrate the reasons for this distrust in more detail. In 1792, the United States became the first modern nation to formally establish a link between paper money and precious metals. The u.s. system was a “bimetallic” one, consisting of gold and silver. Great Britain followed shortly after, basing its money exclusively on gold. Coins and bars in circulation could be freely exchanged against paper currency issued by the Bank of England, and vice versa. Thereafter the use of paper money outmoded the metal’s role as an exchange instrument between individuals, but every pound in circulation was fully covered by a sufficient amount of gold in the central bank’s coffers. And because several governments soon adopted this system, gold evolved into a widely recognized vehicle for international trade settlements.

The First World War caused the creation of substantial debt and, predictably, inflation followed. Between its end in 1918 and the early 1930’s, most countries were forced to abandon the convertible currency system. The value of gold experienced drastic increases and that of paper money suffered. Finally, the world’s two most powerful currencies were also disassociated from gold: the pound was devalued by 30% in 1931, and the dollar by 41% two years later!

World War II threw the system into even deeper chaos and, when the war came to an end, there was a universal desire for stability, both politically and economically. The western nations decided to fully reintegrate gold into their money system and established the “Bretton Woods Agreement”. All the world’s currency values were fixed in terms of the U.S. dollar and, in turn, thirty-five dollars were freely exchangeable for one ounce of gold.

The workability of the Bretton Woods system rested on one of the soundest economic principles: balance of payments discipline. According to this principle, no participating nation could “cheat” by expanding its monetary base without a corresponding increase in productivity. If the United States, for instance, did so, more dollars would chase the same amount of goods and, since some of these goods would be purchased from abroad, more dollars would find their way into the pockets of foreign individuals and companies and, before long, into the coffers of a foreign central bank. Under the dictates of the Bretton Woods Agreement, this foreign central bank could then present its accumulated u.s. dollars for conversion into gold. And since the supply of gold at the u.s. Treasury was limited, the us. Government obviously had to be careful not to create too many dollars which could find their way abroad. In other words, the gold reserve of each nation was designed to impose a limit to inflation.

In reality, economic treaties of this kind do not have any greater chance of survival than political ones. Although the catharsis which takes place when the tragedy of a major war comes to an end inevitably nurtures the desire to pool knowledge and resources, the independent economic developments of each nation tend to pull such alliances apart a few years later. Priorities change. Each nation grows on its own and develops its own problems and, eventually, a recession in one country coincides with a boom period in another.

The Bretton Woods system was a typical illustration of this phenomenon. Everyone in the free West wanted the United States to be the most powerful nation and everyone sensed that only America would have the clout and the know-how to reconstruct a Europe and a Japan which had lost their ability to function industrially and socially.

It was in this way that the Bretton Woods Agreement at first played an integral part in post-war reconstruction. Billions of dollars found their way into Europe and Japan where they fuelled a gradual industrial recovery. Foreign governments, which accumulated these dollars, knew that they could convert them into gold at any time, but they did not do so because the dollar was still seen as the world’s strongest currency.

This perception started to change in the early Sixties. Eager to maintain a profile of strength and power, America had engaged in the Vietnam War, which had a devastating impact on its deficit. At home, meanwhile, American politicians were busy experimenting with Keynesian economics, whose misguided teachings provided them with the idea that a sagging economy should be spurred on by the creation of even further debt. Predictably, this approach was not successful, largely because the Bretton Woods system worked even better than anticipated. European central banks, already accumulating massive amounts of newly created dollars and anticipating still more, started to convert these to gold. By 1968, the u.s. official reserve amounted to only 296 million ounces, compared to over 700 million ounces twenty years earlier. Observers inside the U.S. and abroad predicted a massive devaluation of the dollar and a substantial increase in the price of gold, to which investors everywhere reacted. Ironically, Americans themselves could not respond because President Roosevelt had banned private gold ownership during the days of the Great Depression.

Escalation of the Official Gold Price











u.s. introduced bimetallic standard.

Technical adjustment

Roosevelt bans ownership and de-values dollar by 41%.

Nixon withdraws from Bretton Woods Agreement, dollar comes under pressure and is devalued twice.

Free market gold price explodes. Dollar crisis continues, but official price remains unchanged to this day.


The western governments spent several years trying to fight the inevitable explosion in the price of gold. At first, they formed the “London Gold Pool”, an agreement designed to stabilize the bullion price at $35.00 per ounce. Three billion dollars were spent before speculative pressures became so unbearable that, in March 1968, the gold pool had to be suspended. It was replaced by a two-tier system in which the market was split into an “official” segment, and a “free” segment. The official market, with a fixed price, served for government settlements and reserve evaluations. The free market, in which the gold price freely floated with supply and demand, became the basis for all private gold transactions.

In the meantime, the dramatic decline in the U.S. gold reserves caused a frantic rush among central banks and private holders trying to convert their dollars into gold. Richard Nixon was finally forced to cancel the Bretton Woods Agreement by discontinuing gold’s convertibility in 1971. The u.s. dollar, the world’s mightiest currency, was no longer backed by gold in any fashion. It was this event which triggered the major decline in the dollar’s value which was to last for the next ten years.

Once gold prices were set free, they rose very quickly. Almost immediately, the yellow metal tripled in value, crossing the $100 mark in 1973. And after a brief period of consolidation the climb continued. Once again, inflation rates in the United States, and this time also abroad, were sharply on the rise. Moreover, it became clear that U.S. citizens, barred from owning gold for forty years, would again be able to own the metal. Dealers and private investors speculated that this would bring to the gold market an enormous new source of demand and bought heavily. Ironically, gold peaked almost the same day that the gold market was opened up to American citizens. The price had reached $200 per ounce.

Meanwhile, the frightening developments on the inflation front were being counteracted with high interest rates. America, and most other Countries, moved into a sharp recession which lasted through most of 1975 and early 1976. High unemployment and shocking bankruptcies created a bleak economic landscape. Inflation ceased to be a major Concern and the price of gold fell, as did other prices.

Washington’s policymakers wanted to keep things that way, at least as far as the bullion price was concerned. Afraid of a new surge in speculative demand for the yellow metal, they started to lobby for the “demonetization” of gold. The u.s. Treasury announced that it would auction off a portion of its official stockpile. The IMF did the same but, in addition, urged member countries to use a new accounting unit, the Special Drawing Right, to replace the way they had previously used gold bullion.

The “demonetization” concept turned out to be another disaster. When the u.s. and IMF gold started to come to the market, the price was only a short way from its low of $102, which it had reached in late 1976. But, because the American Government ended its recession by massive creation of new debt, the gold auctions were always over subscribed. The bullion price rebounded and, as inflation once again became the public foe, soon exceeded its previous peak of $200. In 1979, both the United States and the IMF were forced to reduce, and later to abandon, their gold auction program. The International Monetary Fund’s new SDR unit fared no better. Special Drawing Rights are still used as an accounting unit today, but they never provided central banks with the liquidity and independence gold bullion had given them.

The price rebound of early 1979 was impressive, but it was only the modest beginning of an advance which was to carry gold to heights beyond anyone’s imagination. By summer, inflation was gaining ever more rapidly and the debt, its major cause, grew at an alarming rate. It had taken decades to create a debt which, in 1970, amounted to $400 billion. Now, only nine years later, the figure had doubled and was rapidly approaching the one trillion dollar mark! To make things worse, several political conflicts of major proportions started to erupt. The worst were those in the Middle East which threatened to interrupt the flow of oil to the western economies.

When the Government of Iran fell to the revolutionaries behind the Ayatollah Khomeini, this was seen as a very significant event. Investors no longer only feared hyperinflation, they were now also concerned about a major shift in the balance of power between Soviet Russia and the United States. That is why, when the Russians invaded Afghanistan in January of 1980, the stampede into gold drove its price to the highest it had ever been in history — $852.00!


All the world’s gold could be comfortably placed on any modern oil tanker — that is if any insurer could cover its cargo of over one trillion dollars...

Obviously, there had to be a sharp decline once the hysteria subsided. Politically, the new trend began with the election of President Reagan, who confronted Soviet Russia in a firmer way and, through his rearmament program, reassured the world that the balance of power between the U.S.S.R. and America would be maintained. Moreover, the Russians were soon sidetracked by problems in their own orbit, such as the ones in Poland.

On the economic side, a high interest rate policy was again adopted. The cost of money was pushed far ahead of the rate of inflation, thus discouraging speculators and holders of excessive inventories, and rewarding those with large cash positions. The world went into another shocking recession, with the prices of goods and services dropping drastically. As surely as unemployment and bankruptcies increased, the price of gold declined. From close to twenty percent, the U.S. inflation rate fell to around five percent in 198.2. The bullion price, in line ‘with this development, tumbled to below $300.00.

But then a new problem emerged. The world economy grew so feeble that many countries which had borrowed excessively during the preceding high interest rate cycle could no longer find markets for their raw materials. Without their normal income from resource exports they encountered increasing difficulties in paying interest on their staggering debt burden which, in turn, raised even greater questions about their ability to ever repay the loans themselves. Such difficulties were not confined to foreign nations — major institutions in Europe, Japan and North America also faltered.

As the economic crisis deepened people began to wonder about the safety of the money in their banks. The result was a general recovery in precious metals prices as it became evident that a worsening of the situation could only lead to a grave monetary crisis, and that an improvement could only be engineered through the creation of massive new debt. Each of these scenarios suggested a period of turmoil in financial markets, precisely the kind of environment in which gold would do well. The bear market of the early 1980’s was finished.

Moreover, it has since become clear which of the two economic extremes Western governments are opting for. The money supplies of the United States, as well as other industrialized nations, are increasing at a rate quite sufficient to bring back inflation within a very few years. In fact, investors have already begun to react. By the time inflation is again in the headlines, the current uptrend in gold prices will have become a roaring bull market.


When looking at gold’s long history, one cannot help wondering why man has been lured into treachery, revolution and conquest in his search for the yellow metal. We are astonished how, invariably, holding gold translates into power, prestige and wealth. What is so fascinating about gold?

There are many answers. The financial analyst would probably point to gold’s reliability as a barometer of monetary and economic health. A craftsman working with the metal is impressed by its incomparable qualities. Gold’s even distribution among governments, institutions and private holders throughout the world, and its unsurpassed negotiability, are the most important factors to the dealer. Investors find the metal’s rarity a primary asset.

fact: Gold does not rust and is virtually indestructible. It is malleable, ductile and extremely dense. A standard briefcase can hold approximately 4,000 ounces of gold, currently worth approximately two million dollars!

The thing that impresses me the most about gold is best illustrated in an episode which happened back in the early Seventies, at the end of the Vietnam War. Tens of thousands of refugees literally had only hours to get their most essential belongings together. Whatever could not be carried had to be left behind when they boarded hopelessly overcrowded ships and planes. What, in their desperation, could these refugees take with them when they did not even know where they would end up?

The wisest chose gold bullion. It was the only medium which allowed them to condense a significant amount of wealth into something the size of a chocolate bar, and which they could hope to negotiate against cash almost anywhere. And when they arrived at u.s. air force bases, it did not take long for the local authorities to realize what was needed. The State Department called in some gold dealers who, working with simple scales in primitive shacks and tents, purchased gold in exchange for American dollars. The gold bars were foreign, made by refiners in Saigon, Phnom Penh and Hong Kong, and the dealers had to charge for assaying and refining the metals. However, when measured against the convenience of being able to acquire local currency in an emergency, this was a small price to pay.

History is full of such examples, all of which illustrate gold’s usefulness as a long term insurance against monetary, political and social uncertainty. The most recent example was the tragic exodus of the “boat people” from Southeast Asia. How did they buy their way out of their countries? With gold. What do you think they carried with them to start all over again in a new country? Gold. How do families in inflation-ridden countries protect their wealth? Where it’s allowed, they own gold bullion. And where that is forbidden, their women wear gold jewelry.

Those opposed to a direct relationship between government paper money and gold have often said that the metal has no place in our modern world. They would prefer to see the monetary system tied to our supply of food or to our actual industrial production. The problem with this theory is simply that it is not practical. Such a system would enable governments and corporations to set up huge stockpiles of the chosen commodity, while those individuals without the necessary facilities would have a hard time doing so. After all, storing wheat in a basement, or oil in a backyard, is not everyone’s favorite pastime. Industrial commodities are usually bulky and cumbersome to transport. Foodstuffs have the drawback of being perishable. Only gold is not affected by years of storage, is easily hidden and carried, and instantly negotiable anywhere in the world.

Finally, gold’s distribution is practically universal. The metal is held by international bodies, governments, banks, corporations, and individuals in almost every part of the globe. It is this simple fact that makes gold so unique and which gives rise to its most important function: unlike other commodities, precisely because it is so well distributed, the price of gold cannot be manipulated.


If you asked five different analysts to explain why the price of gold moves the way it does, you would probably get five different answers. There are those who argue that gold runs counter-cyclically to stock market trends. Others maintain that gold goes up when the u.s. dollar is down. A third group will pay close attention to the price ratio between gold and silver, while others are convinced that oil, wheat, or other commodities are linked to gold’s fluctuations. There is some truth in all of these theories, but none of them have consistency.

The chart shown sums up the many factors which, in one way or another, affect the demand or the supply of the yellow metal. Let us start at the top of our table and first concentrate on the supply side, or the producing nations.

Gold Production

Gold producers have fared well during the past few years and they are currently in a state of expansion. Thus, the world’s gold supply is gradually rising, a trend which is expected to continue. However, the increases from year to year are not significant and have so far been easily met by growing demand from investors.

The world’s largest producer of gold is South Africa, which accounts for about fifty percent of global output. The country’s immense gold fields in the Transvaal and the Orange Free State date back over two billion years.

Experts believe that glaciers carried mountain debris into an enormous water deposit which was formed in the high velds of Transvaal. Over the next few million years, this inland sea filled up and the land changed. The gold was imbedded in rock and today lies deep below the Earth’s surface.

This means that South Africa’s mines require the most up-to-date technology. As much as three tons of ore have to be hauled to the surface from depths of more than two miles in order to produce one single ounce of gold. Such difficulties obviously lead to higher production costs although these are somewhat offset by relatively cheap labor.

Less is known about Russia, the world’s second largest producer of gold. The first Soviet discoveries go back to the early Twenties, when gold was found in the Aldan River area in Eastern Siberia. News of this find traveled fast and caused a gold rush of similar proportions to that experienced in the United States. Within a mere few months, 12,000 miners had rushed to the site and were looking for their fortune.

Ironically, Russian interest in gold was reactivated by none other than Joseph Stalin. Having familiarized himself in great detail with the economic development of the United States, Stalin concluded that the same principle could be applied to the outlying areas of the Soviet Union. He was interested in the gold of course, but what especially appealed to him was the fact that the American gold rushes had developed whole regions as well. “At the beginning, we will mine gold, then gradually change over to the mining and working of other minerals, such as coal and iron,” Stalin wrote.

Today, the Russians are responsible for about thirty percent of global supply. Soviet gold fields are situated in Siberia, Kazakhstan and the Urals, but, of these, by far the most productive operations are those in Eastern Siberia. The geography there is very similar to that of the Klondike or the Yukon and, like the gold mines in our north, Russia’s are mostly alluvial. Weather conditions are extreme and permafrost makes production difficult and expensive. However, rising gold prices have helped the Soviets increase their supplies steadily.

Although Canada produces less than five percent of global output, it is the world’s third largest producer. Its mining industry has been plagued by declining ore reserves and high costs ever since World War II. In 1941, Canada produced over 170 tons of gold, badly needed to help pay for military supplies. In the following three decades, the mining industry was heavily subsidized by government. The number of operating mines declined from 125 at the end of the war to around 30 in the early Seventies, while output gradually fell back to levels of between 50 and 60 tons. Fortunately, gold’s recent price strength has improved the outlook for Canada’s mining industry considerably. Not only have the major producing firms shown consistently good profits, but a number of new companies have been formed to pursue exploration projects or, even better, have gone into production themselves. In 1982, fifteen new mines joined the ranks of producers and several more are expected to come on stream during the next two or three years. The most closely watched will be those operating in the Hemlo area of Northern Ontario, where most experts agree that the find is large enough to have a major impact on future Canadian production totals.

The United States, Brazil, the Philippines, Colombia, Australia, Papua/ New Guinea and others follow behind Canada. The most promising of these is Brazil where most gold is found in alluvial deposits deep in the Amazonian jungle. Brazil’s government recently estimated an annual output of more than 300 tons by the late 1980’s. These projections seem unrealistic but, even if only half that target were achieved, Brazil would bypass Canada as the world’s third largest producer and would become responsible for roughly 12.5 percent of global supply!

It is interesting to note how politics affect the overall strategies and production policies of gold producing nations. In Brazil and Colombia, for example, large foreign debt makes it attractive for both countries to purchase a substantial part of their own output. Their own gold can be purchased in cheap local currency which, to the outside world, is not of much value. The gold is then held in the two countries’ monetary reserves where it serves as collateral to arrange foreign loans.

South Africa’s interests have recently been best served by steadily reducing its mining output. From nearly 1,000 metric tons a decade earlier, production had fallen to around 658 tons by 1981. This reflects a shift to exploit lower ore grades, a strategy which is more fully explained in our section on mining shares. By concentrating on the production of ores containing the least amount of gold available in the mine, each firm effectively prolongs the overall life-span of its property. And because expenditures are highest when exploiting a low grade ore body, the relatively advantageous labor costs of today are fully utilized.

Finally, it is also in South Africa’s interest to have overall global gold supplies follow a steady long-term pattern. By reducing its overall production output while other nations, such as Brazil, are rapidly increasing theirs, an equilibrium is maintained.

By far the most interesting strategy is that of Russia. Nicholai Lenin predicted that gold would eventually be used to “coat the walls and floors of public lavatories.” But he also added that, for the time being, gold presented a big advantage because it commanded a high price and could readily be converted into goods. “When living among wolves, howl like the wolves,” he wrote.

During the past two decades of highly volatile gold prices, however, the Soviets, if anything, have been howling with laughter. Unlike the Americans, they consistently used their gold hoard to their best advantage and were by far the most ingenious and disciplined operators in international bullion markets. Of course, it is easier to have an effective policy when a long-term strategy exists. What this strategy is, is not only clear from the Communist manifesto but from hundreds of policy statements released by various Soviet Government agencies since then. The goal of Soviet policy is nothing less than world domination and an integral part of this policy is their strategy to control the world’s resources. Gold may be only one of the metals which are predominantly controlled by the Soviet Union and South Africa but, as a key component of the world’s monetary system, it is also one of the most important. What today’s Soviet leaders would do with gold if they ever achieved their goal is not known. But what we can observe is the Soviet Union’s keen interest in the affairs of South Africa and their rapidly growing military presence in the southern tip of the African continent.

In the meantime, how much of their newly mined gold both the Soviet Union and South Africa bring to the market depends, first and foremost, on the price. Both nations obviously want to sell when the price is right and they stockpile gold when it is under pressure. But a combination of other factors affect their policy as well. Most of these are linked to the level of foreign exchange reserves, the balance of payments, and international trade. During the 1970’s, for instance; South Africa had to finance heavy military imports, which led to a ten year low in the country’s gold reserves by the end of the decade. Similarly, Russia had to step up sales of gold to finance its imports of wheat from Canada and the United States. In simple terms, the leading gold producers build up their reserves whenever they can afford to, and part with their hoards only when it is economically advantageous or when they are pressured.

Official Gold Holdings

When governments come to the market, either to purchase or to sell, their transactions are termed “official”. Official transactions tend to influence the market significantly and yet, in almost all cases, the impact is not lasting. This was best shown when the Americans decided to auction sizeable amounts of gold during the late 1970’s. At the same time, a U.S. inspired lobby in the International Monetary Fund convinced that agency to follow a similar policy. The immediate impact of such massive new supplies was a drop in the gold price. But, before long, it was recognized that the more gold the United States and the IMF sold through these auctions, the less gold they could bring to the market later. This reversal in market psychology heavily contributed to gold’s strength in late 1976 and throughout the following two years. In early 1979 the government formally declared that it would support the dollar and increase gold sales further, but this time the effect on the bullion price was almost nil. And when, half a year later, the Americans had to finally withdraw from their auction program, gold rallied sharply on that news alone.

But this is not to say that official purchases and sales could not have a lasting impact on gold prices in the future. As the table below shows, substantial amounts of gold are still held by the western industrialized nations, particularly by the United States. In order to put these holdings into proper perspective, you should compare them to the total of global gold production, which is about 1,400 tons. You will note that the American Government still holds more than five times that figure!

There will probably always be cases where a government, in an emergency, is forced to sell its bullion, as happened with Iran and Iraq when they recently tried to finance their war effort, and the U.S.S.R. when it desperately needed cash to service its debt to the West. And there will always be other nations who will want to add to their reserves, as did some of the producing countries in South America and Africa during 1981 and 1982. Colombia, Brazil, Zimbabwe and Zaire all purchased domestically produced gold in order to improve their borrowing potential in international money markets. In addition, several oil producing nations, such as Indonesia, Libya and four other Arab Countries have been official buyers for years.





West Germany








Great Britain

Millions of Troy Ounces











Metric Tons











Nevertheless, it is unlikely that official purchases and sales will again be a major factor behind gold prices in the near future. What the major nations, particularly the United States, now want is stability. During the late Sixties and Seventies they learned that higher deficits lead to higher inflation, which leads to increased distrust of government and increased investor demand for gold. In 1980, when President Reagan came to power, he recognized these problems and appointed the “ u.s. Gold Commission”, giving it a mandate to “assess ... the role of gold in domestic and international monetary systems.” The Commission studied potential medallion and bullion coin sales by the u.s. Treasury, the issue of gold-backed bonds or notes, the size of the gold stock and the restoration of a gold standard. It concluded that, for the time being, there should be no change in the role of gold, thus brushing aside immediate hopes for a return to a gold based monetary system. Concerning the size of the u.s. gold stock, it found that some limited depletion of reserves would be acceptable, and that the issuance of coins should be considered. These statements all suggest that, on the official front, things will be quiet for some time.

This is not surprising. Once it becomes a component of a country’s monetary reserves, bullion represents international liquidity of the first order. It can be held by central banks at superficially low “official prices”, giving added flexibility. It also improves a country’s borrowing potential and, most important, it cannot be debased or devalued by another country.

Industrial Gold Demand

So far, we have been preoccupied with the role played by the world’s governments and with the supplies they bring to the market. It is now time that we looked at the demand for gold, which basically stems from two sources: private investment demand and industrial demand.

Gold is today widely used in a variety of industries, of which the jewelry sector is the largest. Applications in the areas of electronics, dentistry and coinage are also important. The table below illustrates how industrial sources of demand and private bullion purchase each impact on the gold market. As you will notice, “total fabrication”, the sum of all industrial demand factors, outweighs private bullion demand to quite an extent. Jewelry is not only the largest item in this group, but also the most interesting. Note how periods of low gold prices inevitably bring about an increase in the demand for jewelry, while sharp rises in the gold price tend to dampen it. While jewelry demand exceeded 1,000 metric tons in both 1977 and 1978, as a result of the rising gold price in the following two years the total dropped to just above 100 metric tons! As precious metals prices fell, in 1981, demand for jewelry rose again, and in 1982 a further increase was posted.

Such a brisk recovery in the demand for jewelry is often an early sign of an emerging bull market. This is because, oddly enough, the most successful gold investors are in the third world, where hoarding and dis-hoarding jewelry are the only ways to exploit the inflation cycle. In 1974 and 1980, for instance, significant amounts of hoarded jewelry were melted down as investors sold their gold at top prices. On the other hand, jewelry demand for developing nations increased in 1970, 1976 and again in 1982. Historically, the turnaround in jewelry demand has proven to be a reliable signal that the market has bottomed out.

The Demand for Gold




Other Industrial

Medals & Medallions

Official Coins

Total Fabrication Demand Private Bullion Purchases (Sales)

Net Demand from Unofficial Transactions



































































Industrial demand for gold and net changes in investment holdings. In metric-tons.

Private Gold Investment

When considering the stockpiles held by producing nations, the vast supplies of gold stored in central bank vaults and the influence of major industrial users of the metal, it is hard to believe that the private gold investor can affect prices at all. And yet the combined thinking of millions of hoarders, traders and speculators who are not the least interested in gold’s industrial potential or in its production outlook, can cause far greater price fluctuations than any other factor.

This is even more surprising when we take into account the relatively small figure which private investment demand represents, both in comparison to other demand segments, as well as when measured against the much larger supplies of gold. However, you must remember that the statistics we have so far examined only concern themselves with physical gold. A great number of investors, speculators and traders don’t buy gold in the form of bullion, but resort to mechanisms such as the futures exchanges, where the monthly volumes are often larger than the annual production output!

We will take a closer look at this subject in our section on futures contracts and will for now concentrate on what causes private investment demand to grow and to ebb off.

Changes in investor thinking are often easy to anticipate, but their impact on the gold market is not. Gold is such a sensitive barometer of the health of our economy that it reacts to changes earlier than most other indicators. As a result, a good deal of the gold price depends on how large groups of individual investors, traders and speculators interpret each economic event as it comes along. Chances are, they will be wrong as often as they are right and the market, for a short time, will behave illogically.

But gold is not only a barometer of our economic health, it is also an important indicator of political stability. While this phenomenon is not difficult to explain, it makes it even harder to anticipate private investment demand. After all, it is often impossible to forecast the outbreak of a political crisis, or even a war.

The following pages will show you how each individual factor affects investor psychology and how, in spite of the difficulties, you can anticipate the price corrections of the future.

Gold and Political Conflict

Why does gold demand soar whenever political turmoil erupts somewhere in the world? To begin with, most political conflicts cause severe economic dislocation. Goods which during normal times are freely available to everyone, are suddenly in shortage; services which people are used to, are suddenly interrupted. Inevitably, this causes prices to rise and creates monetary chaos.

And, to no one’s surprise, gold rises in such an environment at an even faster pace. Those living in the affected areas can correctly anticipate massive new deficit spending to finance the war which, in turn, will spur inflation ever further. In addition, they will want to protect their assets from a direct political change or takeover. Obviously, paper money is only a promise made by the government of a country. If there is suddenly the suspicion that the government may not be there a few days later, the paper loses its credibility and the holder will try to convert it into the money of a more secure country or, if he can, he will try to change it into gold. I had an excellent illustration of this phenomenon when the Persian Gulf war erupted, when a friend of mine who worked for a European bank in the Middle East called me every morning to purchase sizeable amounts of bullion. He described how wealthy Gulf residents were literally waiting in line with suitcases stuffed with local cash which they were eager to convert into gold bullion or into dollar deposits abroad. A few years earlier, the Thai coup d’etat in 1976 and the Middle East conflicts of 1977 and 1978 caused similar demand for gold.

The larger the potential political conflict, the more sizeable will be the effect on the price of gold. Both world wars resulted in sharp increases in the bullion price and, more recently, the Soviet invasion of Afghanistan had the same impact. Instead of just a small group of locals, a far larger number of investors from around the world will purchase when crises of such magnitude occur.

Gold and Debt

Most of us have been fortunate enough not to have been affected by a major war or political conflict for decades. Instead, our concerns were largely directed to the economic threats to our freedom and independence, particularly inflation.

Inflation has been around for thousands of years, but it is still a concept which is understood by very few. Whenever inflation occurs, politicians will readily find someone who can be blamed for its existence and, amazingly, the public tends to accept such explanations. The scapegoats of the recent past range from landlords to trade unions, from property owners and speculators to the exotic oil sheiks of the Middle East.

But the real culprit is almost always the excessive creation of money or debt. Inflation is merely the effect. It is only once inflationary conditions exist that the prices of commodities and, later, goods and services rise, and a basis for speculation can be created. Our scapegoats, therefore, are only responding to the malaise of rising prices. They are not causing it.

Gold reacts to inflation earlier than other indicators, and to a larger extent. The reason for this is very simple. Since gold is something which affords a protection against inflation, as soon as investors see a larger increase in the supply of money or the creation of debt than is justified, they anticipate more inflationary developments and buy gold. This usually drives the price up immediately and spells the beginning of a new bull market. But the values of other goods and services will often lag behind because fewer investors follow them closely and because the logical chain of events is longer.

When a government decides to “re-flate” its economy, it is usually during a time of very slow economic activity, stifled demand and falling prices. In such an environment the prices of copper or lumber, for instance, will be depressed. And when the money Supply is expanded or deficits are incurred to spur on these industries again, it will still take considerable time before the values of these commodities are actually affected. First of all, the unemployed need to be brought back to work and consumer spending has to be stimulated. And once people start to spend, they find a lot of merchandise on the shelves which has to be bought before retailers reorder from their supply sources. Wholesalers, too, will want to see steady demand for the items they inventory before they turn around and reorder from manufacturers. Finally, when orders start to pour into the factories, their managers need time to revert to normal output capacity.

As you can see, it may take several months before the consumer’s order has worked itself through this system to the pulp and paper merchant or to the mining conglomerate producing copper. And once this has happened, higher prices work back through the chain in reverse. The producer of raw materials is faced with an extraordinary amount of orders and has to find new ways and methods of satisfying these within the time he is given. The additional cost of this is first noticed in wholesale prices which then, in turn, carry through to the price tag on the retailer’s shelf.

Just how useful gold’s role as a barometer of inflation can be is best illustrated in our chart. Because the yellow metal anticipates inflationary developments, it has the ability to protect an investor’s purchasing power. Most other commodities cannot provide us with this protection because they will rise in price when inflation is already a reality, not when it is in the first stages of its creation.

We concluded that, in most cases, debt is the cause of inflation. The table on below shows you how the growth of the u.s. Federal debt had an immediate and direct impact on the price of gold. The reason, by the way, that the gold price lagged behind debt escalation until the late 1970’s is simply that it was artificially held at thirty-five dollars an ounce. As soon as the bullion price was set free, it caught up with debt developments very quickly.

But ever-growing indebtedness not only leads to inflation. In fact, a good case can be made that the end result of such a condition will be a prolonged period of harsh deflation. Just imagine what would happen if, for once, the government did not counter a lack of liquidity and economic weakness by the creation of new money, but instead left the entire system of indebted individuals, corporations and government to itself. The obvious outcome would be a climate in which those few with real, un-borrowed cash could command the prices best suited to themselves. Before long, the values of commodities, real estate, consumer goods and services would be plunging in a free fall.


Most investors think that gold would do very poorly in such a climate, but that is not true. Surprisingly, an in-depth analysis of the major periods of deflation in recent monetary history reveals that the purchasing power of gold always increased during such episodes. This is not to say that gold did not drop in nominal value; what it means is that gold dropped at a much slower rate than most other items. Next to cash money, it was the best thing to hold.

Thus, gold’s ability to maintain its purchasing power during both inflationary and deflationary periods suggests that the yellow metal is the only medium suitable for the protection of assets during both these extremes.

This basic principle is by far the most important thing to remember about gold. Although other factors may interfere with the bullion price for a short time, the major overriding factor determining the price of the future will always be the extent at which debt has been, or is being, created. And yet, the myths that gold moves with the dollar, the stock market, or the oil price continue unabated. Or are they really myths?

Let’s take a closer look...

Gold and the Dollar

“If gold is up, the dollar must be down”, goes an adage which held true for most of the Sixties and Seventies. At the time, the United States was plagued by sizeable inflation and deficit spending, while several of the European countries and Japan subscribed to strict fiscal and monetary discipline. Predictably, the dollar was very weak during this period, while currencies such as the Swiss franc, the German mark, the Dutch guilder ‘or the Japanese yen became known as “hard currencies”.

During the second half of the Seventies, ever-increasing economic interdependence brought the economic cycles in Europe, the Far East and North America more into line with each other. During 1978, 1979 and 1980, the u.s. was no longer alone in experiencing double digit inflation, and when the u.s. was thrown into deep recession, it pulled the world down with it.

After the advent of the most severe economic slowdown since the 1930’s, cash became king again — cash in u.s. currency, that is. The reason, quite simply, was that deposit rates for American dollars commanded such a high premium over the rate of inflation that investors just couldn’t resist. The more traditional fundamentals, such as the size of the u.s. deficit, or its poor trade performance, were conveniently forgotten. And as the dollar was high, the level of global interest in gold remained low.

In 1984, this international enthusiasm for the American currency began to wane. Even record high interest rates could no longer mask a steadily deteriorating trade shortfall and an ever-growing budget deficit. Once again, the yen, the franc and the mark posted strong advances and, once again, the scramble for alternatives to the dollar benefited gold.

Gold and the Stock Market

Another relationship which is widely misunderstood is that between the stock market and gold. Most brokers will swear by the formula that a weak stock market must translate into a strong gold price, and vice versa.

First of all, it should be observed that different stock markets react to entirely different factors. Industrially based values, such as the United States stocks, suffer when there is an excessive amount of inflation, while gold obviously benefits. Thus, the Dow Jones Industrial Average was very depressed during the high inflation period of 1978 to 1981. On the other hand, resource-based stock markets in Australia, Canada and South Africa benefited immensely during these same years and were outperformed by very few things, among them gold.

Stock markets are worth keeping an eye on. They reflect investor confidence and the health of an economy. But at the same time. trying to equate stock market behavior with the gold price can be treacherous and misleading.

Gold and Grains

Sooner or later, you will also be told that the bullion price always moves counter-cyclically to the prices of grains. Although gold and agricultural commodities, such as wheat, corn or soybeans would seem to have little to do with each other, the workings of international trade suggest otherwise.

Russia is not only one of the world’s primary importers of crops, but is also the second largest producer of gold. And because the Russian rouble is a currency which is not much good outside the Communist Block, the Soviets generally have to pay for their grain imports in gold. (Proof, incidentally, that gold is still the international settlement currency of last resort!) Whenever there is news of a poor Russian harvest, commodities traders anticipate that in the non-Communist world the demand for grains and the supply of gold will both increase. The immediate effect is that grain prices go up while the bullion price weakens.

Of course, the opposite can be true when projections for the Russian grain harvest are good. Because less exports to the East are anticipated, less gold is likely to come to the free world in payment. Grain prices suffer, while gold goes up.

Be careful, however, not to rely on this relationship blindly. The Russians do not always hold their gold even when they have had a good grain harvest. Sometimes they have to raise foreign exchange for some other reason and when they do sell their gold, they usually do it discreetly.

You should also know that the Soviet Union’s long-term objective to create alternative sources of foreign exchange is starting to show signs of success. Export agreements for Siberian oil and gas have been signed with several Western European nations, giving Russia more flexibility and gradually reducing the importance of the relationship between gold and wheat prices.

Gold and Oil

Finally, we should take a look at the relationship between gold and oil. Throughout the Seventies, there was a direct correlation between the price of crude oil and the demand for bullion. As a result, many analysts started to follow the various oil price indices and, based on these, predicted corrections in the bullion price. As long as oil was the major factor behind inflation, and inflation was the major force behind the gold price, everything worked fine. But when the economy plunged into recession, this principle was no longer valid. In 1982, fear of an international banking collapse dominated investor thinking and gold staged a sharp rally. The prices of crude oil and other commodities, on the other hand, were still sharply on the decline.

But just how dangerous it is to discount such correlations was shown in the spring of 1983. As the collapse in oil prices really got underway, gold suddenly came under selling pressure as well. Many observers were quick to point out that this was no surprise because, as they put it, “Lower oil prices will inevitably translate into lower inflation rates and, therefore, into less demand for gold.” Unfortunately, this principle holds true only up to a certain point. Most Western banks chose to base their massive loans to oil producing nations in the third world at prices of around $25 per barrel, which is why that price level now acts as an important support barrier.

What if prices did break that level? Chances are that gold would no longer drop in tandem, but would instead post a dramatic price rise. Western governments would, once again, be caught in a double bind: should they let the banking system get into serious trouble, or should they resort to the printing presses to help the banks and their desperate debtors? We can only guess what the answer would be, but we can say with certainty that investors everywhere would respond by converting their cash into gold.

But whether the outlook for oil is as negative as many analysts predict should be seriously questioned. Remember that the real cause for inflation is the excessive creation of debt by governments. The effect which follows is higher prices for everything, including oil and including gold.

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