The History of Gold
A Brief History of Gold
Gold and silver have been the cornerstones of the world’s economies and banking systems since these systems were first developed, and the metals have lost little of their allure even today. Gold has been a central currency from about 600 BC up until the twenty first century. From Isaac Newton’s recoinage of 1717 to the final closure of the Bretton Woods gold window by President Nixon, it was the pivot of the world exchange system. Gold reserves remain very important to central banking.
Gold was probably first found on the ground and used by prehistoric man as a tool. The first known use of gold was in parts of central and eastern Europe, in 4000BC. Highly sophisticated gold art objects and jewelry dating back to around 3000BC have been discovered by archaeologists in the Sumerian Royal Tombs at Ur, in what is now southern Iraq. The Egyptians used gold to adorn their kings in life and death and, by 1500BC, gold had become a standard medium of international trade. Similarly, goldsmiths of the Chavin civilization in Peru were making ornaments by hammering and embossing gold by 1200 BC.
There are many stories and legends that relate an association of famous people and places with gold. The gold mask that intricately details the facial features of King Tutankamen, the youthful ruler of ancient Egypt, retained its untarnished brilliance when it was uncovered in 1927, after being entombed for more than 3000 years. The Old Testament tells of the wealth of King Solomon’s Mines and how his fleet would return from legendary Ophir laden with gold for his treasury. The Queen of Sheba would visit Solomon bearing gifts of gold in appreciation for his advice and wisdom.
According to Greek legend, Midas, king of Phrygia, was granted a wish by the god Dionysius in exchange for a favor, that everything he touched would turn to gold. He begged to have his power removed after realizing how foolish he had been. The search for the Golden Fleece by Jason and the Argonauts was probably based on the method of gold recovery used. At that time, miners extracted most of the gold from alluvial sands in rivers and streams. By washing the gold bearing sand through the sheepskins, gold particles would be trapped by the wool fibres. The fleece would then be dried and burnt in a fire leaving remnant blobs of melted gold.
Around the fifth century BC, the Greek, Chinese and Arabic cultures began to develop ideas about alchemy, in a pseudo-scientific attempt to change base metals into gold. Alchemists searched for the Elixir or Philosopher’s Stone, a substance of high purity, that would not only convert metals to gold, but also restore health and provide immortality. These alchemists provided the basis for the modern science of chemistry.
The discovery of America by Christopher Columbus was thought to be an indirect result from the endeavor to uncover the source of China’s gold, which had riches beyond any of those of Europe. The lure of gold led the Conquistador’s to murder and pillage the central American civilizations of the Aztecs and Incas. These Spanish invaders melted down centuries old artifacts and icons of exquisite craftsmanship into ingots.
About 600BC the Greeks began to use gold coins and many ‘city-states’ minted their own money in order to conduct trade between states. The rarity and metallic properties of gold made it the ideal choice in the development of coinage.
Currency has remained one of gold’s primary uses. It is considered so valuable that we measure all other values by it. In 1944, the International Monetary Fund and the World Bank were created, setting a new international currency standard in terms of gold.
Gold is still considered to be an extremely safe form of financial security, many preferring to hold gold coins and bullion rather than government bonds because of its intrinsic value. Gold has long been used as a store of wealth, with most countries and financial organizations holding gold as part of their financial reserve.
A History of Gold
The history of gold begins in remote antiquity. But without hard archaeological evidence to pinpoint the time and place of man’s first happy encounter with the yellow metal, we can only conjecture about those persons, who at various places and at different times first came upon native gold. Experts of fossil study have observed that bits of natural gold were found in Spanish caves used by the Paleolithic Man about 40,000 B.C.
Consequently, it is not surprising that historical sources cannot agree on the precise date that gold was first used. One states that gold’s recorded discovery occurred circa 6000 B.C. Another mentions that the pharaohs and temple priests used the relic metal for adornment in ancient Egypt circa 3000 B.C. However, it is curious to note that the early Egyptian’s medium of exchange was not gold but barley.
Gold became a part of every human culture. Its brilliance, natural beauty, luster, its great malleability and resistance to tarnish made it enjoyable and excellent to work with. Because gold is dispersed widely throughout the geologic world, its discovery occurred to many different groups in many different locales. And nearly everyone who found it was impressed with it, and so was the developing culture in which they lived.
Gold was the first metal widely known to our species. When thinking about the historical progress of technology, we consider the development of iron- and copper-working as the greatest contributions to our species’ economic and cultural progress – but gold came first. Gold is the easiest of the metals. It occurs in a virtually pure and workable state, whereas most other metals tend to be found in ore-bodies that pose some difficulty in smelting. Gold’s early uses were no doubt ornamental, and its brilliance and permanence (it neither corrodes nor tarnishes) linked it to deities and royalty in early civilizations.
Gold has always exerted a huge influence on the minds of mankind. The earliest history of human interaction with gold is long lost to us, but its association with the gods, with immortality, and with wealth itself are common to many cultures throughout the world. Early civilizations equated gold with gods and rulers, and gold was sought in their name and dedicated to their glorification. Humans almost intuitively place a high value on gold, equating it with power, beauty, and the cultural elite. And since gold is scarcely distributed around the globe, we find this same thinking about gold throughout ancient and modern civilizations everywhere.
Gold has always had value to humans, even before it was money. This is demonstrated by the extraordinary efforts made to obtain it. Prospecting for gold was a worldwide effort going back thousands of years, even before the first money in the form of gold coins appeared about 700 B.C. In the quest for gold by the Phoenicians, Egyptians, Indians, Hittites, Chinese, and others, prisoners of war were sent to work the mines, as were slaves and criminals. And this happened during a time when gold had no value as ‘money,’ but was just considered a desirable commodity in and of itself.
Early Egyptians associated gold with immortality. The ancient Pharaohs were believed to be sons of the sun-god, Ra and equated gold with the sun, the giver of life. They wore great quantities of gold in life, sat on gold thrones and carried gold into their graves to assist them in their afterlives; it was a constant reminder of their immortality, wealth and position. Ancient Egypt was one of the richest gold producing areas in those days, its gold being obtained by slaves from river beds or shallow excavations, usually under wretched conditions. Here is a description of these slaves by the historian Diodorus:
The Kings of Egypt collect together and consign to the gold mines those who have been condemned for crime and who have been made captive by war…. Those who have been consigned to the mines being many in number and all bound with fetters (chains), toil at their tasks continuously both by day and all night long, getting no rest and jealously kept from all escape…
Their plight was as bad as that of those who were forced to toil in the making of the pyramids. Over the years, the treasures buried with many of the Pharaohs were plundered by grave robbers. One of the most important archaeological finds was the tomb of the young Pharaoh, Tutankhamun, discovered by Howard Carter in 1922. Although the outer rooms had been plundered by thieves, the actual tomb was intact. It had remained undisturbed for more than three thousand years, since the death of the young king in the 14th century B.C. The treasures Carter found reveal the very great skills of the Egyptian goldsmiths.
As far back as 3100 B.C., we have evidence of a gold/silver value ratio in the code of Menes, the founder of the first Egyptian dynasty. In this code it is stated that “one part of gold is equal to two and one half parts of silver in value.” This is our earliest of a value relationship between gold and silver.
In ancient Egypt, around the time of Seti I (1320 B.C.), we find the creation of the first gold treasure map now known to us. Today, in the Turin Museum is a papyrus and fragments known as the “Carte des mines d’or.” It pictures gold mines, miners’ quarters, road leading to the mines and gold-bearing mountains, and so on. Where is that gold mine located? Well, you know how it is with treasure maps – there’s always something a little vague about them, to throw you off the trail. Modern thought is that it portrays the Wadi Fawakhir region in which the El Sid gold mine is located, but the matter is far from settled.
The ‘value’ of gold was accepted all over the world. Today, as in ancient times, the intrinsic appeal of gold itself has that universal appeal to humans. But how did gold come to be a commodity, a measurable a unit of value? The first use of gold as money in 700 B.C. is claimed by the citizens of the Kingdom of Lydia (western Turkey). You may have heard of the kingdom of the famous fortune seeking King Croesus. Croesus, the King of Lydia in 550 B.C., was famous for seeking to possess more and more gold so that eventually the term, “rich as Croesus,” meant someone who had unbelievably vast wealth. By about 560 B.C., the Lydians and Ionians had learned how to separate the gold from the silver, so that King Croesus was able to issue the world’s first bi-metallic coinage. Bi-metallic in the sense that there were gold coins and silver coins. Shortly afterwards, in 546 B.C., Croeseus was captured by the Persians, who came to adopt gold as the main metal for their coins.
Gold, measured out, became money. Gold’s beauty, scarcity, unique density (no other metal outside the platinum group is as heavy), and the ease by which it could be melted, formed, and measured made it a natural trading medium. Gold gave rise to the concept of money itself: portable, private, and permanent. Gold (and silver) in standardized coins came to replace barter arrangements, and made trade in the Classic period much easier.
A love of gold was widespread throughout the ancient Mediterranean world. The civilisations of Crete, Persia, Rome and Byzantium, as well as those of the Nordic peoples as far apart as Scandinavia and Siberia, produced gold and valued it highly.
The Roman Empire furthered the quest for gold. The Romans mined gold extensively throughout their empire, and advanced the science of gold-mining considerably. They diverted streams of water to mine hydraulically, and built sluices and the first ‘long toms.’ They mined underground, also, and introduced water-wheels and the ‘roasting’ of gold-bearing ores to separate the gold from rock. They were able to more efficiently exploit old mine-sites, and of course their chief laborers were prisoners of war, slaves, and convicts.
The early Roman Republic issued few coins in gold, their main coinage being in silver, with bronze or copper for small change. Later Julius Caeser minted gold coins to pay his Roman legions who were thrilled when they began to see the value of their pay growing rapidly.From the death of Julius Caesar, gold coinage came to be an important part of the Roman coinage system. The Romans took a very practical view in exploiting natural resources in the areas of their conquest, and issued coins in gold, silver, and copper according to the resources of the region.
A monetary standard made the world economy possible. The concept of money, (i.e., gold and silver in standard weight and fineness coins) allowed the World’s economies to expand and prosper. During the Classic period of Greek and Roman rule in the western world, gold and silver both flowed to India for spices, and to China for silk. At the height of the Empire (A.D. 98-160), Roman gold and silver coins reigned from Britain to North Africa and Egypt.
Many Classical historians claim that the eventual debasement of Roman gold and silver coinage by various Emperors in order to pay for an increasingly burdensome Empire contributed to the gradual decline of the Empire.
Gold in the Americas
After the fall of the Roman Empire, gold became scarce in Europe until the ‘discovery’ of America in 1492 by Christopher Columbus. This raised hopes in the courts of Europe that the newly found continent would yield vast riches, including gold. In the 16th century, the Spanish mercenaries, Cortes and Pizarro, landed respectively in Mexico and Peru where gold was found to be used lavishly. The Incas referred to gold as the “tears of the Sun.”
Cortes made war on the Emperor Montezuma and seized the vast Aztec treasure. This sad episode was repeated in Peru where Pizarro captured the Emperor Atahualpa. The Inca king promised to fill his prison cell with gold in return for his freedom, but despite his fulfilling this promise, Pizarro had him killed. The story of the Inca civilisation and the role gold played in it is a fascinating one. The Incas were highly sophisticated and more sophisticated than the Europeans in many fields of endeavour. They had royal gardens of exotic plants, and their capital, Cuzco, contained a Temple of the Sun considered one of the marvels of its age. It can still be visited, and here is the impression it left on a Spanish contemporary:
The interior of the temple was the most worthy of admiration. It was literally a mine of gold. On the western wall was emblazoned a representation of the deity (god) consisting of a human countenance (face) looking forth from amidst innumerable rays of light, which emanated from it in every direction, in the same manner as the sun is often personified with us. The figure was engraved on a massive plate of gold of enormous dimensions, thickly powdered with emeralds and precious stones. It was so situated in front of the great eastern portal that the rays of the morning sun fell directly upon it at its rising, lighting up the whole apartment with an effulgence (brightness) that seemed more than natural, and which was reflected back from the golden ornaments with which the walls and ceilings were everywhere encrusted. Gold, in the figurative language of the people, was “the tears wept by the sun” and every part of the interior of the temple glowed with burnished plates and studs of the precious metal. The cornices which surrounded the walls of the sanctuary were of the same costly material; and a broad belt or frieze of gold, set into the stonework, encompassed the whole exterior of the edifice.
Unfortunately due to man’s greed and insatiable lust for power, Pizarro had all the beautiful gold objects melted down and shipped back to Spain. For a period, South America became the chief source of gold in Europe, where the metal from Aztec and Inca treasures was refashioned into objects of adornment for palaces and churches, as well as magnificent jewellery for European kings and queens.
However, the quest for gold continued. The search for Eldorado, the legendary land where gold was assumed to be as common as sand, was to lead to the settlement of new continents.
The Modern El Dorado: Recent Gold Rushes
Most of the gold found up until the last century was alluvial, i.e. gold found in river beds. Panning for such gold was relatively easy. Using a pick, shovel and pan, a prospector would dig out sand and gravel from the river bed, put them into the pan and then rotate it until the water and the lighter mud and gravel spilled over the edge. Because gold is a very dense metal, it remained at the bottom of the pan. Although gold mining in Russia began in the Urals in 1744, most of the world’s major finds occurred in the second half of the 19th century. It is interesting to note that the world output for this period was 10000 tons compared to a mere 750 tons for the entire first century after the discovery of America! Some of the most important gold discoveries of recent times are described below.
The Californian Gold Rush of 1849
In 1849, James Marshall, a carpenter, found gold at Sutter’s Mill in the Sacramento Valley of California. Diggers from as far afield as China, Australia and, of course, Europe, swarmed to the workings and three years later, these “forty-niners”, as they were called, had already dug 820 tons of gold. During the gold rush, almost half a million people were attracted to the area, and those who stayed behind developed it into a new and prosperous state.
The Australian Gold Rush of 1851
An unsuccessful “forty-niner”, Australian Edward Hargraves, noticed a telltale similarity between the geological features of the Sacramento Valley and certain areas in Australia familiar to him. He returned to his home country, in the hope of making a gold find, which he did at Ballarat in Central Victoria in 1851.
The Klondike Gold Rush of 1896
In 1896, gold was found on the border between Northern Canada and Alaska by an ex-sailor named George Carmack, who had married the daughter of an Indian Chief. His story of the find has been told as follows:
George went fishing for salmon in the Klondike river one day. As he paddled along dipping an old tin into the sand, he felt a light tug and when he lifted the tin out of the water, found a thumbsize nugget in the tin instead of fish. The news spread like bushfire. Of the estimated 100 000 men who set out for Alaska, only about 4,000 found any gold – a few found a great deal, but many died of cold.
The Witwatersrand Find of 1886
It was South Africa that became the scene of the greatest gold find of all. However, the gold was embedded in rock and could not be recovered by simple panning. As a result the whole nature of gold mining changed, in that it could not easily be pursued by individuals, but had to be carried out by large corporations. The great mining houses of modern times were born. Still, the dream of Eldorado persists and is pursued by individual men and women.
Virgil, the famous Roman poet of antiquity, aptly described man’s undying lust for gold when he wrote:
“Auri Sacra Fames”
(The cursed thirst for gold!)
More Recent History
In 1792 the U.S. Congress adopted a bimetallic standard (gold and silver) for the new nation’s currency – with gold valued at $19.30 per troy ounce. This remained essentially unchanged until 1834, when the price of gold was raised to the $20.67 level which held for the next 100 years. It was not until 1934 that President Franklin Delano Roosevelt devalued the dollar by raising the price of gold to $35 per ounce.
Relative to today’s world economic conditions, it is imperative to remember that F.D.R.’s stated purpose for dramatically increasing the value of gold was to boost commodity prices (especially farm products) and create more employment for the millions who were suffering the devastating effects of the Great Depression.
In December 1971 representatives of the ten most industrialized nations met in Washington D.C. It was their express purpose to take whatever measures in order to improve international economic conditions. The now famous Smithsonian Agreement accorded an immediate hike in the value of gold from $35 to $38 per ounce. President Richard Nixon hailed it as “the most significant monetary agreement in the history of the world.” Unfortunately, it resulted in a measure too little and too late. International economic conditions continued to deteriorate, forcing the U.S. Government in 1973 to devalue the dollar a second time by raising the official price of gold to $42.22 per ounce. Finally, all international currencies were allowed to “float” freely against gold. By June of that year the London Gold Fixing had risen to an unprecedented $120 per ounce. Exploding demand during the following months set the stage for the creation of gold futures trading on the COMEX in January 1975.
A worldwide feeding frenzy for gold cannonballed its price to an all-time high of $850 per ounce on January 21, 1980. Obviously, speculative excess had carried too far. After that date the price of gold was in a downtrend for some 20 years. Naturally, there have been periods of respite, when prices rebounded slightly. However, on balance the long-term bear market remained intact until September 1999. The new bull market in gold has been quietly more spectacular than the noisy new bull market in stocks. Gold ended its 18-year bear market in 1999, just as the stock market was ending its 18-year secular bull market. Since then, while the stock market was suffering its severe 2000-2002 bear market, gold has been enjoying three years of an impressive new bull market. From its low around $250 an ounce in 1999, gold has surged up nearly 75% to its recent high of $433 an ounce.
In our opinion, this heralded a reversal of the 20 year downtrend, and thus the return of Virgil’s echo: “Auri Sacra Fames”. Or to put it in lay man’s terms – “there is no fever like gold fever”.
Lure, Lore of Gold
Gold is the oldest precious metal known to man. Therefore, it is a timely subject for several reasons. It is the opinion of the more objective market experts that the traditional investment vehicles of stocks and bonds are in the areas of their all-time highs and may be due for a severe correction. In fact the traditional indicators of valuation are far past the excessive readings of 1987 and worst than even 1929! In warning recognition of current market mania, Fed Chairman Alan Greenspan poignantly admonished that current market excesses display “IRRATIONAL EXUBERANCE WHICH MAY LEAD TO A FINANCIAL ASSET BUBBLE!”
Therefore, astute and prudent investors are seeking alternative investments. Their strategy is to seek risk diversification away from stocks and bonds, currently near all-time highs – in order to take positions in hard assets, which are presently near multi-year lows, and hold promise for reasonable good returns in the future.
Why is gold so precious?
To fully appreciate why 8,000 years of experience say gold is forever, we should review why the world reveres what England’s most famous economist, John Maynard Keynes, cynically called the “barbarous relic.”
Why gold is “good as gold” is an intriguing question. Dr. Sigmund Freud, the founder of psychoanalysis, suggested that “our fascination with gold is related to the erotic fantasies of early childhood.” However, we think that the more pragmatic ancient Egyptians were perhaps more accurate in observing that gold’s value was a function of its pleasing physical characteristics and its scarcity.
There are many physical aspects of the yellow metal which are truly amazing. Gold is the most malleable (able to be hammered into very thin sheets) and ductile (able to be drawn into a fine wire) of all metals. It is so malleable that a goldsmith can hammer one ounce of gold into a thin translucent wafer covering more than 100 square feet only five millionths of an inch thick. It would be so thin that 1,000 sheets would be needed to make up the thickness of one newspaper page. Its ductility is equally amazing. One ounce of gold can be drawn into a wire 50 miles long! Furthermore, ONLY one ounce of this marvelous metal is required to plate a thread of copper 1,000 miles long. That’s really stretching it, wouldn’t you say?
Since time immemorial the noble metal’s resplendent luster allows it to be designed into the world’s most coveted and exquisite jewelry – fit for queens or kings.
Gold is also one of the heaviest metals known. It has a specific gravity of 19.3, which means it weighs 19.3 times as much as an equal volume of water. Therefore, one cubic foot of gold weighs 1,206 pounds. More than half a ton! This probably explains why there has NEVER been any large armed robberies of gold bullion throughout history. Who the hell could carry it?!
More unbelievable than its physical characteristics is its scarcity. It is well documented that the world’s holdings accumulated during all recorded history to the present is only about 120,000 metric tons. Understandably, it is rather difficult for the average person to relate to this measurement. Suffice it to say that the total world’s hoard of the shiny metal will occupy a single cube 60 feet by 60 feet by 60 feet – which is equivalent to the approximate volume of three 12-room homes. This is indeed a small volume of matter to have influenced the toil and destiny of so many people since biblical days. In fact the total world’s holdings of the rare metal could be transported by a single solitary oil tanker – that’s if Lloyds of London would ever accept the insurance risk on this priceless cargo. The value of this priceless cargo would be approximately $1.4 trillion.
Another way to appreciate its scarcity is to compare it to the annual steel production in the United States. According to the Iron and Steel Institute in Washington D.C., the American industry poured an average of 10,500 tons of steel per hour during all of 1995! Please appreciate that’s 24 hours per day and 365 days per year – indeed, a lot of steel. In sharp contrast the world’s annual gold mine production increases the total holdings by only 2.0% per year. That’s an average increase in the world’s gold supply of a mere 2,000 tons per year – versus 10,500 tons of American steel per hour. Gold is indeed very, very rare.
Predicting the future price of Gold
Baron von Rothschild, creator of one of the most famous financial dynasties of modern times, was once heard to have said that: “He only knows of two men who really understand the true value of gold – an obscure clerk in the basement vault of the Banque de Paris, and one of the directors of the Bank of England. Unfortunately, they disagree!”
He only knows of two men who really understand the true value of gold…. unfortunately, they disagree.”
Baron von Rothschild
Most serious students of international finance share his sense of frustration on the subject. In fact if you were to ask five different monetary analysts to explain why the price of gold moves the way it does, you would most likely get seven distinct answers.
Accurate predictions for the future price of gold are at best an exercise in speculation as are predictions on the future movement in price of any asset class. Nevertheless, one may establish reasonable and logical criteria for forecasting price expectations — based upon fundamental, technical and intermarket analysis.
Seek the wisdom of the most expert minds in your field.
Ralph Waldo Emerson
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