Print page

The History of Gold

The History of Gold
1,000 tons in 5,000 years – from ancient times to Napoleon
From Asia Minor to the river Nile
Long before gold was used in any way as a monetary metal, early cultures made use of the noble metal's special properties to make articles of daily use, jewellery and religious objects.
Gold deposits were first discovered in Mesopotamia – the land between Tigris and Euphrates – and Egypt, and these regions became centres for its early use. In these areas, gold was initially won by washing the river sand. Its earliest known use in jewellery dates back over 5,000 years to the Sumerian culture, located in modern-day Iraq. In the time between the two World Wars, archaeologists excavated the Royal Tombs at Ur and discovered a golden treasure trove that illustrated the extraordinary capabilities of the ancestors of today’s jewellers.
But the peoples of Asia Minor were not the only ones working with gold; the civilisation along the Nile was using it already by the fourth millennium B.C. The Egyptians were forerunners in developing processes for melting metal. Using blowpipes, they managed to generate temperatures high enough to melt the metal they had discovered. This enabled them to not only directly process larger gold nuggets but they could also work with smaller grains and thin flakes by melting them together in crucibles before processing.

From electrum to gold
However, roughly a thousand years passed from the earliest use of precious metals until ancient cultures were able to produce nearly pure gold. Up to that time, the metal known as electrum to the Egyptians was always gold alloyed with silver because the melting points of these two metals were too close for exact separation, or refining, using the technology available at the time.
Later, the people living at the banks of the Nile developed the art of creating alloys by adding copper, for example. This enabled them to produce objects that were far harder than those made from the relatively soft pure gold. It also allowed them to introduce colour nuances, a process that is still used to this day. A high copper content, for example, gives the South African Krugerrand gold coin a reddish colouration.
But the Egyptians didn’t just limit themselves to processing the gold carried down the Nile from the Abyssinian Highlands: They were also the first to develop a gold mining system. They possessed an amazing ability to locate gold deposits, even from a modern perspective, and numerous archaeological findings today point to the sheer number of gold mines that ancient societies used to exploit reserves between the Nile and the Dead Sea. Experts estimate the amount of gold processed by the Egyptians at about 850 tons, but distributed over a period of about 1,000 years. That roughly equates to the current-day annual production of South Africa and the USA together.

From Egypt to Rome
Knowledge about the extraction and processing of precious metals spread from Egypt to all the other advanced civilisations in the region at that time. The Egyptians’ legacy later descended to the Romans, who also mined for gold in today's Balkan region and in the Spanish provinces. Annual output during the Roman Empire is estimated at 5 to 10 tons. A large part of the technical expertise in precious metals was lost with the fall of the Roman Empire, and it took almost another 1,000 years before humanity reached the level of Roman times once more.

From medieval times to America
In Europe during the Middle Ages, gold was primarily won using primitive washing techniques again. Only some areas in Central Europe had mines, including the Fichtelgebirge and Harz Mountains, Bohemia, Silesia and the Alps.
During the 1,000 years between the fall of the Roman Empire and the discovery of America, experts estimate gold yields at 300 to a maximum of 600 tons, thus reaching only a fraction of the total output of ancient times.
But Mediterranean countries and their bordering European neighbours were not the only ones to develop a preference for that precious metal. For example, China was already mining and working gold in 1,000 B.C. The same is true for regions south of the Sahara, and of course for the ancient Indian cultures in Central and South America.

"Get gold"
Gold’s role in history received another boost in the 15th and 16th century when Christopher Columbus discovered America while searching for a sea route to India. He hadn’t even been confronted with South America's vast riches on his first voyages, and yet he wrote the following in his letters from Jamaica dated 1503: "Gold is most excellent; gold is treasure, and he who possesses it does all he wishes to in this world, and succeeds in helping souls into paradise." And in 1511, King Ferdinand's words to his departing soldiers were: "Get gold, humanely if possible, but at all hazards – get gold".

From all over the world to the Iberian Peninsula
The Spanish and Portuguese fleets dominated the Atlantic for the next 200 years, their galleons returning home laden with gold and even more silver. The conquistadors gathered unbelievable riches, from both an artistic as well as intrinsic value perspective.
However, most of these works of art were irretrievably lost to the conqueror's smelters, and the quest to locate the mysterious city of El Dorado was ultimately unsuccessful despite all their efforts and apparent successes. Why? Because the search for new gold deposits never led to any tangible results. The new masters had too little experience in geology and mining, and pursued their policy of genocide mercilessly – robbing themselves of a potential workforce in the process.
Nevertheless, the conquered gold and silver combined with the comparatively small amount that could be wrung from the earth launched an economic boom back home in Europe, the like of which had not been seen since the Middle Ages.
By the 17th century, however, global gold production had declined again to less than 10 tons per year. During this time, precious metals were initially traded in Amsterdam, until London established itself as the new centre for gold and silver trading in the last quarter of the 17th century.
From one rush to the next – the global hunt for the yellow metal
Gold rush: From Brazil via Russia to the USA
The first traditional gold rush took place around 1700. The discovery of gold deposits in the rivers of Brazil unleashed torrents of adventurers from the entire colony, and even some from the Portuguese homeland, into the country’s interior.
By 1720, Brazil had become the world’s largest gold producer, delivering over 15 tons – and providing almost two-thirds of global production. The gold rush in South America’s largest country already bore all the characteristics of later movements the world over. However, it took almost another 130 years before the next real gold rush happened. Vast gold reserves were discovered in California in 1848. The wave of prospectors that flooded westward never slackened, and within a short time the United States had catapulted to the top of the gold-producing nations. But it wasn’t Brazil, which had long ago led the league, that was nudged out of the top spot: it was the Czar’s Russia. Huge reserves had been discovered in the Urals during the mid-18th century, making Yekaterinburg the centre of Russian gold production.

From Down Under to the Klondike river
However, California did not pose the only serious competition for first place to czarist Russia. An Australian gold prospector was returning home from California in late 1850. While he was still on the ship, he bet that he would only need a week to find geological formations in Australia similar to those he knew from California – and discover gold deposits.
And indeed, Edward Hargraves was right. Upon his return to the fifth continent, it took him only one week to discover the first gold in the Macquarie river in New South Wales. Thus, the Australian gold rush began a mere two years after California’s. Hargraves was later richly rewarded for his service: Queen Victoria appointed him Commissioner of the lands where he had discovered gold, making him financially secure for life.
These finds were equally decisive for both the English mother country and the market in London. While most American gold remained in the country, the Australian gold found its way to Europe and secured London's position as the global centre for gold trading.
The last gold rush in the traditional sense of the word came in 1896, when two Canadian prospectors discovered deposits near the Yukon River. Not only did the Klondike reserves enter the world of literature, these gold fields were also the ones that made the most demands on gold seekers. Of the hundred thousand people who set out for Dawson City, the gold mining town at the centre of the reserves, only 30,000 to 40,000 actually arrived. Of those, only about 5,000 actually prospected for gold, and only a few hundred truly got rich. All in all, the Klondike Gold Rush lasted a total of three years. Seventy-five tons of gold were extracted from the rivers and earth during this time, and then the population of Dawson City – Canada's largest city north of Winnipeg for two years – collapsed. Although gold was mined in this region until 1966, its glory days had long been over.

To South Africa: Without a rush
Already ten years after the gold rush in northern Canada, gold was discovered in an entirely different location on the globe: South Africa. Here, however, traditional “diggers” and seekers of fortune did not dominate the scene from the start. Instead, well-capitalised companies with a high level of technical expertise tackled the task professionally.
Gold had already been discovered in a few locations throughout South Africa during the first half of the 19th century, but it was always overshadowed by huge diamond finds in Kimberly in the Cape Province.
But everything changed in 1886, when gold reserves were discovered near Johannesburg in the Orange Free State – at that time, an independent Boer republic – reserves that still yield large annual volumes to this day. The companies that had established hegemony over the diamond reserves rushed to seize control of these as well.
But in the beginning they were faced with problems that seemed unsolvable. Why? Because the deposits in South Africa are different from those found in other parts of the world. There are no gold nuggets to dig for; not even visible traces of gold. This is because the deposits at Witwatersrand were not found in mineral veins or lodes – they were gold placer deposits, with the gold hosted by ore. And this made it very difficult to recover.
English scientists finally saved the day by developing a technical process for dissolving gold from ore, helping the gold mining industry on the Cape of Good Hope rise from near failure in 1890 to successfully defending its position at the top in 2007.
In 1887, South Africa produced 1.2 tons of gold, which amounted to 0.8% of global production. Five years later it was already 30 tons, a number that grew steadily up into the 1970s, peaking at over 1,000 tons annually. Only then did a combination of high costs and major technical difficulties involved in establishing new mines, along with decreasing gold content in the placer deposits cause companies to slowly scale back production.
Nevertheless, almost 40 years after setting a production record in 1970, South Africa still produces approximately 260 tons a year. In a little more than a century, a total of approximately 60,000 tons of gold have left the country – almost half of all the gold mined anywhere on the planet over the last 6,000 years.

From the world to Berlin
But despite the discoveries described above, gold is not actually a commonly occurring element. To this day, a total of approximately 166,000 tons of the precious metal have been wrestled from the earth’s grasp. Although that sounds like a large amount at first, if it were all compressed into a cube it would only be slightly larger than the passage through the Brandenburg Gate in Berlin.
Golden times and a bitter ending: gold as the sole support for the global currency system
From gold rush to gold standard
After the Napoleonic Wars, England became the first country to adopt the gold standard in 1816. Portugal followed suit some years later, then Switzerland with a gold/silver currency, and finally the German Empire in 1871 after the end of the Franco-Prussian War. France, Belgium, the Netherlands and the Scandinavian states also made the switch relatively quickly, with Russia, Japan and the USA as the only meaningful stragglers, which only transitioned their currencies at the close of the 19th century.
The result: a gold standard currency, meaning that circulating paper money was made legal tender and fully backed by gold in the individual countries. The gold itself was used in the form of gold coins – called full-bodied coins – that were either in circulation or could be exchanged for paper banknotes at the issuing banks.
Not only did the gold standard establish an essential foundation for national economic policy in participating countries, the international currency system was also based on this foundation, characterised by stable exchange rates fixed at a specific proportion to gold.
If a foreign trade deficit arose between countries, a transfer of gold settled the debt. Growing gold reserves led to an increased amount of money in circulation, and the flow of gold out of the country had the opposite effect on domestic capital markets. In this way, the domestic money supply was regulated by the balance of payments to other countries. The free flow of money and capital goods between nations that reigned during this time made this system possible.
But in 1914, World War I put an end to the short-lived era of the gold or gold/silver standard that had been adopted in 59 countries by that time. A few nations attempted to return to the old-style gold standard after the Great War ended, but widespread inflation and the ruined economies in so many countries made this virtually impossible.
The not-so-golden 20s – the gold/exchange standard up to 1939
From the not-so-golden 20s to 1939
The world economic conference held in Genoa in 1922 signalled the official end to the old form of the gold standard. Although a return to the classic gold standard was considered desirable, it was in fact gradually replaced in most countries by the model of a gold/exchange standard developed in Genoa. With this system, gold no longer served as a means of payment but conserved gold stocks in the vaults of issuing banks along with foreign exchange reserves covered and guaranteed the value of circulating paper currency.
Only England made a half-hearted attempt to return to the old gold coin standard in 1925, but allowed pound notes to be exchanged for large gold bars only, rather than gold coins as in the past. This solo effort among countries that had participated in the war didn’t even last a full six years – in 1931 the United Kingdom had to abandon the attempt in the face of the severe economic crisis.
Shortly thereafter, the last countries to remain neutral during the war – and that had still clung to the gold standard – followed suit, among them Portugal and Sweden. France held on until 1936, when the German occupation of the Rhineland fed fears of another great war to come, quickly escalating the demand for gold. The Bank of France neither wanted nor was able to meet this demand, and as a result suspended the gold standard there as well.
The times of stable gold parity for currency were thus over. Central banks and governments adjusted gold prices with growing frequency, devaluing their currencies in the process. Gold trading remained up and running in London, where many European citizens hoarded their gold in accounts or bars, until war broke out. Then, on 3 September 1939, trade was suspended at the world’s most important gold market.
The Bretton Woods currency system
After the world wars: From the American countryside into the world outside
The framework for restoring an international currency system after World War II was drafted at a conference held in the American resort town of Bretton Woods in New Hampshire.
The International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD) were established at this conference.
The IMF became responsible for monitoring a new currency system based on fixed exchange rates. Members of the IMF had to agree to peg their currencies to the US dollar at a specific rate, and since the dollar was linked to gold at a fixed rate of $35 per ounce, this created a de facto dollar/gold standard.
However, fixing the price of gold at $35 by no means meant that central banks were not active in the gold markets. Rather, many countries exchanged a significant portion of their gold reserves for urgently needed US dollars for reconstruction efforts back home. As a result, by 1949 the USA had over 22,000 tons of gold in its reserves – the largest amount in the country’s history.
But after that year, the pendulum slowly began to swing in the other direction. European central banks began to exchange the US dollars they had earned on steeply rising exports during the 1950s for gold once again.
But unlike the era of the pure gold standard, the fixed exchange rates in the Bretton Woods system were not taboo. Participating countries had the option of adjusting their currency’s exchange rate to accommodate post-war economic changes. Countries took advantage of this option with increasing frequency, until in 1969 over 70 adjustments had been made to the exchange rates.

From Bretton Woods to Washington
In the end, the Bretton Woods system’s strong dependence on the US dollar was its undoing. The system worked as long as the amount of US dollars in circulation was fairly limited and participating countries pursued a policy of maintaining the stability of their own currencies. The USA’s persistent trade deficit and the enormous costs of the Vietnam War in particular led to the collapse of the fixed international currency system, and the transition to a system of floating exchange rates.
The monetary policy commotions had led to substantial gold purchases by private hoarders even before this. In fact, private demand in the latter half of the 1960s outpaced new production completely, and it seemed to be just a matter of time before the resulting shortfall would need to be covered by the governments' official reserves.
To prevent this from happening, the central bank heads signed off on the Washington Agreement in 1968, establishing a strict separation between the official and private gold markets. The fixed gold price of US$ 35 per ounce would continue to apply to transactions between central banks. However, prices in the private gold market would be free to adjust according to supply and demand. As a consequence, gold prices rose to about US$ 40 an ounce on the free market, a level that could not be maintained for long from the supplies of private hoarders.

Turbulent start into the 1970s
But imbalances in the international monetary system could not be realigned by splitting the gold markets. As a result, the dollar was devalued in 1971 and 1973 to US$ 38 and US$ 42.22 per ounce, respectively, while the price of gold spiked on the free market to around US$ 100 an ounce.
More and more countries began abandoning the pegged currency system, so that the increasingly obsolete Washington Agreement was finally and officially laid to rest in November 1973. The Washington meeting in June 1974 gave central banks the option of pledging their gold reserves at market prices to borrow money from foreign countries. Italy was the first country to take advantage of this opportunity, taking out a loan based on the floating gold price rather than the official fixed rate.
However, it took another four years before gold was finally banished from the official monetary system. The foundation for this was laid in 1974 when the USA agreed that nations could value their gold reserves at market prices in the future. France was the first to seize this opportunity, followed by other countries later. However, other central banks did not choose this option: The German Central Bank, for example, valued its gold reserves at about DM 4,600/kg for quite some time.

From Kingston/Jamaica to demonetisation
Attendees at the conference in Kingston, Jamaica, in January 1976 decided to demonetise gold for good, rewarding the USA’s efforts of several years toward this end. The conference established the future role of gold as follows:
  • The official price of gold was eliminated. This in turn eliminated settlements between the IMF and its members.
  • The previous obligation for member states to pay 25% of their IMF quota in gold was lifted.
  • Furthermore, one sixth of the IMF’s gold reserves would be sold at auction over a period of four years, with the earnings used to create a fund to benefit the poorest developing nations.
  • Another sixth of the gold reserves would be returned to member states in accordance with their quotas.
The resolutions from the Kingston conference were largely implemented starting in 1978. However, the question of whether these steps actually managed to achieve the demonetisation of gold can only be answered with a qualified "yes". Gold had doubtless lost its previous role as a medium of exchange between central banks. Also, the direct link had been severed between a country’s gold reserves and, for example, its economic performance, fluctuations of its currency's exchange rate or the development of its domestic money supply.
On the other hand, since the dawn of the new millennium a growing number of central banks have been once again emphasising the importance of gold reserves as part of currency reserves, and a large number of them still refuse to sell their gold reserves almost 40 years after Bretton Woods.
Finally given the green light – the independent gold market brings
record prices and bitter setbacks
The failure of Bretton Woods and the step-by-step liberalisation of gold markets around the world, a process still underway in some places, ended up establishing a free market. This market quickly led to a highly speculative phase in the late 1970s.
Pressure from the Soviet invasion of Afghanistan coupled with tensions between the USA and Iran stemming from the hostage crisis at the American embassy in Tehran drove gold prices up to US$ 850 in January 1980. But sales from central bank reserves, pre-sales of future mining production volumes and waning interest among investors all combined to unleash an agony that lasted almost two decades, readjusting the price back down to US$ 255.
The trend finally began to turn upward again in 1999, strengthening after the events of 11 September 2001. Investor interest grew in the following years – stemming from exploding oil prices and a weakening US dollar, among other reasons – and in 2008 finally pushed prices past the historic all-time high of 1980.