History of Precious Metals

Long before gold was used as a currency metal in any form, early cultures made use of the precious metal’s unique characteristics to create jewelry, practical items and religious objects. Gold deposits were first discovered in Mesopotamia—the land between the Tigris and Euphrates rivers—and Egypt, and these regions became centers for its early uses. In these areas, gold was primarily won by washing the river sand. Its earliest known use in jewelry dates back over 5,000 years to the Sumerian culture, located in modern-day Iraq. 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 jewelers. But the peoples of Asia Minor were not the only ones working with gold; the civilization along the Nile was using it 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 discovered. This enabled them to not only directly process larger gold nuggets, they could also work with smaller grains and thin flakes by melting them together in crucibles before processing.

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 point of these two metals is too close for exact separation, or refining, using the technology available at that time. They later developed the art of creating alloys by adding copper, for example. This enabled the ancient Egyptians to produce objects that were far harder than those made from relatively pure gold. It also allowed them to introduce color 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 coloration. 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 society 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.

Knowledge about producing and working precious metals spread from Egypt to all the other advanced civilizations in the region. 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.

In Europe during the Middle Ages, gold was primarily won using primitive washing techniques. 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 neighbors 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.

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 constitutes treasure, and anyone who has it can do whatever he likes in the world. With it he can succeed in bringing souls to Paradise.” And in 1511, King Ferdinand sent soldiers with him on the journey: “Get gold, humanely if possible, but at all hazards—get gold.”

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 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. Precious metals were initially traded during this time in Amsterdam, until London established itself as the new center for gold and silver trading in the last quarter of the 17th century.

The first traditional gold rush occurred in the year 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, but 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 Yekaterinenburg the center of Russian gold production.

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 onboard 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 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 crucially 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 center 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 fields were the gold seekers’ most coveted of all. Of the 100,000 people who set out for Dawson City, the mining town at the center 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.

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-capitalized 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, a former 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. The deposits at Witwatersrand are not found in mineral veins or lodes: They are gold placer deposits, with the gold hosted by conglomerates and grits. 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. 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 that country—almost half of all the gold mined anywhere on the planet over the last 6,000 years.

But despite the discoveries described above, gold is not actually a commonly occurring element. To this day, a total of approximately 160,000 tons of the precious metal have been wrested 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.

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 eventually 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, characterized 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 gold 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 first Great War ended, but widespread inflation and the ruined economies in so many states made this virtually impossible.

The world economic conference held in Genoa in 1922 signaled the official end to the old form of the gold coin standard. Although a return to the classic gold standard was considered desirable, it was in fact gradually replaced in most countries by the gold exchange standard model 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 halfhearted 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: 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 September 3, 1939, trade was suspended at the world’s most important gold market.

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 (currency and financial system). The International Bank for Reconstruction and Development (IBRD) and the International Monetary Fund (IMF) were established at this conference. The former institution, the IBRD, was responsible for monitoring a new currency system based on stable 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 the gold at $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. 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 postwar economic changes. Countries took advantage of this option with increasing frequency, until in 1969 over 70 adjustments had been made to the exchange rate.

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 stable international currency system, and the transition to a system of floating exchange rates.

Shakeups in monetary policy had led to substantial gold purchases by private hoarders in the past. 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 shortfall would need to be covered by the government’s official reserves.

To prevent this from happening, many 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 banking authorities. However, prices in the private gold market would be free to adjust according to supply and demand. Gold prices rose to US$ 40 an ounce on the free market, a level that could not be maintained for long from the supplies of private hoarders.

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 $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 for borrowing transactions between monetary authorities. 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 was a mere four years before gold was finally banished from the official monetary system. The groundwork was laid for this 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. Other central banks did not choose this option: The German Central Bank, for example, valued its gold reserves at DM 4,600/kg for quite some time.

Attendees at the conference in Kingston, Jamaica in January 1976 decided to demonetarize 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 payments between the IMF and its members.The previous obligation for member states—paying 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 demonetarization of gold can only be answered with a qualified “yes.” Gold has doubtless lost its prior role as a medium of exchange between central banking authorities. Also, the direct link has been severed between a country’s gold reserves and its economic management ability, exchange rate fluctuations for its currency and domestic monetary growth. On the other hand, since the dawn of the new millennium a growing number of central banks have been once again emphasizing 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.

The failure of Bretton Woods and the step-by-step liberalization of gold markets around the world—a process still underway in some places—ended up establishing a free market that 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 Teheran drove gold prices up to US$ 850 in January of 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 September 11, 2001. In early 2008, growing investor interest—stemming from exploding oil prices and the weakening US dollar, among other reasons—finally pushed prices past the historic high water mark set back in 1980. The development peaked in March 2008 at a new record high of US$ 1,030 per ounce, but was shortly followed by a downturn that pushed gold prices back down into triple digits.