Introduction to Economics Lesson 12 / 07
GOLD
Gold is an element.
In layman’s terms, an element is a basic and irreducible
substance, not capable of being reduced, divided or broken up into
simpler or more basic components. Amongst
the elements, it is part of a group, which are, by virtue of their
characteristics, classified as metals. Along with other metals of
relatively high economic value, such as silver, platinum and palladium
it is often referred to as a ‘precious metal’.
Gold occurs
naturally in the form of nuggets. It is also found as grains in rock, in
veins and in alluvial deposits. Seawater
also contains a minute concentration of gold.
Apart from copper, gold is the only metal with its own
distinctive colour, others being either silver or grey.
It readily forms compounds with other metals and often occurs
mixed with silver, which whitens its colour.
HISTORY
Gold has been known
for thousands of years. It
is referred to in ancient Egyptian writings and in the Old and New
Testaments. It is
relatively easy to extract geologically and was perhaps the first metal
produced by man. Because of its beauty, scarcity, malleability and ductility
it has been used extensively in the past for decoration, jewellery and
money, including as a medium of exchange, a store of value and a measure
of account. Its use in
dentistry dates back almost 3000 years.. Midas, king of Lydia, a part of
modern Turkey, is credited with producing the first coinage, which was
made from gold and minted between 643 and 630 BC.
From then until the 1930s, gold, along with silver, was the
world’s principal form of money.
At various times
there have been relatively sudden and significant increases in the
supply of gold, which has otherwise been slow and reliably stable.
Thus it is reputed that when the Mali emperor made hajj to Mecca
in 1324 he brought with him and distributed gold that effected the
Mediterranean economy for a decade.
Gold brought back from the New World by the Spanish conquerors
caused a century of inflation in Europe.
The great gold rushes of the C19, to California, Australia, South
Africa and Alaska had similar, albeit lesser, effect.
During the C19
century the leading economies of the world, led by Great Britain,
gradually adopted a gold monetary standard, wherein their unit of
currency was expressed to comprise a fixed amount of gold of a specific
fineness. By 1912 there
were 41 nations on the so-called gold standard.
Gold was the universal money, which greatly facilitated worldwide
trade, production and the flow of capital.
Since gold is impervious to nitric acid, gold coins could be
readily tested by placing a drop thereon [ the origin of the term ‘the
acid test’], or more crudely by biting them to reveal the presence of
any base metal within, typically lead.
WW1 effectively
destroyed the gold standard. Nations
hoarded their gold and issued paper.
Post war attempts to restore the pre-war standard foundered in
the Great Depression. The
last vestige thereof ended in 1971 when President Nixon ended American
redemption of the dollar in gold to foreign central banks and
treasuries.
USES OF GOLD
Apart from its use
for bullion, coins and jewellery, gold’s various qualities, including
its malleability, ductility, reflectivity, thermal and electrical
conductivity and resistance to corrosion give rise to many industrial
uses, consuming approximately 300 tonnes annually.
They include the following:
·
Electronics; Approximately
150 tonnes of gold are used annually in electronics, particularly in the
plating of contacts. For
example a typical touch telephone has 33 gold plated contacts. Gold wire and strip is also widely used as a conductor.
·
Radiation & Heat
Protection; Spacecraft and
buildings are lined with alloys and foil to reflect heat and radiation
·
Dentistry; Despite
declining popularity the use of gold alloys in dentistry remains
significant and accounts still for approximately 60 tonnes annually.
·
Decoration;
Gold is widely used for decoration of china and glass, the
plating of personal items such as pens, watches and spectacle frames,
and bathroom fittings, consuming approximately 85 tonnes annually.
PRODUCTION
Gold is an
extremely rare element. It
is estimated that the Earth comprises only 3 parts per billion of gold.
In seawater it is typically 1-2 parts per 10 billion.
Gold is mined by both open cut and underground methods.
The viability of a mine depends on the price of gold, which has
risen significantly in recent times, making the mining of lower quality
ore grades more viable.
In modern times the
world’s major source of gold has been South Africa.
It is estimated that approximately 50% of the gold ever mined
came from there. In recent
years production, for both technical and political reasons, has
declined. In 1970 South Africa produced approximately two thirds
of the world’s annual production.
In 2006, whilst still the biggest producer, it produced only
11.1%. Second biggest producer was the USA with 10.5%, whilst
Australia was third with 10.2%, followed closely by China and Peru.
Total world
production in 2006 was 2467 tonnes which equalled about 67% of world
demand. The total gold
mined throughout history is estimated at about 160,000 tonnes, most of
which still exists. If
formed into a single cube it would be about 20 metres wide a side,
equivalent to about 8000 cubic metres. Traditionally the alchemist’s
dream was to be able to turn lead into gold.
In fable this was to be achieved by use of the Philosopher’s
Stone. Today producers hope
to discover a cheap method of extracting the gold from seawater.
To date it has eluded them.
ECONOMIC
SIGNIFICANCE
Gold is the enemy
of government or perhaps more accurately government is the enemy of
gold. That this is so
arises from gold’s traditional role as money.
The creation of money was perhaps the most important development
in economic history since it, and the division of labour that it enabled
to occur, has effectively brought about modern civilization.
Without a medium of exchange, aka money, trade would take place
only as barter, which would be unable to sustain mankind’s present
numbers or level of development.
The worldwide
acceptance of gold as money placed significant constraints on
government. In particular
since gold was a commodity, costly and difficult to produce, governments
were habitually short of money and unable to undertake all that they
desired to do. Whilst they could and did claim a monopoly on the issuing of
monetary notes or bills, as long as gold was the real money, these were
only able to be issued sparingly, as money substitutes, since the holder
thereof could always demand their redemption in gold.
A government unable to redeem was in effect bankrupt.
The monetary role
of gold suited those people who regarded government as a necessary evil.
It did not suit those who saw government as beneficent and a
source of potential good. Gold
made government control of money difficult and did not readily permit
government flexibility or central planning.
The latter tended to see gold as a barbarous relic and waged a
campaign, largely successful by 1931, to demonetise it.
Since WW2, and particularly since 1971 when America closed its
so-called gold window, governments have made concerted attempts to
eliminate gold from national reserves, end its remaining role as
international money and replace it by the creation of internationally
agreed assets such as Special Drawing Rights.
Whilst these schemes are generally theoretically sound they have
tended to founder on the human factor.
During the 1990s a
number of national treasuries and central banks sold off their gold
reserves. Thus in 1999,
Gordon Brown, then Chancellor of the Exchequer and now PM sold off, over
3 years, half of the UK gold reserves, approximately 400 tonnes, at an
average price under US$300. Shortly
thereafter the price rose to over US$600 where it remains today. This
represents a loss of US$5 billion.
The RBA did the same in 1997 when it sold down its gold reserves
from 247 to 80 tonnes, for a short-term loss of A$ 1.5 billion. Treasurer Peter Costello endorsed the move stating that
“gold no longer plays a significant role in the international finance
system”
Despite its
attempted elimination therefrom, the ongoing uncertainties and
increasingly frequent international financial crises, such as the one
presently occurring, has tended, if anything, to re-establish gold’s
international financial role. The
routine posting in the daily news over the last few years of the
international gold price seems some confirmation of this.
David Sharp
13 August 2007