Introduction to Economics                                                                    Lesson   12 / 07


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.



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.



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.



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.



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  




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