Gold: The Most Precious of Metals (Part 2)

Gold: The Most Precious of Metals (Part 2)

Contents

1. Gold mining

2. Gold purity

3. Uses of gold

4. Gold and the economy

In an effort to convey why gold is such a precious metal, in part one of this series, we provided a thorough explanation of the history of gold and the gold standard along with a discussion on the potential viability of the gold standard today. In part two, we can further our discussion on why gold is so unique by explaining how it is mined and processed and discuss how its unique physical properties make it one of the most useful metals. Finally, we end the post with a section on gold's importance to the global economy, the factors that set it apart from all other commodities, and how it can be classed as both a commodity and a monetary asset. If you like, you can click on the links to the left to skip ahead in the document.

How Does Gold Mining Work?

Before one can start the mining and production process of gold, one must actually find the gold. Many of the great historic gold rushes began with a story of someone stumbling upon gold in a riverbed or backyard while strolling along, however, finding gold at a corporate level, as you might imagine, is a bit more sophistocated.

Gold is concentrated in the earth’s crust all over the world, and while one can, in theory, fairly easily go to a stream in places like California or Canada and find placer gold, what large mining corporations try to do is find higher concentrations in the earth’s crust to produce at higher volumes. This is tricky because finding gold in high volumes is not an easy task. There is approximately 0.004 grams of gold per ton of the earth’s crust meaning that it is sort of like finding a needle in a haystack.

Finding gold starts with geologists that study the rock formations and types of rock in a certain area by taking samples of the earth, which are called diamond drill cores. They are called this because, as you might guess, a diamond tipped drill is used to cut through the rock to obtain the samples. Gold is normally found mixed in with many other elements, metals and mineral in rock called ore and based on their sample analyses through assays and other processes, geologists are able to determine where the ore is as well as its composition.

The grade of the ore and the size of the deposit dictate the type of mining necessary to get to the ore and whether or not it will be cost-effective to mine it. Obviously, the higher the grade of the ore, the more cost-effective it will be to mine it, however, more cost analysis is needed to determine if the mining process will be worth it.

There are a few different terms used to describe the gold deposits found, but in general they are the following:  proven reserves and probable reserves. A geologist may determine from sampling that a probable reserve exists, meaning that gold exists, however, the type of mining necessary to get to the ore may not prove to be profitable. Proven reserves, on the other hand, basically mean what you might think: the geologists have determined that gold exists and engineers have decided that there is an economically viable way to mine the gold. These terms usually appear on annual reports of gold mining corporations and provide the company’s best estimate as to the total gold that can be mined. These numbers do not, however, actually guarantee that the gold can or will ever be mined.


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Types of Gold Mining

There are a few different mining processes that can be used, two of the most common for large mining corporations are open-pit mining and underground mining.

Open-pit Mining Process

Open-pit gold mining is used when the ore is close to the surface of the earth. As you might guess, an open-pit mine is basically just a massive hole in the ground that has roads along the walls of the pit so that huge trucks can get in to carry ore back out. 

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The extraction process involves the use of explosives and heavy machinery to haul the ore out of the huge mines. There are heavy costs associated with this process, according to Mineweb, about 25% of the total cost of mining is spent on diesel fuel.

Mineweb also estimates that for each ton of ore hauled out of a mine, it might contain a tenth of an ounce of gold. Crunching a few numbers, we can estimate the amount of gold in US dollars that one haul of ore can yield - In the latest FocusEconomics Consensus Forecast Commodities report, the spot price of gold on 15 April was USD 1,230 per troy ounce (a troy ounce is slightly different from an ounce and is a common unit of measurement for precious metals, however, it is only slightly heavier, than a standard ounce). That means for every ton of ore excavated from the mine the yield would be USD 123 of gold, which is not a whole lot. However, the trucks that are used to haul the gold out of the pit can hold up to 300 tons, which means that a good haul could yield USD 36,900 worth of gold. In reality, however, the chances of this happening are slim, and many times the amount of gold in a truck load can end up yielding little to no gold at all.

Underground Mining Process

Sometimes it is determined that an underground mine makes more sense, usually when the gold deposits are located much farther from the surface of the earth. Underground mining, also known as underground hard rock mining, utilizes long winding tunnels and shafts that are dug out of the ground with other tunnels branching off in different directions. Although you might imagine an underground mine with workers slaving away with picks, axes and shovels, those days are largely in the past, at least in the commercial mining anyway. Today, the mining process basically involves drilling holes for explosives, setting off the explosives and then hauling out the debris from the explosion.

In terms of the costs involved with underground mining, they are largely the same as those associated with open-pit mining, however, there is one very important aspect that must be taken into consideration for underground mining: electricity. There is little to no air underground, so electricity must be used to pump air into the mine so that the miners can breathe. Transportation of miners and hauling out the ore would also not be possible without electricity powering the machinery needed for this. Of course, this can be quite costly, so some mining corporations have found more cost effective means of powering the mines by setting up wind farms and solar energy panels near the excavation sites.

What is cyanide used for in gold mining?

Once the ore is excavated from the mine, the gold will need to be separated from the ore. The cyanide leaching process makes use of a mild cyanide solution to dissolve and separate the gold from the ore. The use of cyanide for this process was first developed in the late 19th century in Scotland and since the 1970s it has been the primary gold extraction method used in commercial gold production. First the ore is pulverized until it is reaches a sandy consistency then a cyanide solution is added to the sandy ore. Without getting too technical, the cyanide dissolves and separates the gold from the ore. Further processes of crushing and milling are used to squeeze out as much gold as possible before the smelting process begins to refine and convert the recently liberated gold into gold bullion bars.

How to determine and test the purity of Gold

It is pretty safe to say that since the human race became aware of the concept of possession, gold has been sought after and therefore determining the purity of gold has been extremely important.

What is the purpose of a fire assay?

A metallurgical assay is a composition analysis of ore and can be used to determine the purity of gold. The fire assay was first used by the Babylonians over 3000 years ago and is still one of the most accurate methods to do this. Basically, the process involves taking a sample of melted impure gold from a larger portion of gold or ore. Then the sample is weighed precisely and the amount recorded. The sample along with a given quantity of pure silver is then wrapped in assay lead foil and placed in a furnace in a cupel, which is a special kind of disposable crucible. Eventually all the non-precious metals are absorbed into the cupel and the precious metal forms into a button shape inside the cupel. Once the cupel is removed from the furnace, it is hit with a hammer and the button pops out. Then it is brushed to remove any residue hanging around from the cupel. Then the button is hammered flat and rolled thin and heated again in a porcelain crucible that contains a solution of nitric acid, which removes the silver. What you are left with is gold which is then rinsed in distilled water to remove any residual acid and left to dry. The result is a sample of 99.999% pure gold. The original weight of the impure sample taken at the beginning is then divided into the weight of the new pure gold sample, which tells you how pure the original sample was.

Gold Density to Determine Purity

gold_properties_nma_focuseconomics.pngGold is an extremely dense material with a density of 19.3 g/cm3. Another way of stating gold’s density is that it has a specific gravity of 19.3. All this basically means is that it is 19.3 times heavier than water, meaning it sinks pretty fast in water. If it weren’t for its density, gold may not have ever been discovered in streams and rivers, as its high density to water made it easy to spot on the river bottom. The density of gold has been very important to mining in the past, especially during the California gold rush, as it could easily be seen at the bottom of a pan. Prospectors also realized that gold was dense enough that when dropped into water it would sink to the bottom fairly fast. To determine whether or not they had found a piece of genuine gold, prospectors would use a piece of real gold and drop it into the water along with another piece of possible gold and compare how long it took for both to sink. If the questionable piece of gold took a while to fall to the bottom in comparison with the real gold, they knew they had “fool’s gold”. The density of gold basically made it possible to eliminate fancy equipment to determine its purity, another distinguishing characteristic of gold.

Gold Karat System and Millesimal Fineness

Two measurement systems used to represent the purity of gold are the karat system and millesimal fineness. With the karat system, 24 karat gold denotes pure gold whereas with millesimal fineness, as the name suggests, the purity is expressed in parts per 1000. 24 Karat gold is equivalent to 990 millesimal fineness or higher. Pure gold is not usually used for jewelry because it is too soft, therefore, gold used in jewelry is normally alloyed with other metals such as copper and silver to make it stronger. The highest purity for gold used in jewelry is normally 18 karat or 750 fineness.

Normally the purity of the gold is stamped on the jewelry and there are actually organizations that regulate this. The Hallmarking Convention is an international treaty between countries that seeks to standardize the marking of precious metals like gold and to facilitate their cross-border trade. They have a zero tolerance policy with regard to purity – if gold is 749 parts per 1000 fine, it cannot be marked with a 750 quality mark.


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What is gold used for?

Besides the obvious use of gold in jewelry, you may ask yourself, does it have any practical applications? Does it have any industrial or technological application similar to some other metals? The answer is, yes. Gold is used in a multitude of capacities. It is arguably the most useful metal because of its many unique properties. It is extremely malleable, allowing it to be pounded, hammered, melted down and cast in extremely detailed shapes. It is so malleable that one ounce can be drawn into 80 km of wire. It is also a great conductor of electricity and heat, it is basically indestructible, it does not rust, and it can easily be alloyed with other metals. All of these factors and more make it very useful beyond jewelry making and many of its uses may surprise you.

Electronic Devices and Computers

Solid-state electronic devices, which are basically those with inner workings that are based on semi-conductors, use gold because it does not tarnish and conducts electricity well. These devices include cell phones, calculators, GPS systems, and other smaller electronic devices.

As with small electronic devices, computers use gold because of its electric conductivity. Gold is used in the edge connectors to mount microprocessors and memory chips onto the motherboard.

The challenge with using gold in these types of devices is the potential for the loss of gold. Gold is a very scarce material and costly to boot. According to the World Gold Council, each cell phone contains around 50 milligrams of gold, which equates to about USD cents 50 worth of gold. With over 1 billion cell phones produced a year, this results in a lot of lost gold, and consequently, lost money. One might theorize that electronic recycling programs have a lot more to do with gold recovery than being environmentally friendly, but we'll leave that one for you to ponder.

Dentistry

If you have ever needed dental work done that required some kind of metal, what type of metal do you think would work best? Probably the kind that doesn’t rust, right? How do you think iron would work as a filling? It would be rusted before you know it and you’d have the taste of iron in your mouth for the rest of your days. Gold is one of the most widely used metals for dentistry because it does not rust. Pure gold is a bit too soft, not to mention expensive, so normally gold alloys are used for things such as crowns, fillings, bridges as well as caps. Besides the fact that it does not rust, gold also looks nice. Joe Pesci from Home Alone comes to mind immediately. 

Health Care

Gold is also used in a variety of ways in medicine and health care. In 1927, a French study was published documenting gold’s use in the treatment of rheumatoid arthritis. It is still sometimes used to treat the disorder with injections of a solution of sodium aurothiomalate or aurothioglucose. Sometimes radioactive gold isotopes are implanted in parts of the body to aid in the treatment of certain cancers. It is used to treat people with a disorder called Lagophthalmos, in which the person is unable to close their eyes properly. Small bits of gold are sewn into the eyelids of the person suffering from the disorder in order to weight the eyelids down, aiding them in the ability to close their eyes completely. Gold salts can be injected into patients to reduce swelling, bone damage as well as to relieve joint pain and stiffness.

Aerospace

When building a space ship, NASA needs to use materials that are extremely reliable. If they didn’t use reliable materials and something went wrong in outer space, who would be around to fix it? This is where gold comes in. Similar to electronics, gold is used in the circuitry of the space ships because of its dependability as a good conductor of electricity. Gold coated polyester film is used throughout the space ship because it helps stabilize the temperature of the ship in space. Gold is also used, believe it or not, as a lubricant between mechanical parts of the ships. Lubricants one might use in machinery on Earth, are ineffective in space as radiation outside of Earth’s atmosphere would evaporate them. Gold, however, under intense radiation pressure can serve as a lubricant between moving parts.

Glass making

Gold is also used for glass making as a pigment to tint glass, but it is also used as an insulant. As the world "goes green" to make the world more sustainable for future generations, modern buildings are constructed with gold coatings on the glass to help insulate them. In the summer the gold on the glass keeps the heat out by reflecting the radiation from the sun outward and in the winter it reflects the internal heat inward, keeping the building nice and warm without using much energy on internal heating systems.

The future use or nonuse of gold

The use of gold for things outside of jewelry has increased quite a bit since the U.S. abandoned the gold standard in the 1970s. The malleability, dependability, the fact that it does not tarnish and that it is a good conductor of electricity make it ideal for many different uses. Normally gold is only used when there really is no other substitute and because gold is so useful, it is rarely abandoned once it is found to be useful for something. However, due to its cost and scarcity, as technologies improve and substitutes are found, the industrial and technological use of gold may diminish. Nonetheless, gold’s importance to the modern global economy as not only a commodity, but a monetary asset, will likely continue.


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Gold’s importance to the modern economy

Now we can finally delve into gold as a traded commodity. As mentioned previously, gold no longer backs any currency, however it is still vital to the global economy, which is demonstrated by the fact that almost all central banks hold substantial international reserves in gold.

Gold has many similarities with other commodities, but it also behaves similarly to a currency and can be thought of as monetary asset. Even today after the abandonment of the gold standard, if you went anywhere in the world, you could probably exchange gold for goods and services. One probably wouldn’t be able to do that with most other commodities. However, like most other commodities it is taken from the earth and it has an inverse relationship with the U.S. dollar.

Although gold shares some characteristics with other commodities, it certainly stands out from the rest for a variety of reasons. According to the World Gold Council, gold truly is a commodity like no other stating that “Gold is less exposed to swings in business cycles, typically exhibits lower volatility, and tends to be significantly more robust at times of financial duress.”

How does gold compare and contrast to other commodities?

We will start with the laws of supply and demand, also known as the fundamental drivers, which tend to affect commodities heavily. The fundamental drivers are exposed often and influenced by risks associated with geopolitical issues, wars, disease, and weather, among other factors, which can impact commodity prices heavily. Most commodities are subject to some or all of these risks. Take oil, for example, which is similar to gold in that it is a very liquid commodity, however it is heavily influenced by the business cycle for industrial purposes. It also tends to be extracted in certain geographical regions, leaving it more exposed to the potential for idiosyncratic risks, such as some of those outlined above.

Gold is not exposed to the same risks from the fundamental drivers, especially supply. Think about agricultural and energy commodities – these commodities are generally one and done. Metals, in general, can be reused, which means there is another massive avenue for supply that other commodities do not have.

The fact that gold production is geographically diversified, meaning that it can basically be mined anywhere in the world, also makes it unique. Gold’s geographical diversification is actually a massive differentiating factor from other commodities. If we take a look at other commonly traded commodities, according to the World Gold Council, 47% of global oil production comes from the Middle East and Eurasia, platinum is primarily mined in South Africa (80%) and Russia (11%), while corn, an important agricultural commodity, is produced mainly in the U.S. (39%). Silver, a metal that is possibly the most similar to gold in terms of its status as a commodity and monetary asset is primarily produced in Latin America. Because of this supply characteristic of gold, the price of gold is primarily and almost exclusively influenced by demand.

Perhaps comparing gold to other metals would be a fairer comparison to make. Transportation of metals is fairly easy being that there is little need for specialized infrastructure such as those that are needed for many energy commodities. Metals, especially gold, have a much longer shelf life than other commodities, as was mentioned above, because they can be reused. However, this is generally speaking where the similarities between gold and other metals stop. Gold is nearly indestructible, meaning the recycling of previously used gold makes it much less susceptible to production shocks and shortages and the stocks of annual flows ratio is much higher for gold than other metal, not to mention other commodities. Although, as mentioned previously, gold is used in the technological sector for electronic devices and computers, there is less demand for it in these sectors than for other metals, meaning that other metals are highly exposed to the business cycle in comparison to gold. Gold’s status as a “noble metal”, meaning that it does not tarnish, oxidize, or corrode, makes it unique to many other metals, while at the same time it is extremely malleable and easy to work with.

Liquidity, depth and breadth of the gold market

The gold market is very liquid, but it is also extremely large even when comparing to not only other commodities but other currencies and debt markets. According to the London Bullion Market Association (LBMA), in 2010 the daily net amount of gold that was transferred between accounts averaged USD 21 billion. However, this does not necessarily account for all the trades between bullion dealers that are simply recorded in trading books. Taking this into account, it is estimated that global trading volumes could be between USD 63 billion and USD 211 billion, which is actually larger than many sovereign debt markets. It must be noted that these numbers were taken at the height of the financial crisis in 2010, when gold may have been highly traded as a hedge against low currency values and volatility in financial markets, however, it will still give you an idea of the scale of the gold market around the world.

Gold as a Monetary Asset

Its role as a monetary asset also differentiates it from most other commodities. Although the gold standard has long been abandoned, gold’s long history as a standard of value in monetary systems, and its history of obsession for over 5000 years, has left a lasting legacy and relevance in today’s international monetary system. Central banks still hold substantial international reserves of gold for national wealth preservation and as a hedge against economic instability.

Not only is gold not subject to many of the supply side risks that most other commodities are subject to, but it is actually safer than most currencies and asset classes and used by investors as what is called a safe haven. At times of economic and political uncertainty, investors usually buy gold to preserve their wealth. Historically speaking, it has been the case that those that have survived economic and political shocks were those that had gold. When the economic landscape becomes a bit rocky, values of currencies tend to fall. One thing that remains constant is the purchasing power of gold.

To demonstrate how gold can preserve wealth, we can use a great example from Investopedia. Think about it this way, 40 years ago you probably could have bought yourself a nice suit for USD 35 or an ounce of gold for the same amount of money. Fast forward to today, 35 dollars would not buy you a suit, but if you had that ounce of gold you bought 40 years earlier and sold it, you could probably go and buy yourself a pretty nice suit.

Besides using gold as a short-term safe haven, it can also be invested in the long-term. The purchasing power of currency diminishes over time because of inflation and other factors, whereas the value of gold is inversely related, continuously increasing in the long-run preserving its purchasing power. This makes gold a hedge against rising inflation. As inflation rises, typically so does the value of gold. Gold preserves wealth because it also benefits from a declining U.S dollar.

It is safe to say that gold is neither just a commodity nor just a monetary asset, sharing many characteristics of different asset classes. Its unique characteristics in terms of aesthetics, chemical properties, and its history as a currency, depth and liquidity of the gold market, its geographical diversification, as well as its propensity to preserve wealth, make it a hybrid of the best of both worlds.

Conclusion

If you read all the way through part 2 of this series on gold, you will now have a better idea of how gold is mined and produced, an idea of how its properties make it such a useful metal, as well as its industrial and technological uses. You will also have a better idea of what sets gold apart from all other commodities as well as gold’s unique role as both a commodity and monetary asset. All of the above, albeit a bit disconnected, serves to further explain how gold truly is the most precious of metals.

If you missed part 1 of this series, on the history of gold and the gold standard, don’t forget to check that out. If you want to learn more about gold, stay tuned for part three of our series.
 


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Author: Brian Dowd

Date: May 3, 2016


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