This page contains histories, scientific facts and economic interests on the subject of gold.

The Discovery of Gold in California

The Science of Gold

The "Gold Wars"

Fun Facts About Gold















by Gen. John A. Sutter

It was in the first part of January, 1848, when the gold was discovered at Coloma, where I was then building a saw-mill. The contractor and builder of this mill was James W. Marshall, from New Jersey. In the fall of 1847, after the mill seat had been located, I sent up to this place Mr. P. L. Wimmer with his family, and a number of laborers, from the disbanded Mormon Battalion; and a little later I engaged Mr. Bennet from Oregon to assist Mr. Marshall in the mechanical labors of the mill. Mr. Wimmer had the team in charge, assisted by his young sons, to do the necessary teaming, and Mrs. Wimmer did the cooking for all hands.

I was very much in need of a new saw-mill, to get lumber to finish my large flouring mill, of four run of stones, at Brighton, which was commenced at the same time, and was rapidly progressing; likewise for other buildings, fences, etc., for the small village of Yerba Buena, (now San Francisco.) In the City Hotel, (the only one) at the dinner table this enterprise was unkindly called “another folly of Sutter’s,” as my first settlement at the old fort near Sacramento City was called by a good many, “a folly of his,” and they were about right in that, because I had the best chances to get some of the finest locations near the settlements; and even well stocked rancho’s had been offered to me on the most reasonable conditions; but I refused all these good offers, and preferred to explore the wilderness, and select a territory on the banks of the Sacramento. It was a rainy afternoon when Mr. Marshall arrived at my office in the Fort, very wet. I was somewhat surprised to see him, as he was down a few days previous; and then, I sent up to Coloma a number of teams with provisions, mill irons, etc., etc. He told me then that he had some important and interesting news which he wished to communicate secretly to me, and wished me to go with him to a place where we should not be disturbed, and where no listeners could come and hear what we had to say. I went with him to my private rooms; he requested me to lock the door; I complied, but I told him at the same time that nobody was in the house except the clerk, who was in his office in a different part of the house; after requesting of me something which he wanted, which my servants brought and then left the room, I forgot to lock the doors, and it happened that the door was opened by the clerk just at the moment when Marshall took a rag from his pocket, showing me the yellow metal: he had about two ounces of it; but how quick Mr. M. put the yellow metal in his pocket again can hardly be described. The clerk came to see me on business, and excused himself for interrupting me, and as soon as he had left I was told, “now lock the doors; didn’t I tell you that we might have listeners?” I told him that he need fear nothing about that, as it was not the habit of this gentleman; but I could hardly convince him that he need not to be suspicious. Then Mr. M. began to show me this metal, which consisted of small pieces and specimens, some of them worth a few dollars; he told me that he had expressed his opinion to the laborers at the mill, that this might be gold; but some of them were laughing at him and called him a crazy man, and could not believe such a thing.

After having proved the metal with aqua fortis, which I found in my apothecary shop, likewise with other experiments, and read the long article “gold” in the Encyclopedia Americana, I declared this to be gold of the finest quality, of at least 23 carats. After this Mr. M. had no more rest nor patience, and wanted me to start with him immediately for Coloma; but I told him I could not leave as it was late in the evening and nearly supper time, and that it would be better for him to remain with me till the next morning, and I would travel with him, but this would not do: he asked me only “will you come to-morrow morning?” I told him yes, and off he started for Coloma in the heaviest rain, although already very wet, taking nothing to eat. I took this news very easy, like all other occurrences good or bad, but thought a great deal during the night about the consequences which might follow such a discovery. I gave all my necessary orders to my numerous laborers, and left the next morning at 7 o’clock, accompanied by an Indian soldier, and vaquero, in a heavy rain, for Coloma. About half way on the road I saw at a distance a human being crawling out from the brushwood. I asked the Indian who it was: he told me “the same man who was with you last evening.” When I came nearer I found it was Marshall, very wet; I told him that he would have done better to remain with me at the fort than to pass such an ugly night here but he told me that he went up to Coloma, (54 miles) took his other horse and came half way to meet me; then we rode up to the new Eldorado. In the afternoon the weather was clearing up, and we made a prospecting promenade. The next morning we went to the tail-race of the mill, through which the water was running during the night, to clean out the gravel which had been made loose, for the purpose of widening the race; and after the water was out of the race we went in to search for gold. This was done every morning: small pieces of gold could be seen remaining on the bottom of the clean washed bed rock. I went in the race and picked up several pieces of this gold, several of the laborers gave me some which they had picked up, and from Marshall I received a part. I told them that I would get a ring made of this gold as soon as it could be done in California; and I have had a heavy ring made, with my family’s cost of arms engraved on the outside, and on the inside of the ring is engraved, “The first gold, discovered in January, 1848.” Now if Mrs. Wimmer possesses a piece which has been found earlier than mine Mr. Marshall can tell, as it was probably received from him. I think Mr. Marshall could have hardly known himself which was exactly the first little piece, among the whole.

The next day I went with Mr. M. on a prospecting tour in the vicinity of Coloma, and the following morning I left for Sacramento. Before my departure I had a conversation with all hands: I told them that I would consider it as a great favor if they would keep this discovery secret only for six weeks, so that I could finish my large flour will at Brighton, (with four run of stones,) which had cost me already about from 24 to 25,000 dollars – the people up there promised to keep it secret so long. On my way home, instead of feeling happy and contented, I was very unhappy, and could not see that it would benefit me much, and I was perfectly right in thinking so; as it came just precisely as I expected. I thought at the same time that it could hardly be kept secret for six weeks, and in this I was not mistaken, for about two weeks later, after my return, I sent up several teams in charge of a white man, as the teamsters were Indian boys. This man was acquainted with all hands up there, and Mrs. Wimmer told him the whole secret; likewise the young sons of Mr. Wimmer told him that they had gold, and that they would let him have some too; and so he obtained a few dollars’ worth of it as a present. As soon as this man arrived at the fort he went to a small store in one of my outside buildings, kept by Mr. Smith, a partner of Samuel Brannan, and asked for a bottle of brandy, for which he would pay the cash; after having the bottle he paid with these small pieces of gold. Smith was astonished and asked him if he intended to insult him; the teamster told him to go and ask me about it; Smith came in, in great haste, to see me, and I told him at once the truth – what could I do? I had to tell him all about it. He reported it to Mr. S. Brannan, who came up immediately to get all possible information, when he returned and sent up large supplies of goods, leased a larger house from me, and commenced a very large and profitable business; soon he opened a branch house of business at Mormon Island.

Mr. Brannan made a kind of claim on Mormon Island, and put a tolerably heavy tax on “The Latter Day Saints.” I believe it was 30 per cent, which they paid for some time, until they got tired of it, (some of them told me that it was for the purpose of building a temple for the honor and glory of the Lord.)

So soon as the secret was out my laborers began to leave me, in small parties first, but then all left, from the clerk to the cook, and I was in great distress; only a few mechanics remained to finish some very necessary work which they had commenced, and about eight invalids, who continued slowly to work a few teams, to scrape out the mill race at Brighton. The Mormons did not like to leave my mill unfinished, but they got the gold fever like everybody else. After they had made their piles they left for the Great Salt Lake. So long as these people have been employed by me they hav behaved very well, and were industrious and faithful laborers, and when settling their accounts there was not one of them who was not contented and satisfied.

Then the people commenced rushing up from San Francisco and other parts of California, in May, 1848: in the former village only five men were left to take care of the women and children. The single men locked their doors and left for “Sutter’s Fort,” and from there to the Eldorado. For some time the people in Monterey and farther south would not believe the news of the gold discovery, and said that it was only a ‘Ruse de Guerre’ of Sutter’s, because he wanted to have neighbors in his wilderness. From this time on I got only too many neighbors, and some very bad ones among them.

What a great misfortune was this sudden gold discovery for me! It has just broken up and ruined my hard, restless, and industrious labors, connected with many dangers of life, as I had many narrow escapes before I became properly established.

From my mill buildings I reaped no benefit whatever, the mill stones even have been stolen and sold.

My tannery, which was then in a flourishing condition, and was carried on very profitably, was deserted, a large quantity of leather was left unfinished in the vats; and a great quantity of raw hides became valueless as they could not be sold; nobody wanted to be bothered with such trash, as it was called. So it was in all the other mechanical trades which I had carried on; all was abandoned, and work commenced or nearly finished was all left, to an immense loss for me. Even the Indians had no more patience to work alone, in harvesting and threshing my large wheat crop out; as the whites had all left, and other Indians had been engaged by some white men to work for them, and they commenced to have some gold for which they were buying all kinds of articles at enormous prices in the stores; which, when my Indians saw this, they wished very much to go to the mountains and dig gold. At last I consented, got a number of wagons ready, loaded them with provisions and goods of all kinds, employed a clerk, and left with about one hundred Indians, and about fifty Sandwich Islanders (Kanakas) which had joined those which I brought with me from the Islands. The first camp was about ten miles above Mormon Island, on the south fork of the American river.

In a few weeks we became crowded ,and it would no more pay, as my people made too many acquaintances. I broke up the camp and started on the march further south, and located my next camp on Sutter creek (now in Amador county), and thought that I should there be alone. The work was going on well for a while, until three or four traveling grog-shops surrounded me, at from one and 8, half to two miles distance from the camp; then, of course, the gold was taken to these places, for drinking, gambling, etc., and then the following day they were sick and unable to work, and became deeper and more indebted to me, and particularly the Kanakas. I found that it was high time to quit this kind of business, and lose no more time and money. I therefore broke up the camp and returned to the Fort, where I disbanded nearly all the people who had worked for me in the mountains digging gold. This whole expedition proved to be a heavy loss to me.

At the same time I was engaged in a mercantile firm in Coloma, which I left in January, 1849 – likewise with many sacrifices. After this I would have nothing more to do with the gold affairs. At this time, the Fort was the great trading place where nearly all the business was transacted. I had no pleasure to remain there, and moved up to Hock Farm, with all my Indians, and who had been with me from the time they were children. The place was then in charge of a Major Domo.

It is very singular that the Indians never found a piece of gold and brought it to me, as they very often did other specimens found in the ravines. I requested them continually to bring me some curiosities from the mountains, for which I always recompensed them. I have received animals, birds, plants, young trees, wild fruits, pipe clay, stones, red ochre, etc., etc., but never a piece of gold. Mr. Dana of the scientific corps of the expedition under Com. Wilkes’ Exploring Squadron, told me that he had the strongest proof and signs of gold in the vicinity of Shasta Mountain, and furthers south. A short time afterwards, Doctor Sandels, a very scientific traveler, visited me, and explored a part of the country in a great hurry, as time would not permit him to make a longer stay.

He told me likewise that he found sure signs of gold, and was very sorry that be could not explore the Sierra Nevada. He did not encourage me to attempt to work and open mines, as it was uncertain how it would pay and would probably be only for a government. So I thought it more prudent to stick to the plow, not withstanding I did know that the country was rich in gold, and other minerals. An old attached Mexican servant who followed me here from the United States, as soon as he knew that I was here, and who understood a great deal about working in placers, told me he found sure signs of gold in the mountains on Bear Creek, and that we would go right to work after returning from our campaign in 1845, but he became a victim to his patriotism and fell into the hands of the enemy near my encampment, with dispatches for me from Gen. Micheltorena, and he was hung as a spy, for which I was very sorry.

By this sudden discovery of the gold, all my great plans were destroyed. Had I succeeded for a few years before the gold was discovered, I would have been the richest citizen on the Pacific shore; but it had to be different. Instead of being rich, I am ruined, and the cause of it is the long delay of the United States Land Commission of the United States Courts, through the great influence of the squatter lawyers. Before my case will be decided in Washington, another year may elapse, but I hope that justice will be done me by the last tribunal — the Supreme Court of the United States. By the Land Commission and the District Court it has been decided in my favor. The Common Council of the city of Sacramento, composed partly of squatters, paid Adelpheus Felch, (one of the late Land Commissioners, who was engaged by the squatters during his office), $5,000, from the fund of the city, against the will of the tax-payers, for which amount he has to try to defeat my just and old claim from the Mexican government, before the Supreme Court of the United States in Washington.

Hutchings’ California Magazine
November 1857



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Science of Gold

Atomic Number:   79
Atomic Weight:   196.966569
Melting Point:   1337.33 K (1064.18°C or 1947.52°F)
Boiling Point:   3129 K (2856°C or 5173°F)
Density:   19.282 grams per cubic centimeter
Phase at Room Temperature:   Solid
Element Classification:   Metal
Period Number:   6   Group Number:   11   Group Name:   none
What's in a name?   From the Sanskrit word Jval and the Anglo-Saxon word gold. Gold's chemical symbol comes from the the latin word for gold, aurum.
Say what?   Gold is pronounced as GOLD.

History and Uses:

An attractive and highly valued metal, gold has been known for at least 5500 years. Gold is sometimes found free in nature but it is usually found in conjunction with silver, quartz (SiO2), calcite (CaCO3), lead, tellurium, zinc or copper. There is roughly 1 milligram of gold dissolved in every ton of seawater, although extracting it currently costs more than the gold is worth. It has been estimated that all of the gold that has currently been refined could be placed in a cube measuring 20 meters on a side.

Gold is the most malleable and ductile of all known metals. A single ounce of gold can be beaten into a sheet measuring roughly 5 meters on a side. Thin sheets of gold, known as gold leaf, are primarily used in arts and crafts for gilding. One sheet of gold leaf can be as thin as 0.000127 millimeters, or about 400 times thinner than a human hair.

Pure gold is soft and is usually alloyed with other metals, such as silver, copper, platinum or palladium, to increase its strength. Gold alloys are used to make jewelry, decorative items, dental fillings and coins. The amount of gold in an alloy is measured with a unit called a carat. One carat is equal to one part in twenty-four, so an 18 carat gold ring contains 18 parts pure gold and 6 parts alloy material.

Gold is a good conductor of heat and electricity and does not tarnish when it is exposed to the air, so it can be used to make electrical connectors and printed circuit boards. Gold is also a good reflector of infrared radiation and can be used to help shield spacecraft and skyscrapers from the sun's heat. Gold coated mirrors can be used to make telescopes that are sensitive to infrared light.

A radioactive isotope of gold, gold-198, is used for treating cancer. Gold sodium thiosulfate (AuNa3O6S4) is used as a treatment for arthritis. Chlorauric acid (HAuCl4) is used to preserve photographs by replacing the silver atoms present in an image.

Estimated Crustal Abundance:   4×10-3 milligrams per kilogram
Estimated Oceanic Abundance:   4×10-6 milligrams per liter
Number of Stable Isotopes:   1   (View all isotope data)
Ionization Energy:   9.226 eV
Oxidation States:   +3, +1
Electron Shell Configuration:  
2s2   2p6          
3s2   3p6   3d10      
4s2   4p6   4d10   4f14  
5s2   5p6   5d10      



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The Early Gold Wars

The Congress shall have power coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures."
1787 - The Constitution of the United States - Section 8

That is precisely what the Congress did. In 1792, the Dollar was fixed by law at 24.75 grains or 0.05156 troy oz. of Gold. In 1837, the coinage was reworked and the Dollar was defined at 25.8 grains of Gold "nine-tenths fine". That gives 20.67 Dollars to one troy oz. of Gold. That was the Dollar's "fixed value" (see the quote above) for 96 years from 1837 to 1933.

War Declared - 1933-34

(The reference for this material is: Economics And The Public Welfare - A Financial and Economic History of the United States, 1914-1946   by Benjamin M. Anderson)

March 4, 1933
Not quite 20 years after the establishment of the Fed, President Franklin D. Roosevelt was inaugurated for his first term in office.

March 6, 1933
Using a wartime statute passed in 1917, Mr. Roosevelt issued a proclamation closing every bank in the U.S. for four days. The banks were closed from March 6 to March 9.

March 9, 1933
Day One of "The Hundred Days". The President called a Special Session of the newly-elected Democratic Congress for the purpose of debating an act prepared in advance by the President's advisors. In a few hours, with minimal if any debate, Congress passed the act: "to provide relief in the existing national emergency in banking, and for other purposes".

April 5, 1933
President Roosevelt, acting under the sweeping authority passed to him by Congress on March 9, signed Presidential Executive Order 6102 which invoked his authority to make it unlawful to own or hold gold coins, gold bullion, or gold certificates. The export of Gold for purposes of payment was also outlawed, except under license from the Treasury.

June 5, 1933
A joint resolution signed by the President was introduced into Congress. This resolution abrogated the gold clause on all existing government and private contracts. Needless to say, the resolution passed.

October 1933
The Roosevelt Administration decided to implement a policy suggested by Professor George F. Warren of Cornell University. This policy advocated controlling "inflation" (firmly defined by this time as "rising prices") by raising and lowering the "gold content" of the Dollar. This policy was implemented, amongst many others, under the first big measure of the New Deal, the "National Recovery Act" (NRA). By January of 1934, the "adjustable Dollar policy" was an obvious and perceived failure, and it was dropped. The NRA itself was declared Unconstitutional on May 27, 1935.

January 30, 1934
The "Gold Reserve Act" became law. It had passed through Congress in five days, with minimal debate. Under this act, the Federal Government took away title to all "Gold Certificates" and gold held by the Federal Reserve Bank (the independent Fed?) and vested sole title with the U.S. Treasury. The Fed banks were to be provided with "Gold Certificates" in return for their Gold, but these certificates had no specific value in Gold assigned to them. When one witness testifying before the Senate Committee protested, he was taken aside by an Administration Senator and the situation explained to him:

"Doctor, you don't understand about these gold certificates. These are not certificates that you can get gold. These are certificates that gold has been taken away from you."

January 31, 1934
The day after the passage of the Act, President Roosevelt fixed the weight of the Dollar at 15.715 grains of Gold "nine-tenths fine". The Dollar was thereby devalued from $20.67 to one troy ounce of Gold to $35.00 to one troy ounce of Gold - or 40.94%. The Treasury, which had become the possessors of all the nation's Gold on the previous day, saw the value of their Gold holdings increase by $US 2.81 Billion. The Treasury now "owned" the Gold, and no one else inside the U.S. was allowed to own any Gold except by the express permission of the Treasury.

The new ratio of $US 35 was adopted at Bretton Woods in July 1944. The U.S. Dollar was made the world's Reserve Currency and the IMF and World Bank established in 1947. The now international ratio of 35 U.S. Dollars to one troy ounce of Gold lasted until August 15, 1971.

The End Of the "Fixed" Dollar

Gold War I - The "London Gold Pool" - 1961 to 1968

By the beginning of the 1960s, the $US 35 = 1 oz. Gold ratio was becoming more and more difficult to sustain. Gold demand was rising and U.S. Gold reserves were falling, both as a result of the ever increasing trade deficits which the U.S. continued to run with the rest of the world. Shortly after President Kennedy was Inaugurated in January 1961, and to combat this situation, newly-appointed Undersecretary of the Treasury Robert Roosa suggested that the U.S. and Europe should pool their Gold resources to prevent the private market price of Gold from exceeding the mandated rate of $US 35 per ounce. Acting on this suggestion, the Central Banks of the U.S., Britain, West Germany, France, Switzerland, Italy, Belgium, the Netherlands, and Luxembourg set up the "London Gold Pool" in early 1961.

The Pool came unstuck when the French, under Charles de Gaulle, reneged and began to send the Dollars earned by exporting to the U.S. back and demanding Gold rather than Treasury debt paper in return. Under the terms of the Bretton Woods Agreement signed in 1944, France was legally entitled to do this. The drain on U.S. Gold became acute, and the London Gold Pool folded in April 1968. But the demand for U.S. Gold did not abate.

By the end of the 1960s, the U.S. faced the stark choice of eliminating their trade deficits or revaluing the Dollar downwards against Gold to reflect the actual situation. President Nixon decided to do neither. Instead, he repudiated the international obligation of the U.S. to redeem its Dollar in Gold just as President Roosevelt has repudiated the domestic obligation in 1933. On August 15, 1971, Mr. Nixon closed the "Gold Window". The last link between Gold and the Dollar was gone. The result was inevitable. In February 1973, the world's currencies "floated". By the end of 1974, Gold had soared from $35 to $195 an ounce.

Gold War II - The IMF/U.S. Treasury Gold Auctions - 1975 to 1979

On January 1, 1975, after 42 years, it again became "legal" for individual Americans to own Gold. Anticipating the demand, the U.S. Treasury in particular and many other Central Banks sold large quantities of Gold, taking large paper profits in the process. This had two results. It depressed the price of Gold, which fell to $US 103 in eighteen months. More important by far, it "burned" large numbers of small individual investors.


But this "pre-emptive strike" against the Gold price did not solve the imbalances inherent in the floating currency regime. As the Gold price began to recover from its August 1976 low, the (US-controlled) IMF along with the Treasury itself, began a series of Gold auctions in an attempt to hold down the price through official means. But the problem of yet another free fall in the international value of the Dollar got in the way. Between January and October of 1978, the Dollar lost fully 25% of its value against a basket of the currencies of its major trading partners. By early 1979, due to this precipitous fall, the demand for Gold was overwhelming the amount that the IMF/Treasury dared supply, and the Gold auctions came to an end.


Gold regained its ($195) December 1974 level by July 1978. It then pressed on to new highs, hitting $250 in February 1979 and $300 in July. Also in July, Paul Volcker was appointed as Fed Chairman by a desperate Jimmy Carter. Gold continued to surge, hitting $400 in October. While this was happening, Mr. Volcker was attending a conference in Belgrade. There the assessment was made that the global financial system was on the verge of collapse. When Mr. Volcker returned to the U.S. from Belgrade, he took a momentous step. He announced that the Fed was switching its policy from controlling interest rates to controlling the money supply.

This new Fed policy took some time to have effect. In the meantime, Gold soared from $381 on Nov. 1, 1979 to $850 on Jan. 21, 1980. The public, who had been burned in 1975, were late on the scene. The great burst of public Gold buying came in the four weeks between Christmas 1979 and the Jan 21, 1980 high. As in 1975, they were "burned" again.

The Paper Era Begins

In early 1980, Mr. Volcker's new Fed policy began to bite. U.S. interest rates began to skyrocket. As they rose, the Dollar first slowed it's descent, then stopped falling, and then began to rise. Both the public and the investment community which had stampeded into Gold was lured back into paper by this huge rise in interest rates - and by the prospect of a higher U.S. Dollar. The threat of financial meltdown was averted, but at a cost. The U.S. Prime rate hit 20% in April 1980 and stayed there (with a brief dive in mid-1980) until the end of 1981. There was a rush out of Gold and back to Dollars.

Once interest rates began to come down, in early/mid 1982, the choice of where to put the Dollars faced investors once more. The initial solution was just as it had been in the 1970s. The Dow took off - rising from 776 to almost 1100 between mid August 1982 and late January 1983. Gold started earlier and took off even harder - rising from $296 in late June 1982 to $510 at the end of January 1993.

That's where the similarity to the 1970s ended. Gold fell $105 in the last four trading days of February 1983. As it fell, the Dow broke above the 1100 point level for the first time. The long bull market in stocks, and the long stagnation of Gold, had begun.

Many facets went into this change in investment attitude, but one concrete change in the U.S. financial system was the most telling. Way back in March 1971, four months before Nixon closed the Gold window, the "permanent" U.S. debt ceiling had been frozen at $US 400 Billion. By late 1982, U.S. funded debt had tripled to about $US 1.25 TRILLION. But the "permanent" debt ceiling still stood at $US 400 Billion. All the debt ceiling rises since 1971 had been officially designated as "temporary(!?)". In late 1982, realizing that this charade could not be continued, The U.S. Treasury eliminated the "difference" between the "temporary" and the "permanent" debt ceiling.

The way was cleared for the subsequent explosion in U.S. debt. With the U.S. being the world's "reserve currency", the way was in fact cleared for a debt explosion right around the world. It was also cleared for three of the biggest bull markets in history.

The global stock market boom of 1982-87
The Japanese stock market boom of 1988-90
The Dow (and then Nasdaq) led boom - late 1994 to March/April 2000(?)


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The HIDDEN Gold Wars

In the early 1980s, when world stock markets boomed in tandem everywhere in the world, Gold reached the $500 level twice. The first time was in early 1983, just as the global boom was getting started. The second time was at the end of 1987, two months after the infamous crash of October 1987. From $499 in December 1987, Gold fell throughout 1988 and dipped below the $400 level in January 1989. Gold has only ever regained the $400 for four very short periods since then.

Gold traded as high as $422 in December 1989 - January 1990.
It reached as high as $415 in the lead up to the Gulf war in August 1990.
It reached $408 in August 1993.
And finally, Gold reached a high close of $414 in February 1996.

But Gold's history in the years since the 1987 crash is that at all the actual crisis points, the Gold price has not risen, it has fallen. The best single example of this phenomenon remains Gold's performance on January 17, 1991, the day that the "air phase" of the Gulf war began. On that single day, Gold fell $30 from its previous close. In fact, it fell $40 from its intra-day high. Gold had been rising in the months leading up to the war. As soon as the war started, Gold plummeted.

The Gold price has failed to respond to the fact that Gold demand has exceeded newly-mined Gold supply in every year since 1988. It has, consistently done the opposite of what all of its previous history shows that it "should" do. Why has this happened?

From Overt To Covert

As we have documented in this series, in the 1960s and 1970s, governments fought Gold in the open. They announced what they were going to do before they did it. Of course, they failed miserably. But people in government, just like the rest of us, are quite capable of learning from their mistakes, The first thing they learned was that the best way to "fight" Gold was to go underground. They did so, with great success.

The plan adopted was to fight Gold on their own ground. In order to do this, they greatly expanded the ways in which Gold could be traded. More important, they introduced and developed an indirect market for Gold, they invented a Gold "derivatives" market.

The Paper Blizzard - "Derivatives"

Forward and futures markets were not, of course, an invention of the 1980s. What was an invention of the 1980s was the massive increase in paper trading instruments. These instruments, which became known as "derivatives", were first developed in the currency and debt markets. They then spread into the equity markets and into the Gold market.

The advantage of "derivatives" in the paper markets was twofold. First, they provided more and more leverage for more and more aggressive trading. Second, and far more important, they provided a method to hugely expand the amount of money in circulation without expanding the "money supply"! The traditional measures of money in circulation (M1, M2, M3, M...) expanded much more slowly. What did expand was the blizzard of "derivative paper" using paper money as its underlying "asset". This was one of the main reasons why "inflation" (defined as rising prices) slowed down.

The advantages of a Gold derivative market were similar. Governments learned in the 1960s and 1970s that it was impossible to meet an increased demand for Gold with physical Gold. They needed a paper substitute. Gold "derivatives" provided that substitute. With more tradable alternatives to physical Gold, it became far easier to control the Gold price. But on top of the derivatives themselves, other specific mechanisms were developed to help control the price of Gold.

One of these methods was forward selling by Gold mining companies. This practice began with Gold's retreat from the $500 level in the wake of the 1987 crash. By the mid 1990s, Gold companies everywhere, but notably in Australia, were routinely forward selling years worth of their projected Gold production.

As the performance of Gold in the more than a decade since the market crash of 1987 illustrate, these mechanisms have worked very well indeed.

Paper Gold?

For as long as Gold has been prized, there have been men who have tried to create it. For hundreds, if not thousands of years, the Alchemists strove to transmute base metals into Gold, without success. But even after its introduction to the West and the invention of the printing press by Gutenberg at the end of the Thirteenth century, no-one had the idea of trying to turn paper into Gold. In past centuries, those who would control money contented themselves with substituting paper for Gold, with limited success.

It took some true "visionaries", and the end result of a long process of economic wishful thinking, to seriously propose "paper gold". The notion goes back about 30 years, to the period just before the dawn of the "floating currencies" era. When the U.S. closed the the "Gold Window" in August 1971, the Dollar promptly dived against all its major trading partners. By February 1973, it had become impossible to pretend that any fixed ratio still existed between currencies, and the era of "floating currencies" began.

The IMF actually invented what became referred to as "Paper Gold" in 1971 - months before the U.S. severed the tie between the Dollar and Gold. The IMF knew this step was coming, and so it invented the "SDR" (Special Drawing Right). It was touted as a Reserve "Currency" that would replace both the U.S. Dollar and Gold in the basements of the world's Central Banks.

While these SDRs still exist, they have not done much over the past three decades or so except gather dust. Their prime purpose, to provide a substitute for Gold, was not fulfilled. The SDR was the last major attempt to provide a "substitute" for Gold. For at least the past two decades, the approach has been that no substitute for Gold is necessary. And to "prove it", Gold has been progressively debunked as either a money or even a viable investment option. The price has been forced down, then held down, then forced even lower.

If You Can't Replace It - Dilute It

The price of Gold cannot be held down by selling the physical metal. The decade between 1970 and 1980 proved that conclusively. Hundreds of years of history have proven conclusively that nothing can be sold as a "substitute" for Gold. In the years since the 1987 crash - when the $US 400 "glass ceiling" on Gold has been put and kept in place, Central Banks have continued to sell Gold, but only in emergencies. The real mechanism for holding down the price has been different.

Forward Selling - By Gold Producers

For most of the past decade, Gold mining companies gradually changed the way they market their Gold. To an ever-increasing extent, they have "forward sold". The mechanism is quite simple. A Gold mining company with proven reserves in the ground wants to sell a portion of these reserves forward. The company representative goes to a bullion dealer who agrees to pay him, for example, $500 per ounce for Gold to be delivered two years from now. The Gold company has locked in a profit, and on top of that, has the money now for Gold which is still in the ground.

The Gold bullion dealer is exposed, however. He is exposed to a possible loss if the Gold price falls in the future. So, to hedge this position, the bullion dealer sells Gold - for immediate delivery. "Wait a minute" (you cry), where is the bullion dealer to get the Gold to provide for immediate delivery? The answer brings us directly to the second part of the mechanism for maintaining the $US 400 Gold "glass ceiling".

Gold "Leasing" - The Central Banks' Contribution

Our intrepid bullion dealer goes out and "borrows" the Gold. Where does he borrow it from? That's easy. From the formidable 36,000 Tonne hoard still owned by the world's Central Banks.

To get the Gold - or more accurately, to get a marketable claim to the Gold - our bullion dealer pays what is known as the Gold lease rate (an extremely low rate of interest). He then sells the Gold - or the claims to Gold, and invests the money. This is the way the difference between the spot and forward prices for Gold is determined. The forward price is the money interest rate which our bullion dealer receives for his investment minus the lease rate which he paid to borrow the Gold.

The point is that this entire fandango (that's "fandango" - not "contango") can be performed by lending physical Gold, or it can be performed by lending a paper claim to Gold. The miners' Gold is still in the ground. The Central Bank sometimes lends Gold, or it lends a claim to Gold. These are what our bullion dealer sells. And since most demand for Gold is not a demand for the physical metal but a demand for paper (forward, future, etc) claims to the metal, this mechanism can meet the demand without an undue strain upon the available supply of the physical metal, and the upward pressure on the price of Gold that would cause.



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In the world there are currently somewhere between 120,000 and 140,000 tons of gold ‘above ground’. To visualize this imagine a single solid gold cube with edges of about 19 meters (about three meters short of the length of a tennis court). That's all that has ever been produced.

Divided amongst the population of the world there are about 23 grams per person, about 1.2 cubic centimeters each. This equates to about $250 - $350 worth per person on Earth, depending on the current price.


The value of that short tennis court sized cube is about $1.8 trillion. This compares to the US government’s sovereign debt of $6.9 trillion, which until 1971 was part-backed by gold. The US Gold Reserve is just over 8,000 tons - which is about 6% of the total gold ever mined. It is worth about $100 billion, or 1.5% of the US national debt.

$1.8 trillion is about one fourteenth of the paper based international bond markets, which themselves, at about $26 trillion, are about two thirds composed of western government sovereign debt almost all of which has appeared, co-incidentally, since 1971 and the declared supremacy of paper money, which was what allowed governments to borrow without caution. The total gold content of the world would pay - at current values - about 7% of the international bond market's sovereign debt.  But of course 75% of the world's gold is not available to governments - being held privately as jewelry, bullion and coin.  In fact only about 30,000 tons, about 1% of the world's sovereign debt is what is held in central bank gold reserves.

Meanwhile the entire gold stock of the world - including the privately held bulk - is much less than one half of one percent of the underwritten risk in the global financial derivatives markets.

The world has placed absolute trust in paper currency denominated assets. Investors have shunned gold for about twenty years while the notional value of paper based financial assets has exploded.


About 30,000 tons of the world’s gold [20-25% of above ground inventory] is held in central bank vaults.

Major Central Bank Reserves (2000)

Nations & institutions Reserves (Tons)
USA 8139
Germany 3469
IMF 3217
France 3025
Switzerland 2590
Italy 2452

The totals for other central banks tail off rapidly after these main holders.  Most only hold a few hundred tons, and together they make up a bit over 30,000 tons in all.

The rest is held by individuals in the form of gold jewelry [approx 70,000 - 80,000 tons], coin and privately held bullion [combined at 20,000 tons].

90% of the gold above ground has been mined since the start of the California gold rush in 1848. Modern power machinery and chemicals have steadily lowered the price at which gold can be extracted. The average production cost of the world's biggest producer - South Africa - is about $238 per troy ounce. 1997 industry estimates by the Federal Reserve Board suggested an average production cost worldwide of $300 per ounce.


Where it is known about with reasonable confidence, and can be extracted economically, un-mined gold appears on the books of mining companies as ‘reserves’. There remains as reserves about 40% of the total of gold above ground - i.e. about 50,000 tons. South Africa has 50% of the world's known stock of un-mined gold.


Gold is difficult to find in commercial quantities. It also takes time, typically 5 years, and plenty of money to bring mines into production. In this sense the supply side of the gold equation is relatively constant.

One of the features of this is that boom times encourage investment which takes a considerable time to work through to production and - eventually - to worked out mines. After a boom, when investment decisions may be made on over-inflated expectations of ultimately achievable prices, there is a tendency to subsequent overproduction and poor prices for a considerable period.

The gold price boom of 1979/80 resulted in steadily increasing production all over the world from a stable base of 1200 tons annually to a peak of above 2600 tons in 1999. All major producing countries except South Africa substantially increased production in this period.

Production then leveled out and started to dip slightly, as mines were exhausted and poorer mines shut.  Also the uninspiring gold market encouraged a decrease in exploration which now means there are a lower number of new mines coming into production than is expected to be required by the market.


Nonetheless for the time being gold is still being mined and refined at the rate of almost 2,600 tons per year. Thus the world supply of above ground gold is increasing - or inflating - at just over 2% annually. At current rates the gold supply is growing the under-sized tennis court cube at about 12 centimeters a year. It will reach a full tennis court sized cube in about 20 years time.


The following table compares kilogram quantities of gold with monetary values, spatial volumes, and meaningful human measurements, to get a feel for the numbers.

Kilograms Value @ 390$ / Oz Liters How much
0.008 $100 0.00041 A British sovereign coin
0.031 $390 0.00161 US Eagle / Canadian Maple coin
0.100 $1,254 0.00518
0.500 $6,269 0.02591
1 $12,539 0.0518 1 kilo - a golf ball sized sphere
2 $25,077 0.1036
3 $37,616 0.1554
4 $50,154 0.2073
5 $62,693 0.2591
6 $75,231 0.311 A can of 'Coke'
7 $87,770 0.363
8 $100,309 0.415
9 $112,847 0.466
10 $125,386 0.518
12 $156,000 0.645 A standard 400 oz bullion bar
20 $250,772 1.04 A liter bottle of water
50 $626,929 2.59
100 $1,253,858 5 A good sized deposit box
1,000 $12,538,580 52
10,000 $125,385,802 518 Half a cubic meter - fits in a corner of a small bank vault.
100,000 $1,253,858,025 5,181  
1,000,000 $12,538,580,000 51,813 A small living room - and more than twice Britain's gold reserve.
8,139,000 $102,051,504,000 421,710 The US gold reserve fits into a town house.  Fort Knox is mostly empty space!
30,000,000 $376,163,190,000 1,554,404 The world's total financial reserve of gold (central banks + significant global financial institutions)
100,000,000 $1,253,858,024,000 5,181,347 The approximate total of all privately held jewelry, bullion and coin
140,000,000 $1,755,401,234,000 7,253,886 All the gold in the world - A block with edges 3 meters short of a standard sized tennis court.
  $7,000,000,000,000   The current US sovereign debt (which excludes future pension and health obligations, none of which have been reserved against in the public accounts



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