Minerals 101: Gold

Note: Metric tonnes (t) used in this article.

Gold has played a pivotal role in building and protecting wealth worldwide, holding a role of special importance in almost every society across continents and throughout centuries of history.

While gold is arguably the most aesthetically pleasing metal, it is also an important store of value, that can easily be bought and sold or alternatively handed down through generations.  Gold’s versatility extends beyond just jewelry and coins; by 1947, its excellent conductivity properties were harnessed in the first transistor assembled at AT&T Bell Laboratories. Chemically, gold doesn’t corrode or tarnish, used broadly (but yet sparingly) in circuitry, medicine and aerospace applications where functionality cannot fail.  As such, gold is both ancient and future-facing, a timeless commodity that deserves its place in a modern investment portfolio.

Stable demand combined with falling supply levels mean the future prospects for gold and gold mining investment remain strong.  Investing in gold mines will continue to be a productive application of capital, while also providing a strong hedge against market and geopolitical disruptions such as inflation and war.

History of Gold and Gold Mining

The earliest known gold artifacts date back some 6,500 years in what is now Bulgaria¹. By 2000 B.C., the Egyptians were mining gold², and by 640 BCE, coins made of electrum, an alloy of gold and silver, were being minted, beginning gold’s time as a medium of exchange. Gold coins are thought to have been used in India as early as 1000 BCE and continued to be used until the British introduced uniform currency in 1835³. Gold mining in China is thought to have begun as early as the Xia dynasty⁴, which ruled between 2205 and 1766 BCE. Gold was formally used as currency during the Warring States Period (475 B.C. – 221 BCE)⁵ and was used as currency until the Yan dynasty (1271–1368), when the government attempted to replace it, along with silver, with paper currency⁶. By the 13th century, tales of the vast wealth of the Far East, notably in gold, were brought to the West by travelers like Marco Polo, who spoke of the “almost unlimited” gold wealth.

Beginning in the early 1550s, the Spanish and the Portuguese, enticed by tales of gold, began a conquest of the Americas, changing the New World forever. In 1700, gold was discovered in Brazil, and within 20 years it was producing almost two-thirds of the world’s gold⁷.

In the United States, the first of several gold rushes started in 1803 when gold was discovered in Little Meadow Creek in North Carolina. In 1848, the discovery of gold at Sutter’s Mill in California, precipitated the most influential gold rush in the nation’s history. It attracted around 300,000 people to the area, propelling California to statehood and opening transportation routes to the West Coast⁸. Known as “forty-niners”, the prospectors who came after in 1849 are remembered today by the name of San Francisco’s football team, the 49ers. The California Gold Rush was followed by unifying forces of the telegraph, railroads, and new settlements that built a nation in its wake.

The USA was not alone in new gold discoveries driving migration and economic development. The 19th century saw further global expansion of gold mining, with pivotal discoveries in Australia (1850) and South Africa (1868)⁹, the latter of which has supplied nearly 40% of all the gold ever mined.

In summary, with such a rich and replete history that spans millennia, it is impossible to comprehensively cover the history of gold and gold mining. For those curious to learn more, The Golden Thread is an excellent documentary with Idris Elba, covering the history, uses and production of gold through the ages.

Where is Gold Found?

Gold deposits form in a variety of geological environments, a reflection of gold’s geochemical versatility and suitability for natural concentration and transport under a wide range of temperature and pressure conditions. Currently, more than 40% of the world’s total gold yield has been historically produced by South Africa’s Witwatersrand mines¹¹ from deposits known as paleoplacer deposits.  Numerous gold deposit styles are referenced in literature however the majority of geologists can agree on approximately five main deposit types accounting for the majority of known gold – paleoplacer, orogenic, porphyry, epithermal (subdivided into low- and high-sulphidation), and Carlin gold deposits¹⁰.

China, Russia, Australia, Canada, and the United States are the more recent top five gold producing countries in the world. The fact that some of the largest countries in the world are also the top gold producers speaks to the geographical diversity of gold production. But the most extensive reservoirs of gold on the planet are found in the ocean, which contains roughly eight times the amount of gold mined throughout all of human history¹². The cost of extracting it, however, makes this an impractical source, since one would need to process 100 million tonnes of sea water to recover 1 gram of gold⁵¹.

How is Gold Formed?

Gold, along with other heavy elements, is thought to have been produced in supernova nucleosynthesis. Supernovae, the explosive death of massive stars, facilitate the rapid neutron capture process, or r-process, critical in the formation of elements heavier than iron, including gold. In these cataclysmic events, a burst of neutrons is absorbed by atomic nuclei, leading to the synthesis of new elements.

A significant portion of gold in the universe is also attributed to neutron star collisions. Neutron stars, remnants of massive stars, can collide in a highly energetic event, leading to the creation of heavy elements. The GW170817 neutron star merger, observed in August 2017, provided direct evidence of such processes. Spectroscopic observations following this event revealed the creation of gold, suggesting that neutron star mergers are a major source of this element in the universe. The GW170817 event alone is estimated to have produced between 3 and 13 Earth masses of gold.
The Earth’s gold is believed to have arrived significantly later than the planet’s formation. During Earth’s early molten state, most of the gold likely sank into the planetary core. Subsequently, it is theorized that gold was delivered to the Earth’s crust by asteroid impacts, particularly during the Late Heavy Bombardment, approximately 4 billion years ago. These impacts contributed to the gold deposits found in the Earth’s crust and mantle today.¹⁴

Throughout most of history, gold has been valued as a medium of exchange and as a store of wealth. Today, it continues to be valued as a real asset with its intrinsic value derived from it’s unique chemical properties. Gold can be purchased in physical form as bullion or jewelry or traded using financial instruments, and some investors invest directly in gold mines¹⁷.

Gold Bullion

One carat is equal to 1/24th part of pure gold in an alloy. Therefore, 24-carat gold is 99.99% pure, or 24/24 carats. Certified as 99.99% pure, gold bullion is created primarily for investment purposes and is often kept as a reserve asset by governments and central banks. Bullion comes in a variety of shapes and sizes and can be bought by the gram, kilogram, or in higher units, including troy ounces (31.103 grams), which are used to weigh gold and other precious metals¹⁸.

There are two primary forms of bullion:

• Bars, also known as ingots, are larger pieces of gold that are kept in the possession of the investor or are purchased by big companies and organizations.¹⁹
• Coins are available in more sizes and weights than bars making them easier to buy, store, and transport²⁰. Coins are easy to purchase (though care should be taken to obtain them from a reputable dealer), difficult to counterfeit, and may have some value as a collectible in their own right²¹.

Coinage

The first gold coins were minted in Lydia part of what is now Turkey, around 550 BCE, and for centuries before paper currency was available, coins throughout the world were often made from gold. From the 19th century well into the 20th, many major currencies were pegged to the value of gold under the gold standard²⁹.

Jewelry

Durable and non-reactive, gold is often used for jewelry and high-status objects that are intended to last for a long time and retain their value. Its malleability makes it possible to draw it into wires, hammer it into delicate sheets, or melt and mold it into intricate designs. Its luster and distinctive color combined with its rarity make it highly desirable³⁰. 

Gold jewelry has been a means of storing wealth for thousands of years and still offers opportunities for experienced investors. Gram for gram, it is more expensive than bullion because its price includes manufacturing and design, and it must be carefully examined for authenticity²³.

Jewelry is often less than 24 carat gold, simply because blending gold with other metals makes jewelry pieces more durable and less susceptible to bending or scratching. 18 carat (75% pure gold) is suitable for fine jewelry, whereas 14-carat and below is more commonly found in less expensive pieces.

Dentistry & Medicine

Gold’s uses go well beyond the aesthetic. Being non-reactive and non-allergenic, it is an ideal choice for dental applications like fillings, crowns, bridges, and orthodontic appliances. Dental applications typically use white gold or gold alloys of 15 karats or higher³¹.

Gold is used in a variety of medical situations as well. Gold salts and radioisotopes are employed to treat conditions such as severe rheumatoid arthritis and tuberculosis³², while the gold isotope, gold-198, is used in brachytherapy, the insertion of radioactive implants into body tissue to treat cancer³³.

Electrics & Electronics

Gold is widely used in electronic components, such as connectors, connecting wires, and connection strips, and can be found in everyday devices like smartphones and microwaves, albeit in very small amounts³⁴. Gold’s excellent conductivity, combined with its resistance to corrosion, ensure lasting and reliable electrical connections, and its non-corrosive nature is especially valuable in protecting copper components from degradation. Additionally, the malleability of gold allows for the creation of thin wires that are intricately woven into computer chips to facilitate circuit production³⁵.

In 2019, approximately 37% of the gold used in the United States was used in electronic applications³⁶.

Aerospace

Gold plays a crucial role in aerospace applications. In addition to being used in circuitry to conduct electricity, it provides a protective coating inside spacecraft to shield astronauts from infrared radiation and heat. Gold’s properties also make it invaluable for satellite components, offering protection against ultraviolet light and X-rays, and ensuring long-lasting electrical contacts in electronics. Furthermore, NASA incorporates a thin layer of gold on astronauts’ visors, using its ability to reflect infrared while allowing visible light to protect their eyes from unfiltered solar rays.

Alloys

In its purest form, gold is very soft and impractical for most uses. It is often alloyed with other metals such as copper or silver to make it easier to work with and more durable. While gold is weighed in troy ounces (1 troy ounce = 31.1034768 grams), its purity is measured in carats, sometimes spelled karats (note: “carat” can refer to either the purity of gold or the mass of a gemstone; “karat” refers only to gold’s purity). The carat rating pertains only to the amount of gold in an alloy; it does not convey any information about other metals used²².

As mentioned above, a single gold carat is 1 part out of 24. The purest gold is 24 carats, which contains no other metals; however, this caratage is too soft to be practical for objects such as jewelry. The minimum caratage for an item to be called gold varies by country

Common Alloys

Gold is most commonly alloyed with zinc, copper, nickel, iron, cadmium, aluminum, silver, platinum, and palladium²⁴.

• White Gold Gold alloy that achieves a silver or platinum like color, by mixing gold with white metals such as nickel, palladium and/orsilver.  White gold can be rhodium plated or a homogenous alloy. 
• Yellow Gold: Usually a mix of initially pure gold with alloy metals such as copper or zinc, to achieve greater strength or other alloy properties.²⁶
• Rose Gold: A mix of pure gold with a copper alloy, which provides the reddish or “rose” color.²⁷

Other Industrial Uses

Gold nanoparticles are used in a variety of applications such as sensors, antibacterial activity, and industrial catalysts, including vinyl acetate, which is used to make PVA for glue, paint, and resin³⁷.

Industrial Use Substitution

Being expensive, gold is used in small quantities for industrial applications. When possible, it may be substituted with another metals, such as palladium, platinum, and silver, but this is relatively rare²⁸.

Mining Gold

How Much Gold is Mined, and Where

As the table above shows, the world has consistently produced around 3500 metric tonnes of gold since 2016. The top global producers in 2022 were³⁸:

1. China, 375
2. Russia, 325
3. Australia, 314
4. Canada, 194
5. United States, 173
6. Ghana, 127
7. Peru, 126
8. Mexico, 125

Another country of importance is Switzerland. While it has no significant gold reserves itself, it is home to five of the largest refineries in the world, as well as several smaller ones, and around 70% of the world’s gold is refined there³⁹.

The Gold Mining Process

There are two main types of gold mines: underground and open-pit. Underground mining is the extraction of gold from underground deposits, with miners using specialized equipment, including explosives and drills, to access and extract ore. Open-pit mining targets gold from surface deposits.

Mining Process

Since the 20th century, the most used form of gold extraction has been cyanide leaching.  This can be accomplished by either heap leaching or tank leaching:

Heap Leaching

In heap leaching ore is crushed to around 0.5-1” and agglomerated with cement as a binder and placed on specially prepared leach pads.  The ore is irrigated with a dilute alkaline cyanide solution to leach the gold from the host rock.  The leached solution is recovered from the base of the heap pad via drainage piping and sent to an adsorption circuit where the gold in solution is recovered onto activated carbon.  The leach solution now devoid of gold is re-cycled as irrigation solution to the heap. 

The gold is recovered from the carbon via a process called elution into a concentrated gold solution called eluate.  The carbon is returned to the process for reuse.  The eluate is then subject to electrowinning where an electrical current is passed through the solution causing the gold to precipitate out on the cathodes in the electrowinning cell.  The precipitate is then recovered from the cathodes, dried in an oven, and smelted in a furnace together with fluxes to produce gold doré bars.

Tank Leaching

In tank leaching the ore is first crushed and ground in wet grinding mills to a fine slurry powder.  The ground ore is then leached in large agitated tanks with a dilute alkaline cyanide solution typically for around 24 hours.  The leached gold is then recovered either by the Merrill Crowe Process⁴⁰ or the Carbon in Pulp (CIP) process⁴¹.

In the Merrill Crowe Process the gold bearing solution is filtered from the leached slurry.  The solids which are devoid of gold are sent tailings.  The filtered leach solution is then deaerated in a vacuum tower to remove oxygen after which zinc powder is added to precipitate out the gold.  The gold precipitate is filtered from the solution and the solids are dried in an oven and smelted together with fluxes to produce gold doré bars.

In the CIP process, the leached slurry is contacted with activated carbon in a series of activated tanks to recover the gold.  The carbon is removed from the tanks with screens and then the gold is recovered from the carbon via a process called elution into a concentrated gold solution called eluate.  The carbon is re-activated in a kiln and returned to the process.  The eluate is then subject to electrowinning where an electrical current is passed through the solution causing the gold to precipitate out on the cathodes in the electrowinning cell.  The precipitate is then recovered from the cathodes, dried, and smelted in a furnace together with fluxes to produce gold doré bars.

In some instances, the gold ore can be refractory and not able to be leached by cyanide directly.  In these instances, the ore is usually crushed and ground and subject to flotation to recover the gold into a sulfide concentrate.  The concentrate is then ground further, and the sulfides are oxidized to make the concentrate amenable to cyanidation by tank leaching.  The oxidation process can be biological oxidation (e.g. BIOX⁴²), pressure oxidation (POX)⁴³ or fine grinding and atmospheric oxidation (e.g. Albion⁴⁴).

Refining

Once the gold has been extracted into doré bars, it can be refined using a variety of processes, the most common being the use of high-temperature flames and chemicals⁵⁷. Common purification processes include:

The Miller Process

An industrial-scale method in use since 1867, the Miller process involves blowing chlorine gas through molten gold, causing non-gold metals to concentrate in a slag that can be separated. The resulting gold is 99.95% pure⁴⁵.

The Wohlwill Process

Used for producing high-purity gold, such as for use in electronics, the Wohlwill process is an electrolytic refining technique that produces gold to 99.999% purity.

Costs of Gold Extraction

The costs of gold mining have risen substantially over the past few years, beginning with the Covid-19 pandemic and subsequent supply chain disruptions, and further exacerbated by the Russian invasion of Ukraine, which has resulted in higher energy costs and rising prices for materials such as cyanide and explosives⁴⁶.

The AISC (All-in Sustaining Costs) is a measurement of the cost of sustaining current gold mining operations, expressed in U.S. dollars per ounce of gold sold. The following graph shows the price of gold (line graph) vs the AISC cost curve quartiles and C90 decile (stacked area graph) since 1985.

Figure 2: Gold Price vs. Cost Curve Thresholds

Gold production rarely trades below C90 costs, as shown above and below. The only other metal that demonstrates similar positive cost curve margin resilience is copper. C90 cost refers to the cost threshold below which 90% of gold production occurs. The data shows that the price of gold is typically above the cost of producing it for 90% of the operations.

Figure 3: Gold Margins vs. C90 Cost

Figure 5: Gold Margin and Primary Production

The Price of Gold

The price of gold is determined by supply and demand in both the physical and financial markets around the world; however, the value of gold is tied to its intrinsic usefulness and the amount of work required to produce it. For many, gold itself is a currency and alternative to holding government issued paper currency. The gold price is usually quoted in U.S. dollars, which creates interesting market dynamics considering most gold production and consumption lies outside the United States. The headline impact is gold tends to trade in an inverse relationship to USD strength and corresponding USD real interest rates. When the dollar is strong, gold becomes more expensive for foreign buyers and more inexpensively produced by non-dollar countries, both of which drive gold prices lower. On the other hand, when the USD’s relative value drops, more people want to buy gold and gold production margins shrink for non-USD producers, both of which tend to drive the gold price higher⁵³.

Historically, the price of gold has fluctuated, but overall, it has risen steadily since the turn of the last century from US$18.96 per ounce in 1900⁵⁴ to around US$2000 as of the time of this writing. Because of its perceived safety, gold often becomes a more desirable commodity during times of political turmoil or high inflation⁵⁵. The current price has recently surpassed its all-time high of US$2,074.88 in August 2020, as pandemic lockdowns and the after-effects of Brexit contributed to economic unease and investors sought low-risk investments⁵⁶.

The London Gold Market

Instrumental to the price of gold is the London Gold Market, the largest wholesale over-the-counter (OTC) market for precious metals in the world. Twice a day, the London Bullion Market Association (LBMA) publishes the price of gold. In a given day, approximately 600 times more gold is traded financially than is mined globally. Only 5% is allocated with legal title (i.e., backed by physical gold); the rest is “paper gold,” an asset that reflects the price of gold⁵⁷.

Investing in Gold

For millennia, gold has been a form of stored wealth throughout the world, and these days, investors have more options than ever.

Physical Gold

The most straightforward approach to investing in gold is to buy it outright, in the form of bars, coins, or jewelry. Jewelry is typically not the best option if the goal is pure investment as the workmanship adds substantially to the price. However, gold ownership comes with the added expenses and concerns of storage and insurance, and it is difficult to buy or sell in fractional shares.

Gold ETFs

Gold exchange-traded funds (ETFs) offer investors a way to access the gold market without owning physical gold. These funds trade on stock exchanges and are backed by gold-related assets, providing portfolio diversification and easier exposure to gold prices. While they enable investment in gold in smaller amounts relative to buying gold outright, there can be risks and costs that may reduce their convenience. These include liquidity constraints, potential disparities between ETF prices and actual gold prices, and the possibility of fund liquidation if certain conditions are met (like a drop in net asset value or collective shareholder decisions). Additionally, some Gold ETFs are not physically backed, which creates potential credit risk for investors.

The following chart shows the influence of ETF Gold Holdings on the gold price since 2004. What is interesting is that the price of gold has held and/or risen since mid-2022, despite persistent ETF gold selling.

Figure 6: ETF Gold Holdings vs. Gold Price

Gold Options and Futures

Gold options and futures are investment derivatives that allow investors to speculate on future gold prices in the short term. Derivatives are typically leveraged instruments, meaning they can amplify both potential profits and losses, making them risky but potentially lucrative.

A Gold Futures Contract is an agreement that obligates the holder to buy or sell a specific quantity of gold at a predetermined price on a set date in the future, regardless of the prevailing market conditions. It’s a binding commitment, so parties to the contract are obligated to fulfill its terms⁵⁸.

A Gold Options Contract, on the other hand, provides the holder with the right, but not the obligation, to buy or sell gold at a specified price within a certain timeframe. It offers more flexibility than futures as it allows the investor to choose whether to exercise the option or let it expire based on market conditions⁵⁹.

Gold Mining, Processing, and Technology

Some investors choose to invest in gold mining, processing or technology companies rather than in gold itself. As many of these companies are private, this often takes the form of private equity investment or credit. The value of these investments doesn’t rise and fall with only the value of gold itself but depends on the company’s performance, risk profile, management team, and more. Investors in this area should be careful to work with experts who understand the complexities involved.

ESG Considerations

Gold mining, like all mining, involves moving large amounts of soil and rock, potentially impacting soil health, water, and wildlife habitats⁶⁰. However, many mining companies and investors alike are sensitive to ESG risks. With regular inspections and testing, instrumentation and monitoring, and ongoing testing and optimization programs, it is hoped that environmental hazards and danger to workers can be minimized⁶¹. Gold mining and processing have a relatively small environmental footprint compared to that of bulk commodities and base metals; compared to other commodities, in fact, gold mines produce very high value relative to land disturbance.

In 2019, the World Gold Council instituted Responsible Gold Mining Principles, which sets standards for responsible gold mining amongst stakeholders⁶². Included in these principles is a guidebook tailored exclusively to investors. The World Gold Council is further advancing these Principles by working with the International Council on Mining and Metals (ICMM) and The Mining Association of Canada (amongst others) on a single converged global sustainable mining standard that would be practical and implementable by any mine operator regardless of commodity, geography, or size. Implementation of the standard would be overseen by an independent, multi-stakeholder governance body and a credible assurance process. The Standards are scheduled to be launched in 2024.

Additionally, according to a study completed by ICMM and Urgentem, investing in gold as part of a diversified portfolio can help to reduce the overall carbon footprint of the portfolio. It can reduce the implied temperature risks of the portfolio without sacrificing the risk/return profile of the overall investment strategy. In fact, the study indicated that gold had positive effects not just in terms of climate resiliency, but indicated it can positively increase the overall risk/return profile of a globally diversified portfolio.⁶³

Declining Gold Ore Grades

Over two-thirds of all gold production throughout human history has occurred within the last few decades⁷⁰. As with several other commodities, the industry is progressively mining lower grade deposits (and making fewer high grade discoveries). Lower grade deposits typically need scale to be economic requiring a larger upfront capital investment. In the absence of a significant number of high grade deposits being discovered and developed, or breakthrough technologies driving materially lower operating costs, declining grades will likely drive higher gold prices over time.

Figure 7: Declining Gold Chart

An Attractive Hedge to Inflation and Geopolitical Risk

Gold plays a significant role in the global financial system, serving not only as an important store of wealth but also as an essential part of modern industry. As such, we believe it has—and will always have—an important place in a well-balanced commodity and mining investment portfolio.

One ongoing curiosity is the growing disconnect between the gold price and gold equity valuations, on either an absolute or a relative change basis.  RCF simply tracks this by comparing gold to the gold equity indices, as shown below.   

The above graph clearly shows the largest disconnect between gold and the companies that produce gold in the past 30 years.   In normal circumstances, the companies that produce gold now and into the future are typically valued higher than gold itself, as leveraged plays on the market itself.  Suffice it to say, gold equities appear to be a contrarian market investment at the moment. 

Returning to the fundamentals, there are several positive supply conditions for gold, in terms of supporting gold prices and related asset valuations. One investment advantage is the well-established ore extraction process, which often translates to lower risk in terms of construction, commissioning, and operations compared to other commodities. Another is that, with the gradual decline in the grade of available gold deposits, and in the absence of any major technological advancements, higher operating costs will support a corresponding rise in gold prices. Relative to other commodities, gold rarely trades into the cost curve and retains margin resilience, similar to copper.   

Higher inflation also contributes to higher costs, which will limit the downside of gold prices. Meanwhile, rising political tensions between the US and China, the war between Russia and Ukraine, and most recently, renewed violence in the Middle East are likely to contribute to higher gold prices as investors seek out safe havens against inflation and other economic risks.

Important Information

This information should not be deemed to be a recommendation of any specific commodity, company, or security.

This material is provided for educational purposes only and should not be construed as research. The information presented is not a complete analysis of the gold and/or commodities landscape. The opinions expressed may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by Resource Capital Funds and/or its affiliates (together, “RCF”) to be reliable. No representation is made that this information is accurate or complete. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader.

None of the information constitutes a recommendation by RCF, or an offer to sell, or a solicitation of any offer to buy or sell any securities, product or service. The information is not intended to provide investment advice. RCF does not guarantee the suitability or potential value of any particular investment. The information contained herein may not be relied upon by you in evaluating the merits of investing in any investment. There can be no guarantee historical trends will continue.

Investing involves risk, including possible loss of principal.