Where Does Gold Come From?
Investors often look to gold as a safe-haven asset during times of economic downturn and unpredictable markets. By storing their wealth in the age-old precious metal, they can shield their hard-earned money away from inflationary fiat currencies and volatile stocks.
In recent years, these traditional money systems have revealed their fragility, making a case for a gold investment even stronger. It’s no surprise that interest in buying gold and gold investment products is surging sharply in 2020. But where is all this gold coming from, and will the supply meet the increasing demand?
The origins of gold
There are multiple theories as to the origins of gold. Still, all of them involve massive amounts of heat and energy colliding in space, causing projectiles to fly through our universe. Some of these particles made their way to the moon or various asteroids, but the gold we are talking about today landed here on Earth.
Most of Earth’s gold supply sank to the planet’s core billions of years ago, along with molten iron and most other precious metals. In fact, there’s so much gold in the Earth’s core now that some geologists estimate that it could coat the Earth’s entire surface with 1.5 feet of it. Thankfully, some of the gold remained closer to the Earth’s surface for humans to discover and extract.
While mining operations can sometimes extract gold at only inches or feet below the Earth’s surface, other mines, such as those in South Africa, can drill as deep as 2 miles or more to get to the gold. Naturally, the mining operations to retrieve gold that is so deeply hidden is extremely expensive and resource-intensive. As the supply of gold worldwide gradually decreases over time while demand is on the rise, extraction techniques must evolve to meet the demand.
How much gold supply is there?
From what we know, humans have mined more than 197,000 tons of gold on Earth thus far. Miners worldwide mine about 2500-3000 tons of new gold each year. Additionally, experts estimate that the Earth holds approximately 18,000 tons of accessible gold that awaits discovery. Moreover, mining experts have identified about 15,000 tons that they could mine in the future.
Gold’s stock to flow model
It is this finite amount of gold that provides security to investors. Gold’s stock to flow model expresses the scarcity and abundance of gold by tracking how much gold is mined annually in relation to how much gold currently exists in the marketplace. In essence, the “stock” represents how much gold is circulating now divided by. the annual “flow” of newly mined gold.
Commodity traders often use the stock to flow model, but the major difference is that with gold’s stock to flow, there’s no consumable product. All the gold that has been mined over the millennia by humankind still exists today. So gold, unlike other commodities such as wheat and oil, has lasting monetary value. It also has many long term use cases for manufacturing and jewelry, which contributes to the demand for this precious metal.
Currently, global mining operations mine about 2700 tons per year (representing the “flow”), with the current “stock” of gold about 197,000 tons. Thus, gold’s stock to flow ratio is a very high 79%. This means that it would take about 79 years of annual production at this rate to match the current supply. Stock to flow is a great way to understand and contemplate the long term value of gold.
But it won’t help you forecast gold prices. The stock to flow model helps investors grasp the potential long term gains that a hard asset can supply, especially one with a limited total supply (and not potentially infinite such as the USD). And investors often analyze gold value by incorporating the stock to flow model used for commodities. It really is more of a hard form of metal money.
Low volatility & high liquidity
Over time, gold production rates have demonstrated low volatility, meaning you cannot quickly, easily, or cost-effectively increase gold mining by significant amounts. It’s much harder to increase gold mining production than printing paper money.
On the other hand, gold is a very “liquid” asset, meaning most Westerners could easily sell gold in a pawn shop, to people they know, to qualified dealers, or even online. Gold is liquid in the sense that you have many options to buy and sell it, and people value it universally.
With long term demand as a precious hard asset, gold retains investors who understand that scarcity and demand can lead to price gains over time. This is evident more markedly when a recession hits – gold demand soars, but mining stays relatively even, creating more scarcity and higher perceived worth.
How do we get gold?
Miners extract gold from the Earth through a long, arduous process that requires multiple stages with different sets of experts necessary to get to the next step. It’s an extremely expensive venture that also requires cooperation with local governments and agencies. The basic steps to setting up a gold mine are as follows:
- Exploration and investment to find new gold mines. Experts in the fields of geology, geography, engineering, and chemistry contribute to the search. In recent years, the use of geochemical tools and algorithms have made it easier to target high concentrations of valuable mineral deposits as with gold. With demand increasing worldwide, such tools can help mining companies save money on the high costs of drilling.
- Development of the mine. Once a mining company has identified a site, the mining company must prepare the land for gold extraction. Planning for the construction of the mine and the supporting infrastructure begins at this stage. Another part of this process involves securing the proper permits and licenses. A mine can take up to twenty years to start producing gold.
- Extraction. Getting the gold out of the mine and ready for market is also a time consuming, expensive, and multi-layer process. It involves, among many other steps, identifying areas of ore vs. waste rock, blasting to loosen the rock, crushers, graders, and a chemical leaching and adsorption process. When miners have completed this process, it transforms rock and ore into a metal alloy that will have between 60% and 90% purity. Mining operations may shift from high to low-grade ores as prices and mining expenses fluctuate.
- Decommissioning. Once a mine has been exhausted of ore or is no longer profitable, the mining company must take down the mine carefully and methodically to rehabilitate the land. This complex process can take up to five years, but gold mining companies are held responsible for many years thereafter to ensure the long term viability of the land once mining operations cease.
Finding gold in the world today
Here on Earth in the 21st century, we find most of the mineable gold in just a handful of geographical regions, including South Africa, China, Australia, and the United States. South Africa is home to the largest single source of gold known to man in the Witwatersrand Basin. Mining from this one gold mine alone represents more than 20% of all gold ever mined.
Finding gold to buy
While not everyone has the money and resources to extract gold from Earth’s surface, it is pretty easy to get your hands on gold in a number of ways. From buying physical gold to gold mining funds and even gold-backed cryptocurrencies like Goldcoin, today’s investor will not be without this precious asset.
Humans have been making gold jewelry for thousands of years, and investors today consider it a high-value investment. It’s also easy to purchase and sell gold; as we’ve mentioned previously, gold is also highly liquid and steadily in high demand.
Buying into gold mining funds is one way for investors to diversify their portfolios. These mining funds can have a mix of other precious metals and other assets to help with diversification. Funds may be in the form of ETFs (Exchange Traded Funds) or even mutual funds.
Buying physical gold in the form of bullion bars, coins, and collectibles is very popular, with the Internet creating easy access. Government mints and private companies may issue bullion bars and coins for sale. Investors physically hold their gold and are responsible for securing and insuring it.
Paper gold is another avenue for the investor. Instead of buying physical gold jewelry, coins, or bars, you can pay and hold a certificate of ownership. It saves the costs of having to store and secure the physical gold but also means the investor is dependent that the company or mint that is issuing the certificate remains solvent over the long term.
Gold-backed cryptocurrencies like Goldcoin offer a modern way to invest in gold. By using a hard asset like gold to back the cryptocurrency 1:1, it takes some of the worry and volatility out of investing in cryptocurrency assets. Additionally, when you invest in a gold-backed cryptocurrency, you can buy smaller amounts, reducing the barrier to entry for small or new investors.
Gold derivatives essentially are contracts to buy or sell gold at a predetermined date and price. Investors and traders use derivatives to hedge their risk because they can conceivably buy an option to buy at a certain price by a specific date while at the same time buying a contract that performs opposite to the first option. It provides a way to reduce downside risk and balance out the portfolio.
Gold has become a go-to asset for investors who are planning for the long term, protecting their wealth during a downturn, diversifying their portfolio, or some combination of all of these actions. With a steady yet limited supply of gold in the world, we can expect gold to retain its value as a precious metal for many years to come. Lucky for us, it is easy to acquire, with new methods of investing like gold-backed cryptos making it even easier for all of us to have at least some exposure to gold. With emerging markets just starting to become technologically advanced, the need for gold for use in cell phone manufacturing offers an added value proposition to one of Earth’s most valuable assets.
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