Tag Archives: gold mining

Should we Restore the Gold Standard?

This blog post is a guest post on BullionStar's Blog by the renowned blogger JP Koning who will be writing about monetary economics, central banking and gold. BullionStar does not endorse or oppose the opinions presented but encourage a healthy debate. 

Would it make sense to rebuild an international gold standard like the one we had in the late 1800s? Larry White says the idea has merit, David Glasner believes it isn't worth the risk. Over the years I've followed the back-and-forth between these two blogging economists, each of whom has done an admirable job defending their respective side for and against the gold standard. Let's look at one or two of the most important themes running through the White v Glasner debate.

Like a ruler measures distances, a nation's monetary standard serves as a measuring stick for the value of goods and services. People need to be able to set sticker prices with the unit, calculate profit and loss, negotiate labour contracts, and establish the terms of long-term debts using it. If the measuring stick is faulty, then all these important tasks becomes unnecessarily difficult.

Gold as Unit of Account

Since 1971 our measuring stick has been irredeemable paper currency, or a fiat money standard. Central banks try to ensure that, within the confines of their nation, the general level of domestic consumer prices stays constant, or at least rises at a constant rate of around 2-3%. And while the first decade of the fiat standard was a disaster characterized by high and rising inflation, central bankers in developed nations have generally managed to keep inflation on track for the last thirty or so years.

To re-establish gold as the measuring stick, each nation's unit of account—say the $ or ¥ or £—would have to be redefined as a certain fixed number of ounces of gold. Banknotes and central bank deposits, which are currently inconvertible, would be made convertible into an appropriate amount of gold. It is important that all nations return to the gold standard rather than just one, because one of the big advantages of an international gold standard is that with all currencies pegged to gold, it is much simpler for citizens of one nation to make calculations using another nation's unit. And this makes cross-border trade and investment easier to engage in.

Should banknotes and electronic fiat currency once again be made convertible into gold?

In Favour of the Gold Standard: Larry White

How well have the two standards served as measuring sticks? As the chart below illustrates, year-to-year changes in U.S. consumer prices were quite variable during the classical gold standard era, rising some years and falling the next. The source for this chart is from this paper that White has coauthored with George Selgin and William Lastrapes. The classical gold standard from which the authors draws their data lasted from 1880—when the majority of the world's major nations defined their currency in terms of the gold—to 1914 when the gold standard was dismantled on the eve of World War I. Data shows that the fiat standard that has been in place since 1971 demonstrates more predictable year-to-year price changes. Citizens of developed nations are pretty safe assuming that next year, domestic prices will rise by 2-3%.

Quarterly US inflation rate, 1875 to 2010

However, it is over longer periods of time that gold outperforms as a measuring stick. In the chart below, the authors show that the quarterly price level during the gold standard tended to deviate much less from its six-year average rate than during the fiat era. Because the general level of prices was more predictable under a gold standard, this provided those who needed to construct long-term debt contracts with a degree of certainty about where prices might be in ten or twenty years that is lacking under a fiat standard. White points out that this may be why 100-year bonds were common in the 1800s, but not so much now.

6-year rolling standard deviations of the U.S. quarterly price level

According to White, the main reason for the long-term stability of gold is the tendency for higher prices to encourage gold miners to increase the supply of metal, thus tamping down on the price, and conversely lower prices to encourage them to reduce production, thus buoying prices. In other words, prices under a gold standard were mean reverting. This mean reversion was generated "impersonally", or automatically, by the market, a superior sort of stability compared to that generated by a fiat standard, which depends on the skills and wherewithal of technocrats employed by the central bank.

Against the Gold Standard: David Glasner

David Glasner is skeptical about the gold standard because he doesn't agree that it mean-reverts fast enough. All of the gold ounces that have ever been mined continue to exist in vaults or under mattresses or around necks. Compared to this extant gold stock, the flow of new gold production is tiny. So if there is an increase in people's demand for gold, it is unlikely that new flows will be able to satisfy it, at least not for some period of time. Likewise, reduced gold production on the part of gold miners won't be able to vacuum up enough of the slack should people suddenly want less of the stuff. In either case, the price of gold will have accommodate shifts in demand by rising or falling quite a bit.

One thing that most monetary economists agree on is that fluctuations in the value of the item used as the standard—gold or fiat money—should not interfere with the "real" economy, say by causing unemployment or gluts of unsold goods. While many prices in an economy are incredibly flexible, like the price of stocks or gold or bitcoin, there are also many prices that are sticky, in particular labour. Under a gold standard, if there is a sudden increase in the demand to hoard gold, then there will be pressure on price of gold to rise. The rise in the gold price means that the general level of prices must fall. Goods and services, after all, are priced in terms of gold-backed notes. But with wages and many other prices locked in place, the response on the part of employers will be to adjust by announcing mass layoffs. Rather than cutting the sticker prices of goods, retailers will suffer though gluts of unsold inventory. This is a recession.

Glasner's favorite example of this occurred during the late 1920s. After WWI had ended, most nations attempted to restore the pre-war gold standard with banknotes once again being redeemable with fixed amounts of gold. But then the Bank of France, France's central bank, began to buy up huge quantities of gold in 1926, driving the gold price up. The U.S. Federal Reserve was unwilling to counterbalance what was viewed as insane purchases by the Bank of France, the result being the worst recession on record, the Great Depression.

What Type of Gold Standard?

Given that various commodity standards have been in place for centuries, why did it take till 1929 for a massive monetary mistake to finally occur? White blames this on large government actors, specifically central banks. In the initial international gold standard that ran from 1880-1914, nations such as Canada, Australia, and the U.S. didn't have central banks. Commercial banks in these nations chose to link their privately-issued banknotes to gold, the goal of these competing banks being to to earn profit rather than enact social policies. So earlier versions of the gold standard functioned far more naturally, without the meddling of large actors who refused to abide by the typical rules of a gold standard. It is for this reasons that White prefers that any return to the gold standard be packaged with an end to central banks, thus precluding episodes like the Great Depression from occurring.

David Glasner remains skeptical. According to Glasner, even the classical gold standard that ran from 1880 to 1914 required management, the Bank of England leaning in such a way as to counterbalance large demands for gold from other central banks and thus preventing anything like the Great Depression from occurring. And even if central banks were to be dismantled under a 21st century version of the gold standard so as to preclude an "insane" Bank of France scenario, there remains the problem of "panic buying" of gold by the public—and the resulting gold-driven recession this would cause.

So Where does that Leave us?

As I hope you can see by a quick exploration of the debate between Larry White and David Glasner, restoration of the gold standard is a complicated issue. I'd encourage readers who are interested to dive a bit deeper into the subject by reading David's posts here and Larry's here.

As for myself, White's work on the 1880-1914 gold standard has been helpful in removing many of the preconceptions I had of the gold standard, no doubt passed off to me by commentators who were never very familiar with the actual data. Nevertheless, I tend to agree with Glasner that under a global gold standard (with no central banks) a sudden spike in the public's demand for gold would impose large costs on the global economy. With citizens of the globe being so connected through the internet and free capital markets, these sorts of episodes might be more common nowadays than they were in the 1800s. I'm not sure the benefits of a gold standard, including exchange rate stability, make up for this risk. Given that Western central banks have done a fairly decent job of keeping inflation under control for the last thirty or so years, I'll give them the benefit of the doubt... for now.

The 5 Largest Gold Nuggets that Still Exist

Throughout gold rush and gold mining history, the discovery of a large gold nugget is a phenomenon which always causes excitement throughout a mining community as well as capturing the wider public's imagination. It has probably something to do with so much gold being found at the same time, often with relative ease.

Gold nuggets can be found in alluvial deposits (sediments formed by water movement) or in other placer deposits (formed by other movement), but gold nuggets can also be found in or close to primary gold deposits, for example gold lodes or veins which have been exposed by the weather. "Gold nuggets" can also technically be extracted from hard rock gold deposits as long as the surrounding rock can be removed.

There are a number of gold nuggets which claim to be the world's largest. Obviously, not all of these claims can be true. There are also a number of "largest gold nuggets" lists which confusingly mix historical nuggets which no longer exist alongside nuggets which still exist.

We think a list of gold nuggets which still exist is more accurate, since many historical nuggets are now just legends and have long since been melted down into gold bars or gold coins. Therefore, the following list, based on research to the best of our abilities, profiles the largest 'named' gold nuggets which are still in one piece, all of which are famous, all of which are on display, and all of which can be visited by the public.

1. Pepita Canaã,  Brazil

The world’s largest surviving gold nugget is the Pepita Canaã (Canaan Nugget) which was found by miner Júlio de Deus Filho in the Serra Pelada ('Naked Mountain') gold mining region of Brazilian state of Pará in 1983.

The Pepita Canaã gold nugget has a gross weight of 60.82 kgs and contains 52.33 kgs of gold, or 1682 troy ounces of gold. The "Canaan" gold nugget was purchased by the Banco Central do Brazil in 1984, and is now on display in the "Gold Room" of the central bank’s money museum (Museu de Valores do Banco Central in Brazil) in Brazil’s federal capital Brasilia.

Notably, the source nugget from which the Pepita Canaã nugget came was actually larger, but it split into several pieces while being removed from the ground.

"Pepita Canaã" - The largest surviving gold nugget, on display at the Brazilian central bank headquarters, Brasilia

In the early 1980s, Serra Pelada became known as one of the world's most notorious gold mining areas when over 100,000 freelance miners flocked there to engage in open air gold mining excavations in vast, dangerous, and crowded conditions. The Serra Pelada has essentially been closed since the late 1980s and gold mining is no longer possible due to flooding and government prohibitions. However, Brazil is still a significant gold producer, with gold production output in 2016 totalling 80 tonnes, according to the US Geological Survey (USGS).

Serra Pelada gold rush, Para, Brazil, 1980s

2. The Great Triangle, Russia

The world’s second largest surviving gold nugget is the “Great Triangle”. This gold nugget was found in the Miass area of the Russian Urals mountains in 1842 by Nikofor Syutkin. It has a gross weight of 36.2 kgs and a gold assay of 91%, meaning that it has a fine gold content of 32.94 kgs, or 1059 troy ounces of gold. The "Great Triangle" has dimensions of 31 cms * 27.5 cms * 8 cms, and as the name suggests,  it is triangular in shape. When found, it was dug up from a depth of about 3.5 metres.

The Great Triangle gold nugget on display at the Kremlin in Moscow, Russia

The Great Triangle gold nugget is owned by the Russian State, and through the Gokhran Fund (State Fund for Precious Stones and Precious Metals), it is currently on display in the 'Diamond Fund' collection in the Kremlin in Moscow. The Diamond Fund is an extensive  permanent exhibition of the Russian state's crown jewels, precious stones and gold and platinum nuggets.

While the Urals was one of Russia's first gold mining areas, today, there are extensive gold mining operations in many areas of the Russian Federation, particularly in the East of the country. Russia is currently the world's 3rd largest gold producer, with mining production output of 250 tonnes of gold in 2016.

3. Hand of Faith, Australia

The "Hand of Faith" is a 27.66 kgs gold nugget found by in the area of Kingower, Victoria, Australia in 1980 by a local, Kevin Hillier. This gold nugget has the distinction of being the largest gold nugget ever found using a metal detector. It contains 875 troy ounces of gold, and has dimensions of 47 cms * 20 cms * 9 cms.

The "Hand of Faith" nugget was purchased by the Golden Nugget Casino in Las Vegas, Nevada, USA, and is currently on display in the casino lobby on East Fremont Street in the old downtown center of Las Vegas.

Hand of Faith gold nugget on display in the Golden Nugget casino, Las Vegas

The Golden Nugget Casino claims on its website that the "Hand of Faith" nugget is the world's largest surviving gold nugget, but this is clearly not the case given the existence of other larger gold nuggets such as Brazil's Pepita Canaã and Russia's Great Triangle nuggets.

4. Normandy Nugget, Australia

The "Normandy Nugget” is the name given to a 25.5 kgs (820 ozs) gold nugget found is 1995 in the important gold mining centre of Kalgoorie, Western Australia. Assay analysis shows the Normandy Nugget to have a gold purity of between 80%  and 90% .

The Normandy Nugget was purchased from the finder in 2000 by Normandy Mining, which is now part of Newmont Gold Corporation, and the nugget is currently on display in the museum of the Perth Mint based on a long-term agreement with Newmont.

The "Normandy Nugget", on display at the Perth Mint, Western Australia

Western Australia is the country's most important gold mining region and has been since the late 1880s when gold was discovered in a number of areas including  Kalgoorie. Today, Kalgoorie is home to the Super-pit, one of Australia's largest open-cast gold mines.

According to the US Geological Survey, Australia is the world's second largest gold producer, with gold mine output of 270 tonnes in 2016.

5. Ironstone’s “Crown Jewel”, California

Ironstone’s “Crown Jewel” gold nugget is a single piece of crystalline leaf gold found in California in December 1992 by Sonora Mining Company. The gold was found embedded in quartz rock, however through a cleaning process involving hydrofluoric acid, most of the quartz was removed to reveal a single mass of gold weighing 44 troy pounds (16.4 kgs).

Ironstone Crown Jewel, Crystalline Leaf Gold

The Ironstone “nugget” is now on display at a heritage museum in Ironstone Vineyards in California, and is sometimes referred to as the “Kautz Crystalline Gold Leaf Specimen” in reference to John Kautz, owner of Ironstone Vineyards.

Gold and California have been interlinked since the famous northern California gold rush of the late 1840s - early 1850s. The US is still a major gold producer, and in 2016 produced an estimated 209 tonnes of gold according to US Geological Surveys (USGS), putting it in fourth place behind, Chine, Australia and Russia. Nowadays however, Nevada and Alaska are the US' two primary gold producing states, although there are still gold mining operations in California such as New Gold's Mesquite gold mine.


There are actually a number of gold nuggets from Brazil's Serra Pelada region on display in the Brazilian central bank's museum. A list of these gold nuggets can be seen here. Three of these additional gold nuggets are listed with gold content weights of 30.56 kgs, 29.89 kgs, and 28.2 kgs, respectively, which would make them larger than both the 'Hand of Faith' nugget and the 'Normandy Nugget'. However, none of these other Brazilian gold nuggets has received fame in the same way as the Pepita Canaã nugget, and the Banco Central do Brasil seems to prefer to display them anonymously. Technically these other Brazilian gold nuggets from Serra Pelada would push both the Australian nuggets and the Ironstone nugget down the list.

Two historic gold nuggets found in Victoria, Australia in the 1800s were both larger than the Brazilian Pepita Canaã nugget, and both at times still appear in "world's largest gold nugget lists". The first of these was "The Welcome" nugget found in Ballarat in 1858 during the Victoria gold rush. This gold nugget weighed approximately 69.98 kgs. However, "The Welcome" was subsequently shipped to England and melted down by the Royal Mint in 1859 to fabricate Gold Sovereign coins. Replicas of "The Welcome" can still be seen today in a number of Australian museums. 

The 2nd large historical gold nugget found in Australia was the  “Welcome Stranger” which was discovered in Victoria in 1869. Reports as to its weight vary but are consistently above 70 kgs of gold content. Within a few days of it being found, the Welcome Stranger was cut up, melted down into ingots, and shipped to the Bank of England via Melbourne. However, a replica of the Welcome Stranger nugget can still be seen today at the City Museum in Melbourne.

Infographic: The Chinese Gold Market

This Chinese Gold Market infographic guides you through the largest physical gold trading market in the world, China.

An impressive 16,000 tonnes of gold are held within China's borders.

Did you know that the Chinese wholesale demand for physical gold was an astounding 2,596 metric tonnes in 2015? This was supplied by China mining more gold than any other country in the world as well as importing more gold than any other country.

The chief architect of the Chinese gold market, the Chinese State, is continuously moving forward China's position as the dominant market player for physical gold globally.

The Shanghai Gold Exchange (SGE) is the largest market in the world for physical gold trading. It has 10 million institutional customers, 8.3 million individual customers and 55 certified gold vaults connected to it.

In this infographic you will learn more about the following features of the Chinese Gold Market:

  • Total Chinese Gold Reserves
  • Important Chinese Gold Developments
  • Trading Volumes on the Shanghai Gold Exchange (SGE)
  • Trading Volumes and Trading Lots for the Shanghai Futures Exchange (SHFE)
  • Official Chinese Gold Reserves
  • The Role of the Chinese Banks on the Chinese Gold Market
  • Chinese Gold Mining
  • Chinese Gold Supply
  • Chinese Gold Importation

You can learn more about the Chinese Gold Market at the BullionStar Gold University and in Koos Jansen's blog at BullionStar.

Infographic on the Chinese Gold Market which is the largest gold market in the world

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Golden Stockpiles – The Key to Gold as a Store of Value and Safe Haven

Much is written in the precious metals world about gold’s characteristics, as well as how the behaviour of the gold price allows gold to play the role of a unique financial asset that retains purchasing power over time, acts as a safe haven asset, diversifies risk, and provides hedging benefits.

However, much of the material written in this area skips over an explanation of how the simple, yet powerful, relationships and interactions of the gold price actually work. The appreciation of these simple characteristics and relationships facilitates a far more intuitive understanding of why holding gold - in the form of physical gold - can be so beneficial.


One of the commonly overlooked yet critical attributes of gold that allows it to play the role of a monetary asset par excellence is that physical gold has a vast above ground supply, thereby making the global gold market highly liquid.
Gold is mined to be accumulated and nearly all of the gold ever mined is still in existence in various forms, such as in the form of above ground central bank gold holdings, private investment gold hoards, gold jewellery, or within industrial, medical and scientific applications. With gold recycling services now highly advanced and widespread, this also allows gold holdings to be easily transformed between uses by refineries in a cost-effective manner.

Since nearly all the gold ever mined is still in existence, the world’s accumulated stock of gold is multiple times the annual addition to the stock, i.e. the flow of gold. For ease of illustration, assume that 186,000 tonnes of gold have been mined throughout history and that annual mine production is 3,100 tonnes of gold. This gives a total gold stock-to-flow ratio of 60 times. Depending on the gold price, global holders of gold (in all its forms) are able, and sometimes willing, to step up and participate in gold transactions.

Global gold supply is therefore affected, not just by annual gold mining output, but by the existence of this vast above-ground stock of gold. And it is this stock of gold, over the long-term, that has an influence on the gold price, and that can explain gold’s role as a store of value and as a safe haven asset, as well as explaining gold’s price correlations with other asset prices.


Store of Value and Long-Term Inflation Hedge

Over long periods of time, gold has been proven to retain its real purchasing power. Therefore, gold acts as a long-term inflation hedge and as the ultimate store of value. This may appear to be a complex magical process but the theory is quite simple.

A fiat currency whose supply expands recklessly (which is really all fiat currencies throughout history and at present) will become debased. This leads to price inflation, i.e. an increase in the price levels of goods and services expressed in that fiat currency. As goods and services prices rise, the price of gold also adjusts upwards to compensate for these price rises.

The gold price rises, because on a global basis, there always exists an exchange ratio between physical gold and all fiat currencies, and the vast worldwide above-ground stock of physical gold can always be valued in terms of fiat currencies. But unlike fiat currencies, physical gold cannot be debased. Therefore, the gold price, and the valuation of gold, simply captures and reflects the purchasing power of all fiat currencies, and acts as an inflation hedge and a stable store of value. In practice, in a free market, the gold price is actually a signal of future inflationary expectations, and so gold is known as an inflation barometer.

Is his 1977 book of the same title, a UC Berkeley professor, Roy Jastram coined this phenomenon “The Golden Constant”. Jastram analyzed price level data from 1560 to 1976 for England/UK and from 1800 to 1976 for the United States. He then measured gold’s purchasing power over these periods and found it to be constant over time. Jastram’s study was updated in 2008 by Jill Leyland and also extended to the French and German economies. Leyland’s analysis arrived at similar findings, and was especially illustrative of gold’s critical role during the hyper-inflationary period in early 1920s Germany during which paper currencies rapidly became worthless. The ‘Golden Constant’ was interpreted by both studies as being due to gold’s large but slowly growing supply, resistance to debasement, as well as the gold price's unique behaviour in times of currency depreciation and market and political stress.

The gold as a currency hedge phenomenon can also explained by the above relationships. As fiat currencies become debased or suffer confidence shocks, they depreciate in value relative to gold, because gold has a large, slowly growing and finite above ground stock and cannot be debased. This brings us to the next point.


Gold as a Safe Haven and Hedge against Extreme Risk

Physical gold is a proven and accepted safe-haven. But why is this so? The answer is because gold acts as an inflation hedge and a currency hedge and so preserves wealth. In periods of market or economic stress, gold’s price rises because there is a flight to gold since, due to historical experience, the counterparty and default risk potential of most other assets gold comes to the fore, while gold has a highly liquid market, and gold is universally perceived as having no counterparty risk and no default risk. Therefore, gold takes on the role of financial insurance against monetary crises, geopolitical risks, and systemic financial system risks. Because of its high liquidity and lack of counterparty risk, gold also becomes the high-quality collateral during periods of extreme risk.

Gold’s Price Correlation vs Other Asset Prices

Fans of modern portfolio theory will be familiar with the fact that the gold price is not highly correlated with the prices of most other financial assets. Therefore, adding gold into an investment portfolio can lower portfolio risk. Again, the question is why? The answer is quite simple.

The low, and sometimes negative, correlation between the gold price and other asset prices is due to the gold price not being as dependent on economic and business cycles as most other financial asset or commodity prices. Therefore, the gold price doesn’t react to economic cycles in the same way as most other asset prices. This differing price reaction is… you guessed it… due to the large above-ground stocks of gold which can, due to gold’s liquidity and transformability, be mobilized (by price inducement) to enter the market place irrespective of the economic cycle.

Mobilizing physical Gold

As a practical example, this ability of existing above ground stockpiles of gold to be mobilized into the market is well illustrated by the large number of 400 oz gold bars that flowed out of central bank vaults and ETFs in London during 2013-2015, were transformed by Swiss gold refineries into smaller bars, and then flowed east to Asia. The west to east movement reversed in 2016, with large amounts of gold being imported into Switzerland from locations such as Dubai, Thailand, Turkey and Hong Kong for processing back into large gold bars and then sent back to the London market. Another example is gold recycling, which has an ongoing inverse relationship with the gold price. As the price rises, supplies of gold from recycling sources rise, since the price motivates potential sellers to enter the market. It's therefore worth remembering that gold mining supply is not the full story. Some of these huge above ground stocks of physical gold can and do enter the market in various ways and at various times. In this article, we have not even touched on the controversial subject of central bank gold leasing, a potentially large and hidden supply overhang, but a subject left for future analysis.

Infographic: COMEX Gold Futures Market

This COMEX Gold Futures Market infographic guides you through the largest gold futures market in the world, COMEX.

Did you for example know that only 1 in 2500 contracts on COMEX goes to physical delivery whereas the other 2499 contracts are cash-settled? This corresponds to a delivery percentage of 0.04% of all gold contracts.

The US government claims to hold a fair bit of gold in reserves but how much is it really holding?

In this infographic you will learn more about the COMEX gold futures market considering

  • COMEX Trading Volumes
  • Fractionally Reserved Futures Trading
  • Cash-settlement of COMEX Gold Futures Contracts
  • Eligible and Registered Gold on COMEX
  • US Treasury Gold Reserves
  • Location of US Treasury Gold Reserves
  • Foreign Gold at the Federal Bank of New York
  • US Gold Mining

You can learn more about the US Gold Market at the BullionStar Gold University.

COMEX Gold Futures Market Infographic

Infographic on COMEX gold futures market, the world's largest gold futures market

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