The world gold industry is a truly unique industry. It consists of miners, refiners, traders, and hoarders. Understanding the uniqueness of the industry begins with knowing that physical gold is virtually indestructible. That is, it does not rust, corrode, or otherwise break down like other metals. The upshot of this physical quality is that every ounce of gold ever mined in the approximately seven thousand years that humans have sought gold is still around.
Identifiable aboveground gold stocks at the end of 2003 were estimated at 150,500 metric tons or 4.8 billion ounces. A majority of these stocks, 63 percent, are held in the form of fabricated products, primarily jewelry, and 35 percent is held in the form of bullion, which is gold refined to 99.99 percent (24 carat) purity. The largest part of the 52,600 tons of bullion stocks, or 29,200 tons, is held by Western central banks. The balance of bullion stocks is held by private individuals (Klapwijk et al. 2004, p. 54). A cubic foot of gold weighs approximately one-half a (short) ton (Mohide 1981); accordingly, world identifiable aboveground stocks, if brought together, would form a cube approximately 70 feet per side. It is an indication of how scarce gold is that the entire world’s supply could be stored in a modestly sized building.
Annual mine production from 1994 to 2003 ranged between 2,300 and 2,600 metric tons (74 to 84 million ounces). Because of the large aboveground stocks, annual mine supply only increases total supply by about 1.7 percent. The largest-producing countries during this period were South Africa, the United States, and Australia. The mine production of these countries declined slightly in the latter years of this period as a result of declining ore grades, higher production costs, and low gold prices. However, their production decline was compensated by rising production out of Latin America and Asia, most notably China and Indonesia.
Gold is mined at thousands of locations on all continents except Antarctica. Placer mining involves sifting and washing sands and gravels to isolate visible gold. Lode or hardrock mining involves crushing rock or soils containing gold and chemically processing the material to extract the gold. The chemical process used prior to the twentieth century was amalgamation, which involves applying mercury to the ore. The gold adheres to the mercury and can then be separated by boiling off the mercury. The amalgamation process is not only inefficient, recovering only about one-half to two-thirds of the gold, but it also does serious environmental damage if the mercury is not contained. Mercury is poisonous and does not break down in the environment. Numerous sites around the world where amalgamation is or was used remain seriously contaminated with mercury.
In the late nineteenth century, a more efficient method of processing lode ore was developed using a dilute cyanide solution to dissolve gold from crushed ore. Cyanide is also poisonous but is easier to contain and will break down in the environment over time. Recovery rates for the cyanide process range from around 70 percent for heap-leach processing (rinsing roughly crushed ore on large plastic-lined pads) to 95 percent for milling more finely ground ore in containment vessels. Depending upon the price, these higher recovery rates allow for economic recovery of gold from ores with as little as 0.01 ounces per ton of material processed—gold so fine that it can only be seen under a microscope.
Gold is mined by both “formal” and “informal” sectors. The formal sector involves sometimes large, publicly traded companies operating under the scrutiny of government environmental, financial, and other regulators. The formal sector accounts for the vast majority of world gold production. The five largest producers are Newmont Mining (United States), AngloGold (South Africa), Barrick Gold (Canada), Gold Fields Limited (South Africa), and Placer Dome (Canada). There are, however, thousands of other companies in the formal sector that explore for, mine, and trade in mining properties.
Perhaps the most controversial aspect of the gold industry is the environmental impact of gold mining and processing. Environmental regulation of the mining industry typically involves a permit process in which operators develop and get government approval of a mine and reclamation plan. These plans specify how an operator will extract and process ore, how they will store waste materials, and how they will reclaim disturbed areas. Presumably, government approval is only provided if these plans are in compliance with environmental regulations, but problematic issues include whether these regulations are adequate, whether government oversight and enforcement are adequate, and the fact that, despite the best-laid plans, accidents happen.
The informal mining sector consists of many thousands of individuals who mine gold without formal property rights or mining claims, and without the oversight of government regulators. Perhaps the most famous of the informal or “artisanal” miners are the garimpeiros of Brazil, but significant artisanal mining takes place in many other lesser-developed countries. There were an estimated eleven to thirteen million artisanal miners worldwide in 1999 (Viega and Hinton 2002). Artisanal mining involves both placer and lode mining and generally uses amalgamation for processing. The use of mercury in artisanal mining results in significant public health and environmental problems.
Artisanal miners typically sell their gold in local markets, where it is manufactured into jewelry. Operators in the formal sector produce an intermediate product called doré whose gold content will depend upon the metallic composition of the ore. Gold frequently occurs with other metals, such as silver, arsenic, and copper, so the doré must be sent to a refinery, where it will be melted down and the metals separated. Refineries on every continent except Antarctica produce various refined products ranging from bullion bars, which are 24 carat in purity, to lower-carat alloys (18, 14,10 carat, etc.) used in fabricating jewelry, electronics, dental fillings, and other items. These lower-carat products (as well as some 24-carat items) are sold for fabrication in the form of wire, beads, sheets, powder, and so on. By far the largest fabrication use of gold is jewelry. In 2003 jewelry fabrication accounted for 61 percent of total demand for gold, a total of 2,533 tons out of 4,142 tons sold on organized exchanges (Klapwijk et al. 2004, p. 7).
Labor market conditions in the gold industry vary greatly around the world. In South Africa and other less-developed countries, large mines can employ tens of thousands of laborers working deep underground, sometimes as much as 8,000 feet below the surface, under what most would consider harsh conditions. In contrast, in the United States most gold production comes from open-pit operations where working conditions are much better and far less dangerous. U.S. mine workers are required to undergo safety training before they are employed and periodic refresher courses thereafter, and state and federal governments conduct routine safety inspections. In general, hardrock mining is far safer than coal mining because the latter involves cutting into a combustible material, which results in explosions.
The degree of unionization of mine workforces also varies greatly around the world. South Africa’s mine workers are unionized, while in the United States most hardrock mine workers are not unionized. However, some categories of tradespeople who work at U.S. gold mines under contract, such as electricians, pipe fitters, and masons, tend to be unionized.
Labor market conditions in the informal sector are far worse than in the formal sector, primarily because of the widespread use of mercury amalgamation. Artisanal mining is generally unregulated and the use of mercury poses a significant health risk to the miners, to others, and to the environment.
Refiners also play an important role in the functioning of bullion markets by guaranteeing the purity of gold used in transactions. For historic reasons, the world bullion trade primarily involves countries in the Middle East and the Indian subcontinent as importers and European refiners as exporters through the London market. The demand side of the Asian bullion market is historically rooted in a variety of causes, some cultural, such as the giving of dowries in Muslim and Hindu cultures. But other factors, such as the historic political and financial instability of the region, play a role. In these cultures, bullion continues to play the traditional role of a store of wealth and a medium of exchange.
In Western cultures, the bullion trade arose from the historic monetary uses of gold. Most countries minted gold coin, which served as a medium of exchange. However, as fractional reserve banking gained acceptance in the nineteenth century, the use of bullion coin in trade diminished in favor of paper money issued by private banks that held bullion and bullion coin in reserve to back the paper money. At the same time, Western governments started issuing fiat money —paper legal tender backed by a fixed quantity of bullion—and maintained bullion reserves, creating the gold standard for domestic and international financial transactions. This system proved to be unstable, was modified several times during the twentieth century, and was essentially ended when the United States went off the gold standard in 1971 by refusing to redeem dollars with gold. In 2006 the U.S. central bank held approximately 8,600 tons of gold bullion at various locations but primarily at Fort Knox, Kentucky, and engaged in little if any bullion trading.
In spite of these U.S. actions, European central banks maintained various quantities of bullion stocks for traditional foreign exchange stabilization purposes and continued to be active traders in bullion markets. With the creation of the single European currency in 2000, a significant portion of these bullion stocks was transferred to the newly created European Central Bank, which uses bullion in a similar manner as the individual national banks did when they managed currencies. This changing role of gold in the monetary system has led most European banks to liquidate significant portions of their holdings, primarily shifting bullion stocks into private ownership in Asia.
Even with these significant changes in the gold market, it still works in a traditional and somewhat secretive way. The world price is set twice daily by a committee in London representing major bullion banks, including the Bank of England. In the morning the committee makes its a.m. fix, setting a price at which the banks are willing to buy or sell any quantity of gold. The process is repeated in the afternoon to determine the p.m. fix. Many contracts use the p.m. fix as the basis for transactions involving both doré and refined products. Prices in various local markets around the world will not vary significantly from the London price because gold bullion can be loaded on an airplane and shipped to or from London for a few pennies on the ounce. Gold is also traded actively in options and futures markets around the world, where a gold market is open twenty-two hours out of the twenty-four-hour day.
SEE ALSO Colonialism; Gold; Gold, God, and Glory; Imperialism; Industry; Mining Industry; Money; Reserves, Foreign
Klapwijk, Philip, et al. 2004. Gold. London: Gold Fields Mineral Services.
Mohide, Thomas Patrick. 1981. Gold. Toronto, Ont.: Ministry of Natural Resources.
Viega, Marcello, and Jennifer Hinton. 2002. Abandoned Artisanal Gold Mines in the Brazilian Amazon: A Legacy of Mercury Pollution. Natural Resources Forum 26 (1): 13–24.
John L. Dobra