the gold rush of '24

market vibes

“We are often told that the gold standard will shackle us to the United States. I will deal with that in a moment. I will tell you what it will shackle us to. It will shackle us to reality.” Churchill, the house of commons, May 1925 

Mesopotamians extracted gold from surface sources like riverbeds and alluvial deposits precisely the same way a typical 19th century “49er” did panning for gold at Sutter’s Mill. And thence in those ancient times, gold was melted and molded into standardized bars by weight for trade. The immortal shekel was approximately 8.33 grams of gold (a quarter of an ounce), and a mina was equal to 50 shekels (12.5 ounces). These weights referred specifically to gold and silver money. Since the ancients wouldn’t have Microsoft Windows for another 50 centuries, they used clay tablets to clear their trades. Apart from that, not much has changed. 

Let’s fast forward 3000 years. Early in the reign of Gaius Julius Caesar Augustus (27 BC to 14 AD, the Las Médulas gold mine opened in Spain and continued to operate for 250 years. Las Médulas was the first gold mine in history to deploy hydraulic mining techniques known as "ruina montium" or mountain destruction, to extract gold by using an army of slaves, water canals and tunnels pressurized by gravity (some over 40km long).   

Pliny the Elder, historian and Porcurator (a sort of regional CFO) of southern Gaul around 50 AD mentioned in his financial writings that over 5 million Roman pounds of gold or 1600 tons per year or 50 million ounces were extracted during his lifetime.   

According to GROK’s AI calculations: “A Roman pound, known as a "libra," was equivalent to approximately 12 ounces (incidentally equal to the Mesopotamian “mina”). From 25 BC to Pliny's Death in 79 AD gives us about 104 years of operation. Estimated Annual Output = approximately 499,484.17 troy ounces or 1606 tons which is a slight variance to the wiki estimate in the link above. Sources: Pliny's descriptions of gold mining, in "Naturalis Historia" and Healy's "Mining and Metallurgy in the Greek and Roman World." This would have put the Las Medulas Mine in the same league as Alamos Gold (135,700 toz. Q 1 production) ca 2000 years ago.   

After the Fall of Rome and throughout the dark ages there was very little gold mining in Europe. Acquisition of precious metals came from mercantile trade and wars in the middle east like the Crusades. However, there was a significant amount of gold mining in West Africa from 300 AD to 1400 AD. Regions like modern Ghana and Mali were major sources of gold and they are still actively mined often in partnership with global mining concerns.  

During the 14th century the Emperor of Mali, Mansa Musa made a pilgrimage to Mecca in 1324. His gifts to dignitaries and rulers of the cities he passed through, intended to fulfill religious obligations, were so immense his distributions caused a devaluation of gold in Cairo. Three major gold mines under his rule were said to supply half of the world's gold at that time (Sources for this are extensive according to AI searches from documented Arabic histories). That fact is not so extraordinary as you will see when we get to South Africa 5 centuries later.  

Taking a step back the Egyptians began mining gold in Nubia the southern part of the region in 3000 BC and used gold as money in non-standardized form by purity rather than weight. As east-west trade developed across Africa between 1500 and 500 BC Egyptian mines in Nubia and Kush produced significant quantities of gold. I couldn’t find any data per se but judging from what I read about Africa in general, especially Mali and South Africa, total extraction had to be hundreds of millions of ounces spanning nearly 20 centuries. From the time of Julius Caesar ca 30 BC, to about 600 AD Egypt was a province of Rome, and the Egyptians would have almost certainly adopted Rome’s hydraulic "ruina montium" techniques.  

Two years after Columbus landed on the beaches of Hispaniola, Spain and Portugal divided the globe between themselves on June 7, 1494. Immediately, expeditionary forces funded by Queen Isabella sought out and seized approximately 300 tons of gold and 300 million ounces of silver from 1500 to 1600. The importation of it directly caused a new European phenomenon known then as the "Price Revolution." Historians have documented not without disputes, how prices in Spain and Europe rose as much as 600% in the 16th century due to the influx of precious metals and a concurrent surge in economic activity.   

From 1700 to 1800 colonial acquisition of gold and gold mining became a global business. The Spanish continued to exploit the indigenous people in Lat Am, especially the Aztec and Mayan tribes. An epic gold rush known as Minas Gerais lasted nearly a century in Brazil. Ghana became known as the gold coast of Africa. By 1850, discoveries at Sutter’s Mill in America, Ballarat and Bendigo in Victoria Australia, and Bathurst in New South Wales Australia were transformative for the wealth of both nations.   

The last great gold rush in modern history (1500 AD to present) happened in 1886 in South Africa, with estimates suggesting that 33% or more of all gold ever mined from Genesis to present came from the Witwatersrand Basin near Johannesburg. This equates to approximately 2 billion ounces.  

In Alaska, which is nearly twice as large as Texas, there was a mini gold rush of sorts from 1896 to 1900 producing 1.5 mm toz. However, fewer than 40% of the prospectors survived and even fewer found any gold. Alaska still produces gold at the rate of roughly 750k toz per year but there are known deposits that could be mined with regulatory approvals.  

The Homestake Mining Company was one of the most significant gold mining companies in the United States, founded in 1877 during the Black Hills Gold Rush in South Dakota. Originally, the company was owned by George Hearst (father of William Randolph Hearst), and partners. It quickly became one of the largest gold producers in the world. The Homestake Mine, in Lead, SD, was one of the deepest and most productive gold mines in North America producing more than 40 million ounces from 1876 until 2001.   

Gold mining stocks have traded on exchanges wherever and whenever capitalist exchanges existed but the indubitable discovery of immense quantities of gold in South Africa in 1886 exploded global speculation in gold shares. Those issues remained the core of gold speculation for more than a century, not gold bullion. Buying and selling physical gold and its paper derivates is a relatively new invention.  

During the South African era the implied leverage of shares to gold bullion was commonly thought to be factored as much as 7 to 1. For example, from 1929 until January 1933, Homestake mining’s shares rallied 474% and kept going up relentlessly as the stock market crashed. They kept going up when FDR made public ownership illegal and raised the gold price from $20 to $35 in 1934. (source (@JamesGRickards "The New Case for Gold). When the London Gold pool failed in 1968, and gold rallied from $35 to $43 in 11 months fortunes were made in South African gold shares whetting the appetite for Americans to freely own gold when it was legalized it in 1975. For the rest of the 20th century gold mining shares flourished and none more so than Peter Munk’s America Barrick.  

By 1985 futures markets changed the trading world. Banks were active participants on global futures exchanges, and it was inevitable that someone would connect the dots to monetize proven gold reserves in the ground. Munk did it sparking a stampede into project financing.

Essentially, the mine collateralized gold in the ground with a swap for spot and sold it with credit embedded in a forward sale to attrite with production for the term of loan. The dollar interest rate curve was steep because inflation fears were fresh from the 70s and forward sales were legitimately co mingled at prices vastly higher than sales of spot production. Boom! Earnings went through the roof and other mines followed. Wall Street made a fortune in credit, spot dealing transactions, hedging options, and rolls. However, the supply of spot gold and paper went up and gold prices died for 15 years.  

In time, financing the mining sector became an habitual, flabby and poorly monitored business. In 1999 Ashanti (Ghana), first listed on the LSE in 1900, blew up a spectacular default and gold rallied from $250 to $1000 begininng an 8 year period of short commercial covering of millions of ounces of forward sales at bloodletting losses.  

In the chart below, BBG’s percent-appreciation calculator shows GDX rising 22% between October 2007 and October 2011 and spot gold rising 122%%. It was devatating for miners and their shareholders. After that, an exodus of AUM by angry shareholders left the mine’s reputations in tatters and balance sheets in danger. Some diluted without warning to survive which made things even worse. By 2012 every gold mining company in the world had publicly foresworn project finance forever.  

So far, the sector has been true to their oath. And the sector is now pristinely candid about reporting fair and accurate data and guidance. However, the markets have long memories.  Have gold miners been forgiven? Let’s turn the page on the past and look at the miners today.