Commodity Derivatives, 2nd Edition

CHAPTER 4Gold

4.1 THE MARKET FOR GOLD

‘Boys, by God, I believe I've found a gold mine.’

—James Marshall

Along California's Highway 49, tucked away in a beautiful valley in the Sierra Nevada foothills is the tiny town of Coloma. Running through the centre of the village is a fork of the American River where on 24 January 1848; James Marshall found some gold flakes in the streambed, sparking one of history's largest human migrations.

What are precious metals?

Arguably the most recognizable precious metals are gold and silver. Another important segment market comprises of the Platinum Group Metals (PGMs). Of the PGMs there are two actively traded metals, platinum and palladium, although the category includes other non‐traded metals such as:

• Rhodium
• Ruthenium
• Iridium
• Osmium

4.1.1 Physical Supply Chain

Gold is extracted from open pits or underground mines by blasting or digging. The economics of mining are such that deep level mines extract gold at purities of less than 10 grammes of gold per tonne of dirt (or ore), while for open pit operations the figure can be below one gramme per tonne. However, at this stage in its production it will contain several impurities and will not be in any usable form. It is first milled to release the metal before being refined and partly purified on site to produce doré gold bars. These bars will then be sent to refining operations dedicated to produce metal in a form that can be used by a variety of industries. The resulting output from the ...