Learning from the California gold rush

Selling shovels instead of trying to find gold is an old piece of wisdom about booms and bubbles

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It’s a cliché about booms and bubbles that you can probably more dependably make money from selling shovels than actually finding gold. I’ve used this line myself, but only recently, when doing research for a new module I now teach on financial crises, did I discover the historic basis of this argument.

Gold was discovered in California in January 1848, almost exactly at the time of the treaty ending the US-Mexican war that led to what is now the state of California passing into US ownership. Neither country knew about the gold, but one can imagine the dismay in Mexico City when the news came out. (The term “Latin America” dates from this period, as the countries south of the US saw a common enemy to the north.)

What became the gold rush of 1849-50 led to around 300,000 people pouring into California, not just from the rest of the United States but from around the world. At this time it was a fearsome journey to reach California and many of the “49ers”, as they became known, perished on the way (the name lives on with the famous San Francisco football team).

One of the first men to hear of the gold discovery was Sam Brannan, a Mormon who had set up a store in California in 1947. On learning that this was a major gold find, he bought up every shovel and pick he could find, opened a second store, and travelled to San Francisco to actively promote the gold rush.

He became, by reputation, the richest man in California, without every prospecting for gold himself. But a combination of bad investments, a ruinous divorce and perhaps some bad luck, led him to die poor, his last job being travelling door to door to sell pencils. Whether you see a morality tale in this is, I suppose, a matter of perspective.

The reason that Brannan’s case became a source of timeless wisdom, or at least a point worth thinking about, is that in any boom or bubble, chasing the direct source of profits (gold, real estate, AI etc) is inevitably risky. Indirect profits from supplying those doing the chasing may be either less risky or at least face less competition. Many 49ers did indeed strike it rich, but the majority ended up working for those that did.

In today’s AI boom, which of course may or may not prove to be a bubble, there are companies pouring money into the hunt for generalised AI, or at least a commercially viable AI product, which counts as the “gold”. Since AI largely runs on data centres built of computer chips, there are two potential sellers of “shovels”: Nvidia is the main seller of chips, though it faces competition; and in the US anybody who can come up with a dependable supply of electricity can sell it to the highest bidder. So we have seen Nvidia become the world’s most valuable company (as of January 2026), and the shares of previously sleepy electric utilities surge on the new power demand outlook.

Sam Brannan’s example doesn’t mean that searching for gold is necessarily a bad idea, just that it’s worth thinking laterally about the indirect effects of a major investment surge, or indeed any news. I think I recall in Michael Lewis’ Liars Poker that a trader, on hearing the news of the Chernobyl nuclear power disaster in what is now Ukraine, in 1986, immediately started buying potatoes, on the argument that contamination of land by radiation would push up the price of food. I don’t know if he actually made money, but it seems like a sensible, if slightly cold-hearted, response.

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Further listening: BBC Short history of…The California Gold Rush

Best book on bubbles: William Quinn and John D. Turner Boom and Bust: A Global History of Financial Bubbles; YouTube interview with authors here

Neil Young After the Gold Rush (nothing to do with the Californian gold rush, uses it as a metaphor for environmental damage, but a beautiful song)