There are many stories about the discovery of gold in Confederate Gulch but the one I like is:

In 1864 shortly after gold was discovered at Last Chance Gulch (now Helena, Montana - capital of the state of Montana) a group of prospectors (former Confederate Soldiers) were prospecting along the Big Belt Mountains on the east side of the Missouri River Valley (now Broadwater County).  They were prospecting at the opening to a gulch when a band a raiding Indians chased them far up the gulch.   About six miles gulch the raiding party lost them (or got tired of the chase).  The prospectors decided to try their luck at that spot -- and found gold, a lot of gold.

Despite trying to keep the discovery quiet, the gulch named Confederate Gulch became a boom area bringing miners and prospectors from all over Montana and the United States to seek their fortunes and Diamond City was founded.  A history of Montana written by professors at Montana State University stated that at its peak Diamond City had a population of around 10,000 people(1).  The town supported restaurants, saloons (many), breweries, launderies, bakeries, etc.).

The Montana Bar (from wikipedia):

The Montana Bar was only about 2 to 3 acres (8,100 to 12,100 m2) in extent, but it was one of the truly spectacular placer gold discoveries in terms of yield per unit area. The Bar was also unique in that the gold was not located on bedrock at the bottom of the gulch, but was in a shelf of gravel located up on the side of the gulch.[6] The Montana Bar gravels were saturated with gold from the surface down to the bedrock, which was a dense blue-gray limestone. Depressions in the bedrock trapped gold, and when washed over by water, the gold in these depressions was so thick it could be seen from a distance as glowing metal. The gold-bearing gravel deposit was about 8 feet (2.4 m) deep in most places, but thickened to 30 or 40 feet (9.1 or 12.2 m) against the mountain.[6]

The few acres of the Montana Bar were freakishly rich in gold. It was claimed that the gravels of the Montana Bar were some of the richest ever washed, anywhere.[8] It was not uncommon to get $1,000 of gold from a pan of gravel and dirt, and this was at a time when gold was worth less than $20 an ounce.[8] The record pan, according to witnesses, was $1,400, or roughly seven pounds of gold in 15 pounds (two shovelfuls) of gravel. At the first clean-up of the sluice boxes on the Bar, the riffles were clogged with gold. One week's production of gold on Montana Bar netted $115,000.[6]

Huge amounts of gold were placer mined and shipped out of Confederate Gulch. The town fourished and was the County Seat Meagher County. 

However, Diamond City peaked in 1868 - a mere 4 years after the initial discovery of gold in Confederate Gulch.  By 1880 the population of Diamond City had fallen to just over 200.  The Meagher County Seat was moved to White Sulphur Springs. By 1900, the town was deserted and placer mined out of existence.

To learn more about Diamond City and Confederate Gulch:


(1): After years of extensive research, Kelly Flynn (local rancher, teacher, state legislator and author) decided that the widely stated population of 10,000 people is in accurate.  From his research, Kelly concluded the population of Diamond City peaked at about 2500 - still a very large city for Montana Territory in the 1860s.