An extensive deposit of agate occurs in Pedro González Island in the Gulf of Panama. Previous archaeological research showed that the agate was exploited between 6200 and 5600 cal BP to make stone tools found at the oldest known Preceramic human settlement in the Pearl Island archipelago. We constrain here the origin and geological context of the agate through a geological and geochemical study of the island. We show that it includes primary volcanic breccias, lavas, and tuffaceous marine deposits with sedimentary conglomerates and debris flow deposits, which we define as the Pedro González Formation. This formation records submarine to subaerial volcanic activity along an island arc during the Oligo-Miocene, confirming previous regional models that favour progressive emergence of the isthmus in the early Miocene. The igneous rocks have an extreme tholeiitic character that is interpreted to reflect magmatic cessation in eastern Panama during the early Miocene. The agate is hosted in andesitic lavas in unusually large amygdales up to 20–40 cm in diameter, as well as small amygdales (0.1–1.0 cm) in a bimodal distribution, and in veins. The large size of the agates made them suitable for tool manufacture. Field evidence suggests that the formation of large amygdales resulted from subaqueous lava–sediment interaction, in which water released from unconsolidated tuffaceous deposits at the base of lava flows rose through the lavas, coalesced, and accumulated below the chilled lava top, with subsequent hydrothermal mineralization. These amygdales could therefore be regarded as an unusual result of combined peperitic and hydrothermal processes.