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Can Gold Producers Survive By Promoting Jewelry?
by Lawrence Parks
Executive Director, FAME
November 30, 2001
The more gold is fabricated into jewelry, the more producers suffer:
The amount of gold fabricated into jewelry is a contrary indicator of the well being of the gold producers. More gold fabricated into jewelry
corresponds with a lower price for gold, lower profits for gold producers, and a lower market capitalization of their companies.
Consider the evidence:
Chart 1: Jewelry gold offtake for the years 1972 ?1999 vs. the price of gold (source: Tonnage gold used for jewelry
fabrication from Gold Fields Mineral Survey; Price data from Kitco).
Chart 2: Correlation between the price of gold and jewelry gold offtake for the years 1987 (the year the
World Gold Council began operation) and 1999. Data sources: jewelry fabrication from Gold Fields
Mineral Services; Gold Price data from Kitco.
While correlation does not prove causation, it is noteworthy that since 1987 jewelry offtake and the price of gold have had a consistent and
significant negative correlation. The data indicate that for more than fourteen years, whenever the price of gold decreased, jewelry offtake
increased, and vice versa. Either way, especially in light of this high negative correlation, the clear implication is that promoting gold jewelry
will not be profitable for the producers.
Mindful of this evidence, why does anyone believe that further increases in jewelry offtake will reverse a relationship that has held for almost
two decades?
Jewelry is a low-value marginal use for gold
The above data suggest that jewelry is a low-value/low-utility marginal market for gold, albeit one that can, as the price decreases, suck up an
unlimited amount of gold. It's as if Perrier Water was diverted from its primary high-value/high-utility market as drinking water to a much
lower-value/low-utility market, such as crop irrigation. It's not worth $2 a bottle, or even five cents per bottle, to water crops.
When the gold price is perceived as cheap, more of it is fabricated into jewelry. If gold demand for a higher-value use increases, then the gold
price increases, and gold demand for jewelry fabrication falls off. In other words, jewelry fabricators are akin to marginal salvagers; they use
more gold when the price decreases. By promoting gold jewelry, the producers have helped divert gold from a higher-value use to a much
lower-value use. This is confirmed by the empirical data.
Understanding the evidence
The most important insight to be gained from this data is that a decrease in jewelry offtake coincides with an increase in the price of gold. Any
increase in the price of gold means that there must have been increased demand. The use of gold to which that increased demand was put,
therefore, must have a higher value to whomever bought the gold than to those who buy gold for jewelry fabrication. Whatever the
higher-value use of gold is, that is the market the producers should concentrate on; not jewelry fabrication, which, as the data confirms, is a
lower-value use.
Whenever the public begins to question the efficacy of paper-ticket-fiat money, the price of gold increases. Gold used for jewelry fabrication has
nothing to do with increases in the price of gold.
As I have discussed elsewhere, gold is in competition with fiat money - a.k.a. "funny money," a.k.a. irredeemable paper tickets, a.k.a. tokens,
or as President Roosevelt's Secretary of the Treasury William Woodin put it in 1933, "stage money." Therein lies the paramount opportunity
for gold and the gold producers: challenge the artificial barriers to using gold-as-money.
Perhaps more essential to influencing the price of gold, however, the mere possibility of credible competition for the "dollar" will send gold
soaring. Were the media to merely ask basic questions relating to gold-as-money, such as how gold might better protect savings or end the
so-called "contagion" that has led to currency instability in the Far East and elsewhere, some people would begin to allocate a portion of their
savings to gold. Most important, the current monetary structure is unacceptable to large multi-national industrial companies, ordinary people,
and small countries all over the world. My organization, FAME, has developed intellectual ammunition to mobilize them.
Because the price of gold, and producer profits, declined despite ever-larger amounts of gold being fabricated
into jewelry, promoting gold jewelry fabrication has alienated institutional investors
Starting in the early 1990s, and taking their cue from the industry trade association, the World Gold Council (WGC), Wall Street analysts
argued that the shortfall in yearly gold production as compared to yearly gold jewelry "consumption" was bullish for gold and for gold stocks.
It was indeed a rare analyst report that did not highlight the bullish case for gold based on an expected increase in gold jewelry fabrication and
the expected gap when compared to current gold production.
When the analysts' prediction of increased gold jewelry fabrication came true and the gold price - and concomitant gold share prices - decreased,
two things happened: First, institutional investors that had bought into the gold-as-jewelry analysis dumped their gold mining shares, thereby
depressing shareholder valuations. Institutional investment managers abhor negative surprises not only because it degrades their results - and
their bonuses - but also because it makes them look incompetent.
Second, analysts who proffered the jewelry story were discredited. From then on, institutional investors declined to take their phone calls or pay
attention to them. Commissions to their houses fell off, and many (most) of these analysts left the business.
It was only natural for Wall Street analysts to rely on the WGC's market definition for gold as being primarily jewelry. (The Wall Street
analysts who cover the gold industry are mostly miners, or folks educated in mining, with accounting or business degrees. They are not heedful
about the monetary issues relating to gold.)
The market definition for gold was wrong. Today, now that an investment in gold made twenty years ago is down almost 99% relative to the
S&P, gold producers - and their shareholders - are paying the price for this misread of the primary market for gold.
Jewelry manufactures want the gold price to decrease
For jewelry manufacturers, gold is a cost of doing business. As with all business costs, jewelry manufacturers seek to minimize them. This
makes sense if one realizes that jewelry manufacturers make their profit from their value added, specifically design, workmanship, and
distribution. As the price of gold increases, there is price resistance from potential customers, and jewelry sales and profits decrease. This is
confirmed by the empirical data.
Further, as the gold price increases, jewelry manufacturers lessen their dependence on gold. Mostly, they reduce the purity of the gold they use
by mixing it with other metals or by using less gold in their jewelry designs. They accomplish this because they control the distribution
channels, and they set the fashions by advertising to the consumer. In America, for example, it is common to see 14-carat jewelry. Given these
facts, how can the producers ever expect to increase profits by aligning themselves in any way with jewelry fabricators?
Emphasizing gold-as-jewelry rather than gold-as-money imperils the producers
The gold-as-jewelry strategy has helped to reposition gold from being, as the American Federation of Labor put it in 1896, "The standard of
every great civilization" to, in the words of The Economist, "the spent fuel of an obsolete monetary system." This strategy has gone a long
way to diminishing gold's perceived utility and, with it, the fortunes of the gold producers.
Perhaps even more significant, the attempt to reposition gold away from gold-as-money to jewelry has made the producers vulnerable to the
claim of environmentalists who argue that the producers are "raping the earth" to get something out that we already have too much of and don't
really need that much of in any event. It is conceivable that the industry could be shut down based on environmental concerns. (There are
already calls, although faint, for closing the mines.)
It would be foolhardy to dismiss the environmentalists. They have already succeeded in banning whaling all over the world, and for many years
the have been successful in impeding oil drilling in the U.S., despite the immense power of the oil industry.
With the increase in gold production and official sector selling, where would the producers be had they not
promoted gold-as-jewelry?
For openers, those producers who supported the gold-as-jewelry strategy would be $800 million (the amount they spent promoting
gold-as-jewelry) plus the time value of the money, a sum exceeding $1.2 billion, to the good. That would not be an inconsequential amount on
their aggregate balance sheets. More important, had the industry not worked to reposition gold-as-jewelry, then perhaps younger people would
have been more amenable to the age-old notion of gold as money. This is vital because there is a continuing demographic shift in the
ownership of gold. Older people, who are the major owners of non-high-workmanship gold and who are mindful of the monetary issues, are
passing on.
Their heirs, not knowing about the monetary issues, but being influenced by the repositioning of gold-as-jewelry, are selling off inherited gold
to participate in other investment vehicles, such as equities. A shrinking audience of other older people is purchasing this gold. Thus, absent
gold-as-jewelry promotion, perhaps more gold would have been saved by the younger generation in anticipation of it being put to its
higher-value use, gold-as-money-and the gold price would be substantially higher.
Finally, there is good evidence that, as gold became cheaper, perhaps due to increased production and/or to official sector selling, more gold
would have been fabricated into jewelry without any involvement by the producers. Consider:
Table 1: Jewelry offtake in tonnes and corresponding yearly average price in US$ for years 1975 ? 1982. Data sources: Jewelry offtake from
Gold Fields Mineral Services; Gold Price data from Kitco www.kitco.com.
When the price of gold dropped from $161 per ounce in 1975 to $125 per ounce in 1976, a decrease of 22%, jewelry offtake increased from 523
tonnes to 935 tonnes, an increase of 79%. Similarly, when the price of gold dropped from $613 per ounce in 1980 to $460 per ounce in 1981,
a decrease of 25%, jewelry offtake increased from 513 tonnes to 780 tonnes, an increase of 52%. The important point is that in 1975 and in
1981 there were no industry-wide producer programs to promote jewelry. Yet, there were very sizable increases in jewelry offtake.
Given this evidence, along with the persistent and high negative correlation between the gold price and jewelry offtake, what is the justification
for the producers spending large amounts of money-or any money-promoting jewelry? The historical data show that the lower the gold price,
then the higher the demand for gold jewelry. Gold jewelry sells itself when the price of gold is low.
Is the diamond and platinum strategy relevant for gold?
It has been suggested that the industry explore and possibly emulate a marketing strategy similar to that for diamonds and platinum. However,
unlike gold, diamonds are not a commodity. The diamond strategy cannot be used for gold. Diamonds maintain their value primarily because of
the DeBeers Diamond Cartel. Is anyone suggesting that the gold producers form a cartel? That is not possible.
Furthermore, diamonds are more akin to works of art. Each one is different and must be examined under a jeweler's loop for imperfections. The
workmanship that goes into cutting diamonds adds significantly to their value. Also, there are no central banks with a huge stash of diamonds
threatening to dump them onto the market.
As to platinum, it is mostly an industrial metal used as a catalyst in chemical processes. Unlike gold, platinum is consumed. According to Mr.
Aran Murphy, an economist working for the Platinum Guild, there is roughly six months' production supply of platinum above ground. Gold,
on the other hand, has more than fifty years' production supply above ground.
The reason for the disparity is that a principal use of gold is to facilitate the transfer of wealth over time, i.e., to be used as money to provide
for future payment. The large above ground inventory provides stability, i.e., supply disruptions or new finds will not appreciably alter pricing
arrangements in terms of gold. The same cannot be said for platinum.
Promoting gold as an "investment"
Aside from the fact that an "investment" in gold made twenty years ago is down 99% relative to the S&P, which knocks gold off virtually
everyone's radar screen, what does an "investment" in gold mean? The concept of "investment" implies some value added. But there is no value
added possible in owning gold. Therefore, "investment" is an inappropriate term.
Purchasing gold is really a "speculation," i.e., a bet. When one allocates funds to gold, what is the nature of the speculation? For other
commodities, the bet is based on one's assessment of supply/demand fundamentals. This kind of assessment does not apply to gold for this
reason. Gold is the only commodity, with a minor exception being silver, and the amount of silver in the world is immaterial in the scheme of
things, for which there is more than a year's production supply above ground. In the case of gold, there is about a fifty-year supply above
ground. As a result, gold is relatively unaffected by disruptions in new supply. Demand, on the other hand, is potentially infinite. Thus, there
is no viable bet based on supply/demand fundamentals.
Accordingly, the only feasible bet one is making when one takes a position in gold is a bet against currencies. So, lack of "investment" in
gold really means a lack of speculation against a currency, and to foster "investment" in gold means to foster speculation against currencies.
This rationale has the added virtue of explaining the otherwise inexplicable constraint in the IMF Articles of Agreement that prohibit member
countries from linking their currencies to gold. They want to protect fiat-funny-money from its strongest competition: gold.
As an aside, this rationale is confirmed by one of the most knowledgeable observers of central banks, Mr. Robert Pringle, former
Editor-in-chief of The Banker, an industry trade publication, and the co-author, with Marjorie Deane, of The Central Banks, now the Corporate
Director of the WGC's Public Policy & Research. In a recent speech, he said:
"The IMF's Articles of Agreement need to be changed to allow countries to peg their currencies to gold. It is ridiculous that the IMF's article
(sic) allow countries to fix the value of their currencies to anything except gold - the one true reference point. Do you know the reason for this
prohibition? It is the US fear of gold as a competitor to the dollar."
Does "marketing" gold make sense?
Perhaps the producers might reconsider the notion of "marketing" gold. The industry trade association, the WGC, sees itself as a marketing
organization dedicated to developing new markets and increasing demand for gold, primarily by promoting gold jewelry. That kind of mission
statement might make sense for a manufacturer that can set the price of its product, but the producers have no control over the price of gold.
What's more, how does one "market" money, which is the only use for gold that can be profitable for the producers?
What good is increased demand at lower and lower prices? What good are new markets that are unprofitable to the producers? One is reminded of
the manufacturer who loses money on every unit sold but hopes to make up the loss by increasing his volume. There needs to be more
emphasis on what will increase the price of gold.
More credibility should be given to what are commonly, and derogatively, known as gold bugs. They are the chief promoters of gold. They
even own gold! It is relevant that those engaged to tell gold's story do so with conviction. Owning gold shows a measure of conviction about
the efficacy of one's strategy for improving the fortunes of the gold industry. As the marketing people at IBM say, you want your people to eat
their own dog food. If they don't do that, why believe that they will get anyone else to eat it?
Gold "consumption" is an illusion
Soybeans are consumed. So is oil, platinum, and, except for some silver, so is every other commodity. Excluding immaterial amounts that are
consumed by dental fillings and electrical contacts, gold is transformed. There are some who believe that gold fabricated into jewelry is
permanently off the market. Confronted with South Koreans and others throwing their jewelry into the melting pot, some say that these folks
are culturally inclined to do something that folks in the West will not do. This is not correct.
I recall in the early 1980s, when the price of gold soared to $800+, candy stores, smoke shops, and scores of others put up signs announcing
that they were buying "scrap gold," i.e., low-workmanship jewelry. I bought some of that jewelry: charms, rings, and a Waltham watch - for
less than the melt value of the gold. There were even folks selling correspondence courses on how to buy scrap gold! Further, as the WGC's
Robert Pringle points out, "the vast proportion of jewellery (sic) purchased is acquired partly - or even primarily - as an investment and store of
value," not as fashion jewelry to be saved forever. So, all things considered, most newly-produced gold is not consumed, and almost all of the
gold ever produced can be thought of as current supply.
If you don't know where you're going, stop
The course of action that the industry has taken is not producing meaningful profits for the producers. I don't know what the metaphor is in the
gold mining industry for what in the oil industry is called a "dry well." On the evidence, the attempt to reposition gold-as-jewelry is a dry well.
Consideration should be given to abandoning any connection with the jewelry industry. One could also make the case that the producers have
been snookered.
The role of hedging
One of life's most profound lessons is that a novice cannot beat an expert at his game. This is true in every sport, game and business. Every
profession has its own vocabulary, sometimes called jargon. Jargon is used for two reasons. First, there are special needs that the vernacular
doesn't fill; and second, industry participants do not want to share knowledge with laymen. Otherwise, there might be competition from others,
and profit margins would decrease. For example, doctors have their own language as do physicists, molecular biologists, and, of course,
financial people.
In the case of the banking sector, the jargon is so thick, and there is so much misinformation, bankers have completely disguised what they are
doing from laymen. As famed Establishment economist John Kenneth Galbraith observes:
"The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to
evade truth, not to reveal it." (Emphasis added)
We have a word in the English language for "disguising truth and for evading truth." It's called lying! What Professor Galbraith is saying,
albeit in a politically correct fashion, is that economists have lied about money. This means that virtually everything the last three to four
generations think they know about money, and about gold-as-money in particular, is wrong. I understand that this is so disquieting that most
will pass over Professor Galbraith's observation without taking it to heart. However, he then backs this statement up with another:
"The process by which banks create money is so simple, the mind is repelled." (Emphasis added)
Ask yourself, why should the mind be "repelled?" The answer is because there is so much cognitive dissonance that people cannot face the fact
that they have been deceived about money. This is something the producers should work to correct.
Have you heard the phrase "I ripped his face off?" That's trader talk for "I beat my customer at a trade." That's how traders think of their
customers-rubes to be taken. There is a saying in poker that if you look around the table and cannot figure out who the sucker is, you're it.
Now, when it comes to hedging or trading derivatives, which is the expert: Goldman Sachs or Cambior; or Ashanti; or Newmont; or anyone
else? The folks at Goldman Sachs don't provide a product or service in the traditional sense. Mostly, they run financial games. Does it make
sense to think that mining people are going to beat financial people at their game? Oh, I see, gold producers hire financial people too so they
can compete. Please know that the Goldman Sachs boys are world class, and not for no good reason.
How can the WGC best help the producers?
An area where the WGC has been operating that has been and could be much more useful to the producers is in helping to get rid of
laws/regulations/barriers that inhibit the free use of gold. Foremost among these are the legal tender laws, a.k.a. "forced tender" laws, in all
countries. These laws compel people to use the official fiat "funny" money of their respective countries as opposed to a much more efficient
money - gold. The legal tender laws bring Gresham's Law into play: when bad money is made legal tender, good money goes into hiding, i.e.,
it does not circulate.
Second, as Robert Pringle points out, it is of the utmost importance to get rid of the restriction that the IMF has placed in its Articles of
Agreement that prohibit member countries from linking their currencies to gold.
Conclusion:
At the end of the day, to revive the fortunes of the gold producers, it is necessary and sufficient to restore gold as the choice of free markets and
free people all over the world as money that doesn't depreciate at home or abroad; as money that is as steady as the stars; as money that is as
faithful as the tides, or, as the American Federation of Labor put it at the turn of the century: "Gold is the standard of every great civilization!"
That is the salvation of the gold mining industry: gold as the standard of every great civilization!
End Notes
1.Parks, Lawrence M.; "The Fight for Honest Monetary Weights and Measures" - Palisades Press, New Jersey, 2000; also available at
www.FAME.org.
2.See: "Closed for the Holiday: The Bank Holiday of 1933" - Federal Reserve Bank of Boston, p20.
3.Pringle, Robert, "The Official Sector: Building on the Washington Agreement" - World Gold Council 14th Annual Meeting.
4.Galbraith, John Kenneth; Money: Whence it came, where it went - Penguin Books 1975, p15.
5.Ibid., p29
Dr. Lawrence Parks is Executive Director of the Foundation for the Advancement of Monetary Education, (FAME).
He is the author of What Does Mr. Greenspan Really Think?
Box 625, FDR Station, New York, NY 10150
Phone: 212-818-1206
www.fame.org
Email: Lparks@FAME.org
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