Money or Jewelry?

July 24, 2000 – Is Gold money? Or is it jewelry? The answer to these questions about the essential nature of Gold is of fundamental importance to everyone who has an interest in Gold.

It is the nature of a product, good or service that determines its usefulness. The more useful it is, then the higher will be the demand. And demand, along with the supply, together determine the price of that product, good or service.

This entirely logical and intuitive observation is nothing more than basic economics. But many people both within as well as outside of the Gold industry have a difficult time applying this basic supply/demand equation to Gold because they simply do not understand Gold’s essential nature. It is for this reason that the attached essay by Larry Parks of the Foundation for the Advancement of Monetary Education is very important. Larry identifies the key factors to determine the price of Gold.

Looking first at the supply side of the equation, Larry clearly explains that Gold is not ‘consumed’. Most people within the mining industry believe that once Gold is fabricated into jewelry, it disappears forever and will never again have any impact on the supply/demand equation. This view is completely wrong.

Gold doesn’t disappear; it doesn’t get ‘consumed’ like crude oil and soybeans. As I have noted many times in the past, Gold is accumulated, and all of the Gold mined throughout history still exists today, except for the indeterminable amount I estimate to be around 5% that has been lost in shipwrecks, from attrition in coinage, etc. Newly mined Gold competes with this accumulated aboveground stock of Gold because all Gold is perfectly substitutable.

Larry also explains clearly why the mining companies are misguided to focus on the demand for Gold as jewelry, which has been the mining industry’s principal effort since the creation of the World Gold Council fifteen years ago. In my view, it is about time that the mining companies re-direct their effort by recognizing that their best interests are served when Gold is purchased, held and used as money.

As Larry explains, there are demands for Gold from two different uses. Some Gold is fabricated into jewelry, and used for adornment. Relatively little Gold is used in each piece of jewelry, with most of the price being the result of mark-ups for fashion and design. Thus, it is not unusual for a $1,000 piece of ‘gold’ jewelry to contain only $100 worth of Gold.

However, Gold is also fabricated into high bullion content forms and held for monetary purposes. The mark-up over the Gold content in monetary applications is relatively small, usually 7% or less for coins, small bars and high-karat jewelry and 1½% or less for bars of kilogram size (32.15 ounces) or larger.

Which of these two uses is the greatest benefit to the Gold mining industry? Which of these two applications has the highest added value?

Larry offers a descriptive analogy to explain the impact from using Gold in jewelry, which is a low-value marginal use for Gold, instead of money. “It’s”, he states “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.”

This observation highlights what I have in the past identified to be a major flaw in logic of a statement that most everyone in the Gold industry accepts without thinking. Namely, for years now in the Quarterly Demand Trends published by the World Gold Council, the so-called “demand” for Gold has been rising consistently. Yet at the same time the price of Gold has been falling. How can this be? How can quarter after quarter of record demand lead to falling prices?

Clearly, the answer to this question is that “demand” is not what we may think it to be. The reports of the WGC as well as those of Gold Fields Mineral Services use the word demand instead of fabrication, which is what I believe to be the accurate word to explain the nature of what is happening.

The WGC and GFMS describe the weight of Gold being demanded, but the reality is that they are describing only part of the total demand for Gold — the weight being fabricated principally for Gold’s use as jewelry. Totally ignored from their so-called ‘demand’ calculation is the declining demand for Gold’s use as money.

Depending on whose numbers you use, fabrication is 1500 tonnes or so greater than new mining production. Where does this 1500 tonnes come from?

This 1500 tonne deficit arising from 4000 tonnes of fabrication above 2500 tonnes of new mining production comes from the aboveground stock. Because some 80%+ of the aboveground stock is held for monetary reasons, the 1500 tonnes is being diverted from high-value to a low-value use. And we know fabrication into jewelry is a low-value use. If it wasn’t, the price of Gold would be rising with these increases in jewelry fabrication instead of falling. It’s as simple as that.

I am hopeful that Larry’s essay may prove to be a wake-up call for the Gold mining industry. I am also hopeful that the overwhelming statistical evidence Larry presents may at long last cause many within the Gold industry to finally understand that the fabrication of Gold into jewelry is rising only because the price of Gold is falling. In this sense Gold need not be marketed because Gold sells itself. Gold marketing isn’t needed, but Gold education is indeed needed because so many people have lost sight of Gold’s essential nature and high value use as money.