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									Session Four: Debate The Importance of Jewellery vs. Investment to the Gold Market
Andy Smith Analyst, Bracteà Asset Management (The Ridgefield Capital Group)
“Happiness: an agreeable sensation arising from contemplating the misery of another.” Ambrose Bierce, ‘The Devil’s Dictionary’, 1911 It goes without saying that my past year in a group of commodities and precious metals investment funds will in no way bias my remarks. Investors can be short too, or length-challenged as we must now say. Nevertheless, I’m required to preface my comments with the customary rigorous disclaimer, vetted by leading international auditors not yet serving prison time.

IMPORTANT:
This presentation is intended for the use of individual delegates and may contain information that is confidential, plain wrong or unsuitable for overly sensitive persons with low selfesteem, no sense of humour or irrational religious beliefs. If you are not the intended recipient, any dissemination, distribution or copying is not authorised and constitutes an irritating social faux pas. Those of you with an overwhelming fear of the unknown will be gratified to learn that there is no hidden message revealed by reading this warning backwards. However, by pouring a complete circle of salt around yourself you can ensure that no harm befalls you and your pets.

Neither is our fund’s mission statement ‘rape and pillage’; we don’t do rape. Our objective is closer to that of Louis Napoleon. His life-goal, according to our keynote speaker, Professor Niall Ferguson (in The House of Rothschild), was to amass “plenty of money so that he can roger comfortably and get drunk when he likes.” But let’s assume for today’s purposes that funds know something about ‘prosperity’ or ‘enrichment’ as it’s now known. Rather less than Mahmoud here, of course. Which is possibly why we have just about four minutes to make our case. He’s currently faced with what’s called (if not quite spelt) a ‘carat and stick’ alternative. But he’s said he would not exchange his ‘gold’ (Iran’s nuclear enrichment plans) for ‘walnuts’ (western trinkets). Could there be a more glowing and topical endorsement of investment over consumerism? He’s not the first with such vision, as Kelvin will remember. In October 2001 the CEO of AngloGold, Bobby Godsell, alluded to the kind of pickle the Mahmouds of this world might foment. In his candour, Mr Godsell implicitly acknowledged the primacy of gold investment over jewellery. “I’ve never been a
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….. now, what does this one here do?

Debate: The Importance of Jewellery vs. Investment to the Gold Market

Andy Smith

fan of the disaster scenario by the way”, Mr Godsell admitted, “because it always seemed to me that the proposition was that the good news is that the gold price is at $600, and the bad news is that somebody has just nuked Islamabad.” Well, apart from a few bucks per oz and a few miles…here we are. ‘Enjoying’ in the gold market the bittersweet nature of Bierce’s ‘happiness’. Understandably, Mr Godsell was “not sure that’s the kind world I want to live in”. But we have to live with and in it. Fear is the new black. It’s fashionable to be frightened. Since when was the gold industry against being fashionable? And isn’t fear the more enduring fashion than the ‘hope’ that drives jewellery demand? It was ever thus: in 1848, as Professor Ferguson recorded, one commentator put his finger on the button of the Rothschilds’ success: “in Brazil there is plague, and war in Italy, America is falling to pieces – everything is going splendidly.” Which points up the second logical argument for recognising the dominance of investment over jewellery. Everyone by now is surely a member of the Church of the Commodity Supercycle, in which eternal price levitation is written in stone, copper, soyabeans, rhodium, even gold. So it’s almost heresy to suggest price downside. But what type of demand does the gold market think will keep price erect? A clue, in the shape of this outstanding exhibit from the Shanghai sex museum: the fascination with hard assets is now international, if, in some cases, behind closed doors and still ignored by some. If you are bullish on price, you must believe that investment will have to keep it up. Jewellery is not so much for the birds, as for the bears. But don’t take my word for it. Greater organs than mine, and probably yours, are pretty clear about the pecking order of investment and jewellery for the market. Let’s examine what the ‘Golden Consonant’, the LBMAGFMSWGC, has to say:

Jewellery is for the birds/bears
Jewellery consumption, identified investment cumulative change since 2000 [tonnes] 500

Cumulative 'identified' investment

600

0

500 gold price $/oz

-500

400

gold price
-1000 300

Cumulative jewellery demand
-1500 2000 2001 2002 2003 2004 2005 200 2006**

Source: derived from GFMS 'Gold Survey 2006', World Gold Council 'Gold Demand Trends' May 2006 [** 2006 is annualised Q1 data, from latter]

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LBMA: in the Montreux conference ranking, investment is Session 2 – the first after the compulsory welcome. Fabrication occupies the slot, or crevice, before closing, Day 2. Otherwise known as ‘purgatory’. Gold Fields Mineral Services: as Paul will acknowledge, the 2006 Gold Survey continues a trend begun in 1999, when they gained independence and so greater freedom to choose, by placing the
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Debate: The Importance of Jewellery vs. Investment to the Gold Market

Andy Smith

investment chapter third - the first substantive chapter after ‘summary’ and ‘gold prices’. Where’s ‘fabrication’? Chapter 7. Last. Ranked just above an appendix.
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World Gold Council: provide a 24-carat investment endorsement in their last Demand Trends. “we expect demand to recover…driven…by the increased desirability…that the price rise brings to the metal.” And in the US: “gold jewellery sales increase when gold is in the news.” And why is it in the news? Investment! Investment is important for the prosperity of …jewellery!

This is excuse enough to suggest the third major reason investment is the key to market prosperity – jewellery IS investment. I’ll develop this in a moment, but it seems to me that we can no more separate jewellery from investment than we can …

A budgerigar

President of the European Central Bank

Mr Burns

Giscard d’Estaing

Pinocchio

UK Prime Minister

Small tree-dwelling creature

The England Captain

… you never see them in the same place at the same time, do you? QED. The case that jewellery IS investment is part of the argument that, since gold is, uniquely, ‘indestructible’, most of what we mistakenly call ‘demand’ and ‘supply’ should properly be redefined as ‘investment’ and ‘dis-investment’. After all, on the indestructible Titanic, the deckchairs were famously re-arranged, not supplied or consumed. If the market wants to preserve – for prosperity’s and posterity’s sake – gold’s unique brand, it’s time to throw traditional ‘demand/supply’ overboard. With one eye on the icebergs, I want to suggest that we are all (mostly) investors or disinvestors now.

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Debate: The Importance of Jewellery vs. Investment to the Gold Market

Andy Smith

S & D bars understanding
Supply
mine output scrap
official sales

Invest in a better brand
Dis-investment
mine output less private official dis-invt. dis-invt. electrical/industrial

Demand
jewellery mine de-hedging 'identified' electrical/ implied investment industrial investment 0 1,000 2,000 3,000 4,000 5,000 tonnes

Investment
jewellery investment mine investment 'identified' implied investment investment 3,000 4,000 5,000 tonnes

0

1,000

2,000

Source: derived from GFMS

Source: derived from GFMS

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Disinvestment, unarguably, includes sales by central banks (from a 30,000+ tonne long position in the vault) and private scrap sales (from a 100,000+ tonne long position in the ear, nose and other places displayed in the Shanghai sex museum). Investment, unarguably, includes GFMS’s ‘implied’ investment, ‘identified’ investment (coins, bars, ETFs etc), plus, more arguably, mine de-hedging (adding to a long gold position underground which dwarfs that in central bank holes), plus… jewellery. All of it.

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In this brave new order newly mined output (net of gold more or less used up in electrical/industrial demand) is a kind of condom on the market, keeping excess investment in check. But jewellery indistinguishable from investment? Pull the Shanghai sex museum exhibit? In fact, this argument has two prongs. First, we all agree, and Virtual Metals’ estimates confirm, that at least half of jewellery, the ‘upper class’ pure-gold half, can readily be classed as ‘investment-jewellery’. I’d argue further that every carat of jewellery deserves the hyphen. For 9 carat gold is as ‘forever’ an investment as a diamond – try selling either back. Second, both jewellery (in all its guises) and investment appeal to the same human frailty - personal vanity. Jewellery buyers are willing to pay a large mark up for some tiny (as a percent of bodyweight) accessory they think will turn them from a frog into a princess. Investors (at least in paper gold) are willing to pay contango (the premium of the future over the spot price) for a token gold holding (as a percent of their portfolio) to make them feel better, or look better to their peers. If/when Mr Ahmadinejad’s finger touches the button, will your first question really be: ‘Does my portfolio look good in this?’ No surprise that both sides of this investment coin use variations on the same marketing pitch. Heads: ‘jewellery’ hopes a billion Chinese will buy X grams each. Tails: ‘investment’ dreams that just 0.000003637 (approx.) of the $ trillions of investible money will stick to gold. Both sides are equally blinded by big numbers. So, logically, each should embrace the other in the dark. Finally, every business needs role models, thinking outside the (jewellery) box, if it is to prosper. Over four hundred years ago, Francis Bacon correctly diagnosed that “the mind grows languid that has no excesses.” The secret of gold’s success, its prosperity, surely lies in its excess?

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Debate: The Importance of Jewellery vs. Investment to the Gold Market

Andy Smith

Ask yourself, what’s the more inspirational: • Being ‘investment driven’ or watching jewellery take a ‘back seat’ in what the proposers of this motion will tell you is a longhorn bull market? • Embracing the Viagra of volatility or the Tylenol of tonnage, the deadening, almost Soviet fixation with volume, as if we’re in the tractor business? • Bed rocks or the bedrock of jewellery? • Evangelical fervour or even-handed pragmatism? (Gallup, by the way, notes fast-growing, newer age religion in the US “generates worship participation” and comes with “highly involving, if not entertaining services”. Hallelujah!) Every religion needs good sects.

Whatever turns you on

of volatility

of tonnage

Bed rocks
$8000, man

Bedrock
On the one hand…

Comatose Rowan

Purely in the interests of fair play (no mystery why the English almost never win World Cups) let me finish by addressing two of what I expect will be the most popular objections to the notion of investment as the secret of success. First, the accusation that ‘you can’t wear an investment’. Patently false, and an insult to jewellery makers and the structurers of investment products alike.

COMEX Eye Share, by Tiffany

Second, the heretical doubt that this ‘can’t last forever’. How are investors going to get out of underwater positions? Hedging is never a bad idea – but we had that debate last year. A more universally acceptable answer surely lies, with most hopes (and the best museums), in China. Where they’re busy making lifebelts, or manufacturing inflation, depending on your point of view. ■

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