The Gold Jewellery Myth

Just the other day we were handed a piece from the Wall Street Journal, which you can read here. This piece brings to mind an issue we've been wondering about over the last several months: why is there such a fixation on gold-as-jewellery being the prime mover in gold's price?

The graph that the Journal provides is courtesy of HSBC -- more on that bank shortly. It seems to suggest that demand for physical gold for 2008 (estimated around 3,500 metric tonnes) breaks down roughly into 10% "other," 30% investment, and 60% jewellery. Generally, we don't dispute that the demand for physical gold is indeed mostly jewellery related; it's the most popular and easily-discovered form which the common schmoe can expect to see.

Another pundit who also espouses the 'gold is driven by jewellery' line is Jon Nadler of KITCO. His angle is more specific: he points to India. India is the largest importer and consumer of gold and gold jewellery, and in Mr. Nadler's world, that means India drives the price of gold. Hmmm...

Let's say that gold-as-jewellery was 2,000 metric tonnes in 2008, which is worth around $58,000,000,000 at $900 per troy ounce. Big number, quite intimidating.. but now let's look at the volume of 100 troy ounce contracts traded on the NYMEX on February 5th only. Crunching the numbers, there are 107,136 contracts, which equals 10,713,600 troy ounces, which represents $9,642,240,000 at $900 per ounce. In one day. This is approximately forty times one day's jewellery buying.

Looking at the actual dollar values of these two markets, we feel it is pretty self evident which is the prime mover in the price of gold. At this point -- and we're looking at you, Mr. Nadler -- we would very much like to not hear anymore twaddle about Diwali gold-buying causing the price of gold to do anything at all.

Finally, HSBC is the banker and financier for KITCO. KITCO is rumoured to have a huge naked short position in gold, and HSBC undoubtedly financed that operation. Both these organisations want to keep themselves in business... Mr. Nadler often sounds like he speaks for a company -- or companies -- on the wrong side of a losing bet.