A Paradigm Shift for Gold
By George J. Paulos
On the rocky planet Earth, billions of years of volcanic and alluvial processes separated the different heavy elements and accumulated them into concentrated deposits. Element 79 is unusual in that it does not easily form compounds and almost always remains in its metallic form. Human populations all around the planet easily discovered flakes of the shiny metal tumbling down streams, scattered in rocky veins, and conveniently condensed into heavy nuggets. Mesmerized by its beauty, humans eagerly collected the element. Finding it soft and easily workable, they fashioned it into a myriad of designs. Although widely distributed around the Earth, Element 79 is quite rare as a result of the quantum mechanics of its formation. Humans appreciated the rarity of the substance and learned to treasure it as something of great value. Almost every culture that had exposure to the element placed special, even spiritual, significance on the shiny yellow metal. Throughout human history, Element 79 earned many names. The common English designation is Gold.
Humans found gold to be a strikingly beautiful substance that begged to be collected and treasured. But its softness and rarity also limited its usefulness as a metal. It was a poor choice for tools or utensils. Because of its allure, people started trading it for goods and services and it became one of the first universal mediums of exchange, a form of money. Gold was particularly suited for this role because of its rarity and its durability. Cultures everywhere acknowledged its intrinsic value. Gold was aggressively mined, minted, smithed, and accumulated over many millennia. Its importance as a monetary commodity grew to the point that people often killed each other for possession of the metal.
Ultimately most of the gold fell into the hands of kings and governments. Fearing loss of power if the public hoarded gold, many leaders decided to hold their gold in vaults and distribute certificates as gold substitutes for monetary exchange. People eventually accepted the certificates because they were much more convenient than heavy gold coins for most transactions. Over time, the paper certificates became synonymous with money and lost their official link with gold. Gold faded from the public consciousness as a monetary metal. Economies grew and technology advanced to the point that even the paper money certificates were unneeded as electronic payments systems allowed instant transactions at the touch of a button.
For most ordinary people, gold became strictly an ornamental metal. Rings, necklaces, and gold-plated accessories were all the gold possessions that the average person typically held. These objects contained very small amounts of gold and the gold content added little to their market value. A few industrial uses for the metal such as electronics and optics became prevalent but consumed an inconsequential fraction of the gold supply. Despite the lack of public consumption, Gold continued to be mined and refined, most of it destined for storage.
Although gold as a monetary metal has almost disappeared from common usage, its deep cultural heritage has remained as a metaphor for all that is good and valuable. The gold designation has been applied to credit cards, hit songs, computer software, and a thousand other product offerings to signify status and value. Gold has played a central role in many of the fundamental myths of society. From the fable of Midas to the treasures of El Dorado, the legend of gold is deeply ingrained in human consciousness.
This state of affairs is a curious contradiction. People everywhere acknowledge the intrinsic value of gold yet few endeavor to seek out and acquire the metal. Many historical circumstances can be identified that have led to the current situation. In the United States, four decades of gold prohibition destroyed the gold distribution network by forcibly confiscating monetary gold from the citizenry. Although the prohibition was repealed in the early 1970s, the legacy from that period remains to this day. Americans rarely consider gold ownership as a component of an investment portfolio, overwhelmingly preferring paper assets. Those who do seek out the precious metal find it difficult to acquire in bullion form. In other parts of the world, crushing poverty never allowed the average person to accumulate significant quantities of gold, or anything else for that matter. In either case, gold is not easily available nor is it widely promoted for consumption.
As a result of public apathy towards monetary or investment gold, the gold producing industry has become dependent on a small cartel of gold brokers who, along with the collusion of governments, control the price and supply of the metal for their own interests. A vast supply of gold is in the possession of governments and bullion banks, hidden deep in giant vaults and away from public view. Governments of the world have never abandoned the power of gold. International monetary agreements always include a role for gold. The latest agreement called the Smithsonian Accord specified that governments would use gold to purchase each other’s currencies and debt obligations to stabilize a free-floating currency regime. Despite frequent proclamations to the contrary, gold is still a fundamental component of international finance.
The dynamics of the modern gold market has left the gold producing industry in a serious dilemma. Declining gold prices have made many mines uneconomic. Others provide only marginal return on investment to their owners. Like all other commodity producers, gold miners are unable to directly influence the selling price of their product and concentrate on reducing costs to extract profits. The low price of gold has created an almost cannibalistic environment in the industry. Gold investors find themselves secretly hoping for international chaos or financial collapse to raise the gold price. Large gold producers callously exploit the industry malaise by purchasing troubled mines at fire-sale prices. Gold industry participants desperately need a price increase.
Throughout history, gold’s rarity and nobility discouraged frivolous or wasteful use. The vast majority of gold ever mined is still in existence today. Gold is not consumed to any significant extent. Almost all is produced for accumulation. This means that the world gold supply is always growing. Currently gold supply growth is about 2% per year. Curiously, this is about the same growth rate as the population such that the amount of gold per capita is approximately constant. This is a very unusual characteristic for a commodity. This characteristic means that any increase in per-capita demand for gold will result in a commensurate increase in real price, all other things being equal.
The only way to raise the price of gold is to increase demand since the supply characteristics of the metal are pretty much predetermined. One thing that will raise demand is an increasing price. An increasing price will capture the interest of investors who will further increase demand and bid the price ever higher. Of course, demand has to increase before the price rises. This kind of circular reasoning is common and has placed the industry inside a conceptual box. It is abundantly clear that the traditional primary sources of demand, investment and jewelry, cannot be relied on for significant price appreciation. Jewelry demand is too small and investment demand too fickle.
A new market for gold is required to create fresh demand. This demand cannot be borne out of need, or else the demand would already be in place. This new demand must be manufactured. Many industries have been created out of nothing by building demand for their products using modern marketing. Massive amounts of money have been made by promoting seemingly ludicrous products. Consumers with money are often enticed to purchase items for no other reason than impulse. Others have become compulsive in their need to acquire things like collectibles and antiques. None of this consumption occurs in a vacuum. Significant resources are required to market these products and maintain an effective distribution system for bringing products to the consumer.
Gold products may be marketed in the same way. But it would require a paradigm shift in attitudes about gold to succeed. The perspective of gold as primarily an investment commodity is destructive to its value. Regardless of very long-term trends, investment markets are fickle and unpredictable, leading to periodic bubbles and collapses. Investment gold is valued only by weight, its form and function immaterial to the owner. As a result, investment gold is sentenced to life in a vault, its beauty and allure hidden from view. This strips gold of its emotional appeal as it fades from public consciousness in real form, remaining only as a legend. Gold in storage is nothing more than the inert Element 79, unused, unloved, ignored.
Gold needs to be seen and used. As such, gold needs form and function to be once again coveted by the masses. This implies that gold must become a product, something to manufacture and market to mass consumers. The exact form of these products is immaterial to the disposition of the metal. They may be collectibles, commemoratives, utensils, wearables, or any other object that creative minds can imagine. These forms give the product added value to the consumer. Placing intangibles into the product can create additional value. Brand, fashion, guarantees, and exclusivity can all contribute to the value of any consumer product. It may seem presumptuous to assume that consumers will pay hundreds or thousands of dollars for items containing a few ounces of gold, but witness the prices in the collectibles and antiques markets. The consumer culture seems to give rise to all sorts of objectively irrational overpricing. Yet this tendency is reliable enough to support entire industries. There is no reason to doubt that properly marketed gold products would follow the same pattern. To those people under the spell of gold, creating consumer baubles out of the precious metal seems frivolous, maybe even vulgar. But it is just this kind of frivolous use that can increase the metal’s real value.
A consumer’s motivation to purchase gold products may be frivolous, but the consequences of mass consumption are profound. Widespread use of gold would guarantee a permanent increase in price. Increasing gold price is threatening to governments because it depreciates their sovereign currencies. In response, central banks are likely to increase sales of government gold to suppress price. As the population hoards and governments dishoards, a quiet shift in economic power would result. Millions of gold owners would become stealthily independent of the governmental monetary powers. Those fortunate enough to own gold would be at least partially insured against the desperate panic of a potential monetary collapse. With fungible assets in the form of gold, they could purchase needed items with the metallic money of last resort. Even without such a disaster, a steadily rising price would validate even the most overpriced gold items as prudent purchases. Producers who peddle value-added gold merchandise can have a clear conscience knowing that their customers could ultimately benefit in unforeseen ways.
Could a journey through the digestive system of the consumer culture return value to the precious metal? Or would it decline to the status a mere consumer bauble? Perhaps the real paradigm shift would be a future that is much like the distant past, with gold being a common part of life where people feel comforted and empowered by their possession of the metal. Throughout history the emotional connection between humans and Element 79 has never been severed. It is part substance and part legend, representing the best and worst in human behavior. The permanence of gold is in stark contrast to the transience of life. Within its yellow radiance we capture a glimpse of immortality. This is where the real value of gold resides.
George J. Paulos
georgepaulos@mn.mediaone.net
December 17, 2001
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