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Gold Producers to Push Baubles While the World Burns
(October 27, 2001) The Denver Mining Investment Forum, a high-level annual confab of gold mining companies, analysts, investors, and camp followers, was held with the usual fanfare within the rather insular gold community. The forum convened in early October, when gold prices spiked after the terror attacks, but the big news was an industry initiative to sell jewelry. What is gold for, anyway? Accountants and poets disagree.
Every self-respecting product has its own support organization. For gold, it’s the World Gold Council. But the WGC, as a union of gold producers, doesn’t have the same clout as the Milk Board, the Soybean Council, or even California’s ever-powerful Raisin Advisory Board. Of course, OPEC, the granddaddy of them all, stands as the premier model of a fearsomely effective producer organization.

But gold differs from other products. The mining of gold simply adds to the 3,000 year supply of a product that it is permanent instead of perishable. In contrast, producers of perishables have a unique power in that they represent the entire supply of that product. For instance, if dairy farmers refuse to ship milk, then within days, children will go thirsty.

But if all the gold mines in the world were to suddenly shut down, there still exists in the world over 100,000 tons of their product, sitting idly in banks, mattresses, and jewelry boxes. If mines ceased their production (some 2500 tons per year), the price of gold would certainly rise. But gold would be dis-hoarded from sources all over the world to make up the shortfall in supply. Gold producers, to say the least, do not wield OPEC-strength clout.

One reason for that lack of clout is the disparity of interests among gold producers. Hedged producers see the world one way, and non-hedged mining concerns see it another. As Bob Landis in an October 15, 2001 article entitled “The Skunk at the Garden Party” (an entertaining and detailed article which we highly recommend, and can be found at the website) interestingly puts it, there are “accountants to whom gold is soybeans versus… poets to whom gold is permanent, natural money.”

In a nutshell, gold-miners are of two types: naked and covered. And the interests of the two are entirely dissimilar. The covered, or hedged, miners have already sold in the futures markets the gold they anticipate producing over the upcoming few years. For these covered miners, stabile or even falling gold prices, coupled with a low-inflation environment which keeps their labor and energy costs down, makes for the situation in which they are most profitable (and would most resemble business geniuses).

The naked miners see things differently. They are simply producing gold as inexpensively as possible and hoping the markets over the life of their mine(s) stays high enough for them to sell their gold at a profitable increment over their cost of production. If gold prices go up, and they keep their costs under control, they stand to profit immensely. Naked miners believe in their product, and stand in the cheering section with the gold bulls, hoping for higher gold prices.

A proposed “Gold Marketing Initiative” presented at the Denver conference is the idea of a “Steering Committee” in cahoots with a consulting firm (in this case, McKinsey & Co.) with the avowed purpose of stimulating consumer demand for gold. According to Landis, “The GMI is the brainchild of Randall Oliphant, CEO of Barrick Gold, who last fall organized an informal group to investigate the "long term impact of launching a significant marketing initiative to stimulate demand for gold jewelry.””

The irony of Oliphant’s role in this initiative is that his firm, Barrick, has hedged some five years worth of its gold production as of 12/31/2000, a total short position in gold of 18.5 million ounces. (Conspiracists take note: it would seem that Oliphant’s financial interests are in no way served by higher gold prices.)

So when the Gold Marketing Initiative proposes to rescue the gold mining industry with a public relations and advertising plan that will encourage the sale of gold jewelry, one has to look askance at both the viability and sincerity of such an avowed effort. By concentrating on the stimulation of jewelry demand, the GMI seems to propose a trivial goal, attainable only at great expense, and one that is totally out of sync with the world post-September 11th.

A few quibbles with the GMI:

-Where is the effort to stimulate investment demand, at exactly the time that that demand is growing?

-Where is the acknowledgment of gold’s monetary function?

-Where is the promotion of gold as a safe haven in uncertain times?

-Where is the effort to remind the public of the historical role of gold as wealth itself?

-Where is the rationale for pushing luxury goods in this post-September 11th era?

-Where does the WMI get off in proposing to spend $600 to $900 million of gold producers’ money over the next five years to spread the patently obvious message that gold is the preferred material for shiny baubles?

- And of all things, why stress jewelry use during a time in which the world’s interdependent financial structures seem most at risk, and gold seems to be the most obvious safe haven among available financial assets?

Goldbugs have griped about low gold prices for years. Conspiracists have harped on the collusion among institutions that want to keep gold prices low. Long-time investors have patiently waited through a 21-year retrenchment in gold prices back to 1979 levels.

But evidence is growing that gold prices bottomed out in 1999, and that a long-term secular change in the direction of gold prices is underway. Natural demand, without any ‘marketing initiative’ whatsoever, has exceeded new supply for years now. As long as that continues, higher gold prices are inevitable.

No thanks at all is due to the gold mining companies, who in toto hold enormous short positions in their own product, and think it a smart idea to promote gold as a luxury accessory during a wartime recession.


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