The Gold Jewelry Standard — A Continuous System from Ancient Times to Present Day
Last fall, Josh Crumb and I spent three weeks in China and India. We were invited as guests to each country by leading families involved in the gold industry. In India, by a family who controls the leading gold bullion trading business. In China, by a family that owns Chow Tai Fook, the largest gold jewelry business in that country.
It was during this trip that we spent an extensive amount of time studying the local gold jewelry markets. We visited factories, markets, dealers, manufacturers, and financial firms involved in gold jewelry finance.
On the third day it began to dawn on us that this “jewelry “ was not what we were used to in the West. Our first observation was the jewelry seemed to be made of 24K pure (99.99%) or 22K (92%) gold. In the West, I had never seen a jeweller sell an item with purity in excess of 18K (75%).
This whole “jewelry ecosystem” in the East appeared to be a vehicle for pure gold ownership with a sophisticated ﬁnancial economy around it. This economy included: ﬁnancing, lending, and layaway firms servicing an estimated $2 trillion in jewelry owned by 2 billion citizens in China and India. One $4 billion publicly listed entity in India (Muhtoot Finance) operates a business which extends loans against jewelry through a network of 4,000 branches. With a loan book totalling 250 tonnes of gold jewelry ($10 billion), Muhtoot would rank as one of the larger regional financial institutions in the US.
Even more impressive was the the integrity of this decentralized gold jewelry economy. The system had evolved over thousands of years and is therefore far reaching. No matter where we traveled or which jeweler, manufacturer, or lender we visited, this pure gold “jewelry” was always bought or sold using a simple formula: (Purity of Gold x Weight of Gold x Daily Gold Value) + 7–10% markup for design. To my personal amusement, this transparent process remained the same irrespective of whether the purchaser was rich, poor, old or young, all of them having a clear understanding that they were not purchasing jewelry but acquiring gold.
It is important to note that citizens in these countries cannot simply buy US Dollars or trade into stronger currencies. Moreover, the unequivocal performance of gold vs. Indian Rupee or Chinese Renminbi shows, Indian and Chinese citizens buying gold for family dowry (as their ancestors have done for thousands of years) have preserved their wealth better than most developed-world hedge funds and middle-class savers.
It was during this trip that Josh and I had an epiphany: Pure gold jewelry, as practiced in the East, was the only true gold standard.
Jewelry in the East today remains consistent with the ancient tradition dating back 10,000 years: Jewelry as a vehicle for gold ownership, a store of enduring value that enables humans to measure, store, and transport an earned surplus of savings generated through cooperation with fellow man.
History of Jewelry — The Only True Gold Standard
Gold (Au) has been desired as a rare element due to its physical attributes; it’s exceedingly rare, yet lasts forever. In a cooperative system, an intermediate commodity is required to facilitate exchanges of various goods, services, and skills, given that barter becomes inefficient at scale and over wide geographies. Gold ascends as the premier commodity money due to its superior physical properties, never decaying while all goods and services suffer from diminishing utility over the immutable arrow of time.
To fully understand gold’s uniqueness, one must be proficient in at least four critical subjects: Physics, Economics, Geology, and Anthropology. This eclectic mix of disciplines may seem odd at first, but the ancient man was well-versed in each. It is only in the modern age that a professor of economics will lack sufficient knowledge of geology, where he or she would be reminded of the relative finite abundance of elements in the earth and understand that for each gram of gold we extract from the planet, we could yield 5,000 grams of copper using the same time, energy, and labour.
These facts are important as most academics’ “conventional” wisdom in the modern era suffers from cognitive and causal delusion when it comes to gold; they believe its value is not intrinsic and is instead subjectively ascribed by the whims of the market. In their quest to nullify gold’s value they even dare point to jewelry as an example of how gold’s adornment exemplifies subjective expression and therefore subjective value. In reality, the empirical study of jewelry markets helps elucidate and reconcile gold’s intrinsic value. It is not jewelry that’s being adorned for subjective expression; gold is being acquired as a measure and store of enduring value.
The jewelry industry is the only true gold standard — one continual and causal chain of transactions linking ancient Mesopotamia to the present. Incorporating this knowledge, we can view various government-mandated gold standards where the currency was backed by physical gold (either fractionally as in the case of the U.S. Gold Standard, or 100% as was the case in various other attempts through history) as attempting to compete with the hegemony of the global gold jewelry standard.
Expanding on this thought: Gold was not monetized and demonetized throughout history because governments said so; gold was always money in the form of jewelry for most of the population. It was governments that would, owing to prosperity and fiscal prudence, back their currencies by gold in a demonstration of strength — thereby competing with and attracting capital from the gold jewelry standard.
This ancient tradition continues to thrive in the East and most emerging countries today just as it was 10,000 years ago. In countries such as: Brazil, Russia, India, China, Malaysia, Indonesia, Philippines, Thailand, Vietnam, Pakistan, UAE, Singapore, Saudi Arabia, etc., the average jewelry item is sold in a manner that ascribes 90% of the purchase price to the pure gold value and just 10% of the purchase price to the subjective value attributed to gems or design. In other words, when you purchase a ring for 1,000 Indian Rupee, that ring has 900 Rupee worth of gold value when you walk out the door. That 900 Rupee is a savings weight of gold that can be passed down, sold, or borrowed against in the future.
In terms of importance, jewelry in these cultures is desired once attaining sufﬁcient food, shelter, and clothing and is viewed as a bridge to eventual land or property acquisition.
The story is different in the West in countries such as the U.S., France, Australia, Spain, Italy, and the U.K., where the last 50 years have seen a marked decline in the relationship between the deﬁnition of jewelry in general — and “Fine Jewelry” specifically — and the actual gold content as a percentage of purchase price.
Today, the average jewelry item in the West has 90% subjective value attributed to gems and design and merely 10% pure gold value, the result of which is that most Western jewelry becomes worthless almost immediately after purchase. Taking that same example: A western jewelry buyer will spend $1,000 buying a ring that has at best $100 intrinsic gold value.
The Jewelry Industry — A Story of East vs. West
Every year, $310 billion of jewelry is bought by roughly 1 billion households and the market has been growing by about 5% per year globally. This equates to roughly $1 million per minute. To place the scale of this market in perspective, the entire internet advertising market, where Google, Facebook, Twitter and Tencent derive revenue, is half the size of the jewelry market at $170 billion (annually).
Within the $310 billion jewelry market, there is roughly $130 billion of pure gold (2,600 tonnes); however, this split isn’t equal. To understand what’s happening, we must divide the $310 billion of jewelry sold into two markets: East vs. West.
· In the West, $180 billion of jewelry is bought every year with gold value of just $13 billion; therefore, most jewelry in the west loses 90% of its value upon purchase and has little resale value.
· In the East, $130 billion of jewelry is bought every year with gold value of $117 billion. This gold subsequently serves as a store of value appreciating against currency and non-storable commodities. It also powers a “jewelry economy” that beneﬁts billions of people around the world with a stable store of value for savings, collateral for borrowing, and value exchange across geographies.
Consumers in the West are getting the short end of the stick, a terrible deal indeed. This can be reconciled by simply analyzing historic jewelry prices. By examining Tiffany & Co.’s annual “Blue Book”, which has been published for more than 100 years, one can easily see the deterioration in the ratio between fine jewelry price and gold value in the West — a ratio that used to be consistent with ancient tradition and has only been declining over the past 50 years.
Jewelry Buyer in the East — “What is the weight and purity? What is the Gold Price today?”
Jewelry Buyer in the West — “What is the retail price?”
(1) Admittedly, even I did not recognize this to be false at first. I viewed jewelry as a segment of gold that was not the fulcrum but instead an edge case fashion. True gold ownership, I felt, was manifest through the bullion markets, where monetary gold was acquired and sold every day to the tune of billions of dollars. It was only on the trip to Asia and through reflection on global gold flows that I realized this view was flawed. The low margins over pure gold value in the East on jewelry meant that it wasn’t jewelry that was being acquired, but gold. When re-analyzing the flows, it became obvious to me that most gold mining flows into the jewelry market. Combining these two heuristics: Gold demanded as savings in the form of jewelry is the ultimate causality, the fulcrum anchor for bullion markets and mining. The physics of gold keep it functioning as an efficient measurement of monetary inflation practiced through the lens of modern economics, but only the jewelry market has served as a de facto gold standard since ancient times.