WGC Chairman Lassonde seeking new friends Can’t they all just get along?

The old joke about being a Protestant is that when last week’s sermon isn’t sitting well with you, you know it’s time to go off and start your own church.

The urge of a sect to split off from a group bound together by ideas is deeply rooted in the human psyche, and we’ve seen it time and again — with Trotskyists warring with Marxist-Leninists, “Animal Rights” groups taking on the “Animal Welfare” establishment, and the post-Mulroney splintering of Canada’s right-wing political movements, to cite a few examples.

The gold mining industry is not immune to the phenomenon either, with the membership in the impressive-sounding World Gold Council actually representing the producers of only 35 per cent of global gold mine output.

Here is the entire WGC membership: AngloGold Ashanti, Barrick, Cedimin, China National Gold Corp., Coeur d’Alene, Buenaventura, Golden Star, Gold Fields, India’s Hutti Gold Mines, Peru’s Inversiones Mineras del Sur, Tanzania’s Kahama Mining, Mitsubishi Materials, Newmont, Placer Dome, River Gold, the Royal Canadian Mint, Royal Gold and the Saudi Arabian Mining Co. That’s it!

The WGC notes that of the 65 per cent of gold producers who are not currently members, 21 per cent have annual production greater than 500,000 ounces gold (hello Kinross, Goldcorp and Freeport McMoRan), and another 19 per cent produce between 150,000 and 500,000 ounces of gold each year.

The current chairman of the WGC, Newmont President Pierre Lassonde, drove the point home during a speech before his gold-mining peers at the Denver Gold Group forum in September: “The five biggest companies in the world basically support the other seventy per cent, and we’re fortunate to have some intermediate producers . . . but it’s not a pretty picture. We are paying US$55 million per year as a group to do this, and we think it has enormous value. But from a moral stand point, this is not the majority of the industry and it’s not enough.”

(The Denver Gold Group, incidentally, is far more representative of the industry, with 57 gold miners and explorers as members.)

Lassonde is the smoothest of promoters, so he didn’t bring up the unpleasant truth that the WGC has been passionately reviled by many in the rather emotional gold bug community because, through the 1990s, it was controlled by companies deeply involved in hedging gold, and it promoted gold as jewelry rather than as a currency.

But those objections lie in the past, and should have remained buried since mid-2002, with the appointment of the unquestionably pro-gold Chris Thompson of Gold Fields as WGC chairman, followed by the current chairmanship of the outspoken gold bull Lassonde.

Since late 2002, the WGC has done an excellent job restructuring, cutting overhead in half and, with relatively limited funds, promoting gold demand through increased gold use in jewelry, financial instruments, and industrial components.

Lassonde is blunt when it comes to the WGC’s promotion of gold jewelry: “Whether you like it or not, gold jewelry is the bedrock of physical demand in our business — women going to shops and buying gold. When a woman has $5,000, she can pick a Chanel suit, and (Louis) Vuitton bag, a diamond or gold. We have to compete against all of that. Don’t think gold is so special — it’s jewelry!”

Indeed, for worldwide gold demand between 2000 and 2004, the 5-year average was 3,980 tonnes, dominated by demand for jewelry (69 per cent) and investment (13 per cent).

The 5-year average for gold supply over the same period is 3,980 tonnes divided between mine production (66 per cent), jewelry (15 per cent), central bank sales (13 per cent), industrial (four per cent) and disinvestment (two per cent).

In a world where economic growth is driving gold demand, gold jewelry demand is on track to hit a record high of US$38 billion this year, and account for 75 per cent of physical gold demand.

The WGC says its marketing of gold jewelry is generating clear results in core markets with large and growing demand. Most tellingly, since 2003, when the WGC first adopted its current marketing strategy, gold demand is up 340 tonnes — but it is up 23 per cent in markets where the WGC has been active, while remaining flat in markets where the WGC was absent.

“We drove demand through innovation with the Italian jewelry manufacturers,” said Lassonde. “These guys are the best at creating new designs that are interesting. If you want people to buy your product, you have to make it interesting. It’s the same with diamonds, and De Beers learned that a long time ago.”

Furthermore, the WGC formed relationships with some of the best retail partners in the business to form an advertising campaign. Last year, the WGC and its partners funded a US$20-million ad campaign in the U.S. and Italy, with resulting gold demand up in both countries.

This year, they’re targeting China, India and the Middle East.

In the Far East, noted Lassonde, there are 620 million people under the age of 20.

“You’ve got to get to those kids, and get them to think about jewelry,” he said. “In those markets, there is a natural affinity for gold, vis–vis other metals and other goods. Yellow is in today, guys, but we have to help it a little bit.”

Looking at other mining sectors, Lassonde pointed out that the platinum guild — with platinum only a US$2-billion-a-year business — spends US$40 million each year on advertising, and the US$7-billion-per-year diamond-mining business has De Beers alone spending US$200 million annually on advertising.

By comparison, the gold sector is a US$38-billion-per-year business that spends less than US$25 million each year on advertising.

“We’re pikers — that’s not a Colorado expression; it’s a Canadian one — but it means that we’re cheap,” said Lassonde. “And we’ve got to do something about it.”

Meanwhile in the official sector, the WGC has scored victories such as lobbying for the renewal of the Central Bank Gold Agreement (a.k.a. the “Washington Agreement,” which Lassonde described as being “key in turning around gold.”) and for the withdrawal of the International Monetary Fund’s dumb idea to fund Third World debt relief through gold sales.

The WGC also had success convincing East Asian governments to lower tariffs and remove other barriers to gold imports and retail investment.

Lassonde regards the WGC’s leadership in developing exchange-traded gold funds (ETFs) around the world as the “biggest success in twenty-five years of the WGC” and the “biggest thing since the introduction of the Krugerrand.”

In terms of the new gold-backed securities, the WGC-sponsored ones now represent 87 per cent of total market share and will have contributed 95 tonnes of net demand just this year.

By mid-2005, there were already 8.5 million ounces of gold under management in ETFs in the U.S., the U.K., Australia, Canada and South Africa.

Said Lassonde: “If gold has a chance of becoming a competitive currency with the dollar, the yen and the euro, I think the ETF is what will do it, because once this product is listed on the other exchanges around the world that we’re working on, you will be able to buy and sell gold 24 hours per day, 7 days a week, 365 days per year. If you make it easy for people to buy things, they will purchase it if it has real value. And that’s what we’ve done with the gold ETFs.”

In the industrial arena, the WGC is sponsoring a global network devoted to fast-tracking innovative ideas for industrial gold-based products, chemicals and materials. Last year, the WGC helped showcase gold’s effectiveness as an industrial catalyst in air cleaners, mercury emissions control and odour neutralization.

Another consideration is how gold’s yearly supply and demand flows are dwarfed by the existing above-ground stocks of gold, which amounted to an estimated 150,000 tonnes in 2004, split between jewelry (51 per cent), central banks (19 per cent), investment (16 per cent), and industrial (14 per cent).

“The demand and sup
ply fundamentals are very good for gold,” said

Lassonde, “but what this tells you is you need to do something to manage the supply of gold coming back into the market from this 150,000-tonne stockpile. Gold is rising in all currencies, so we are in a gold bull market, but we’re all so busy exploring, developing and financing mines that we rarely stop to look at the whole picture.”

As WGC chairman, Lassonde wants to broaden membership to include gold explorers, brokerage houses and investment banks.

“Let’s make this a bigger success than what it is. We can really rock the boat here, but we have modest ambitions in the next year or two until we can get past fifty per cent.”

It’s time for more of the world’s gold miners to put aside their reservations and join the WGC. With more money at its disposal, the WGC is in a far better position to speak for the industry, promote gold demand and goose the gold price.