Gold and the Jewellery Supply Chain A Context. Philip Olden: 18 th May 2010

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1 Gold and the Jewellery Supply Chain A Context Philip Olden: 18 th May 2010

2 The revitalisation of gold jewellery demand Gold Jewellery Demand (US$m) 70,000 60,000 50,000 40,000 30,000 20,000 10, Others India USA Middle East Turkey Gtr China Source: GFMS, WGC

3 Market profiles, gold and diamond jewellery 8% 2% 22% 18% RoW India USA M East Japan 11% 12% 8% 2%4% 18% 7% 1% Gtr China 40% 16% 23% Turkey Italy 9% Gold Demand 2008: $60 billion at av. gold price Diamond Demand 2008: $14 billion at rough prices Source: GFMS, WGC, IDEX, Tacy

4 Mine Supply Refining Bullion bank Alloying Manufacture Import/ Wholesale Retail Consumer Gold supply chain is not linear 41% of supply Scrap Supply 59% of supply Scrap supply is a major component and makes the supply chain cyclical. Scrap gold: recycled, pre-owned, laundered?

5 Mine Supply Refining Bullion bank Alloying Manufacture Import/ Wholesale Retail Consumer Gold supply chain is not linear 41% of supply Scrap Supply 59% of supply Gold can be owned and supplied by multiple participants in the supply chain. This also makes the supply chain non-linear. Unallocated bullion can be sold, leased, loaned, swapped etc.

6 Unallocated and allocated gold Unallocated gold: - gold as money - not individually identified and owned - can be leased, loaned, swapped by bullion bank - stored and insured by bullion bank - the simplest and cheapest way of owning gold - not traceable (yet?) Allocated gold: - gold as a product - individually identified and owned (bar serial numbers) - bullion bank cannot deal in the gold - separately stored and insured at cost to owner - used where integrity of inventory is essential (e.g. ETFs) - traceable

7 All gold jewellery is bought by weight 1 oz, branded fixed price gold jewellery (c. ⅓ of total) Refiner margin Duties/ freight Bullion bank buy/sell spread Cost of Production Mine margin Making charge W/S margin Retailer margin $600 $700 $1,000 $1,200 $1,400 $1,800- $2,000 + Spot price 1 oz, unbranded commoditised gold jewellery (c. ⅔ of total) Refiner margin Duties/ freight Bullion bank buy/sell spread Cost of Production Mine margin Making charge/ retailer margin $600 $700 $1,000 $1,200 -$1,400 Spot price

8 Perceived obstacles to gold chain of custody Gold as money Tight margins Large above ground stock and scrap supply Non-linear supply chain Over-capacity in refining Lack of will Existing gold chains of custody are insignificant

9 Opportunities to create a gold chain of custody Mine supply is traceable Establish dedicated/allocated refining Integration of mining and refining Use of allocated gold accounts Involve bullion banks in RJC process Collaboration of RJC and ICMM membership Impact of Freetrade/Fairmined gold Focus on branded fixed price market in US/EU Create reputational and financial value

10 Reputational risk of dirty gold It s about mining practices Gold is a consumer product NGOs influence public opinion and media in US/EU Gold sector is fragmented and lacks leadership No Dirty Gold Golden Rules unenforceable?

11 The jewellery industry s reputation Damaged by blood/conflict diamonds, dirty gold - High profile with NGOs and media - But little impact on sales Strong alignment by industry leaders to address reputational issues, despite fragmentation Industry remains very defensive Fine jewellery losing market share Losing relevance and desirability with younger consumers

12 Trust: the new opportunity? Consumers have lost trust in businesses/companies in US was all-time low of 38% 91% bought products from companies they trust 77% refused to buy from distrusted companies 55% paid a premium price from a trusted company Source: Edelman Trust Barometer 2009, 2010

13 Trust will change jewellery marketing Quality products & services Attentive to customer needs 53% 47% Transparent and honest practices Company I can trust 83% 83% Financial performance 42% High quality products & services 79% Fair pricing 38% Communicates frequently 75% Well known brand 37% Treats employees well 72% Employee relations 35% Good corporate citizen 64% Socially responsible 33% Prices fairly 58% Visible CEO 23% Innovator 48% Dialogue with stakeholders 23% Top leadership 47% Employee/CEO communication 12% Financial returns 45% Q: What shapes your trust in a company? Q: How important are these factors to corporate reputation? Source: Edelman Trust Barometer 2010

14 Trust: the new opportunity? Trust is now; - a major market differentiator - a source of reputational value - a source of financial value and price premium

15 We can create competitive advantage The best responsible sourcing guidelines in the premium/luxury market Leading players in industry driving change Be more positive, less defensive Create reputational and financial value Improve market share and consumer demand Chain of custody is important to enable this Must connect with consumers at retail level

16 We need a chain of custody in gold Gold is largest and broadest category Consumers will demand it, esp. in US and Europe It is possible, esp. in high margin US/EU markets Requires the will to change Needs to be significant to be credible Enables a more positive competitive position Will drive reputational and financial value

17 Gold and the Jewellery Supply Chain A Context Philip Olden: 18 th May 2010