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1/3/13

Why miners should use gold as a functional currency

This links to a really great essay, call it a rant even, by Robert Cohen, VP and portfolio manager of Dynamic Funds (part of the Scotiabank group)and dated December 2012. Your humble scribe has asked for and been given permission to feature it here on the blog and hope you guys out there take advantage of the opportunity, too. Here's the executive summary of the note to give you an idea of what's going on:

  • The industry needs to recognize that it is in the business of mining a monetary asset. Selling gold for cash is exactly the opposite of what the companies should be doing for their own good whilst giving investors precisely what they seek exposure to. 
  • There are numerous benefits to using gold, wherever possible, as a financial asset: borrowing loans in gold to protect purchasing power of capital and saving gold production to continue to achieve purchasing power protection over the long-term. 
  • Expressing the health of the business in gold filters out the effects of the deterioration of the value of paper money. The gold industry would not only be healthier, but the reporting would be more sensible and exact. Investors will understand the idea of gold flow rather than cash flow and will think of the project payback period using ounces of gold rather than constantly deflating dollars. The industry will demonstrate itself as the premier safe-haven industry for investors. 
  • Gold companies will become quasi ETFs that not only accumulate gold, but produce gold at a fraction of the cost of prevailing market prices. Each company’s stash of gold can represent a future source of capital for new projects that not only pays back the original gold to the company’s coffers, but adds to it. 
  • Most importantly, gold companies can demonstrate that the preferred monetary asset is gold and not cash. Ultimately, investors would be attracted to gold equities even during times when the functionality of the broader stock market is compromised.


What you'll read isn't particularly "goldbuggy" but tackles, head-on and in a financially intelligent manner (i.e. not your average goldbug ranteration) the issues of gold, money and how gold mining companies are going about their financial business in a way that can be pitched a lot better, so says Cohen. Even if you decide to disagree with his argument (and fwiw IKN largely agrees with his thrust) this is still a must-read article. So download your copy now.