Dynamic Funds Manager Rob Cohen Imagines A Gold-Centric World

Robert Cohen, lead portfolio manager with Dynamic Funds, has been kicking up dust at conferences and in board rooms with his "revolutionary and simple" idea that gold mining companies should hold gold on their balance sheets and use gold-based loans. But the idea is gaining traction and he suggests in this Gold Report interview from the Prospectors & Developers Association of Canada conference that management teams and investors alike would do well to question their use of U.S. dollars as a functional currency.

The Gold Report: Robert, you presented a paper at the Prospectors & Developers Association of Canada conference that focused on, among other things, the uses of gold as a monetary asset. Please tell our readers about that.

Robert Cohen: Gold is quintessentially a monetary asset. Many people believe it is the most ideal monetary asset on the planet, given that the world's other monetary assets are fiat currencies that can be expanded at the whim of a government.

Every ounce of gold ever produced is still kicking around on the surface, a total of about 160,000 tons. Half of that may be in the banking system. Miners produce about 2,500 tons a year. So only a very tiny expansion of liquid gold accrues every year, especially compared to the global liquidity created by printing money.

Imagine that we could remove currency from the world. We would have to think about hard assets such as real estate, oil, primary and precious metals relative to how one has performed with respect to another. If you do that, you see that since 1971 the average gold-to-oil ratio has been about 16.5 barrels of oil per ounce of gold. If you had been paying the gas station attendant in gold every time you filled up, you would have paid the same amount in gold for the last 40 years without noticing any price inflation.

You can extend it further, to real estate if you filter out the real estate bubbles. Thirty years ago, the average home in America was valued at about 200 ounces (200 oz) of gold. Today, the average home is still about 200 oz of gold.

TGR: So for investors to understand the value of gold, they have to understand gold's historic ability to buy goods and services at a relatively consistent rate.

RC: Right. You need to look at price changes from a macro perspective. From a monetary point of view, the prices of oil, gold, copper or your house have increased for the same reason. Most price levels are driven by the global monetary base, its debasement and the expansion of global liquidity.

One reality check is to look at the cross ratios of gold to other hard assets and that of one hard asset to another.

TGR: In other words, the gold price is fluctuating because of what is going on with the fiat currencies?

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RC: Yes, and today's currency war is creating confusion in the market. When the yen falls, the U.S. dollar goes up. But you have to ask yourself if the yen has been engineered by the Japanese government to be devalued or is there fundamental strength in the U.S. dollar?

People think very linearly: If the U.S. dollar is up, gold is supposed to be down. Not necessarily. Think of gold as a sovereign country with a currency called gold. If the yen-dollar ratio drops, so should the yen-gold ratio, but the dollar-gold ratio should remain constant.

I think the right way to think about gold is to ask how many yen it takes to buy an ounce of gold. Gold is most commonly quoted in U.S. dollars, but if you are outside the U.S., it is better to think about the gold price in your local currency. That is an absolute measure of your country's purchasing power against the world's most stable monetary asset.

TGR: And your belief that gold is the most stable monetary asset is why you think gold companies should keep gold as an asset on their balance sheets.

RC: Yes, because investors are trying to escape the ravages of fiat currencies. Gold in the ground is not a liquid asset, but as soon as the gold companies turn it into a liquid asset, they immediately dispose of it and trade it for U.S. dollars.

TGR: Devalued U.S. dollars.

RC: Yes, devalued U.S. dollars or any fiat currency. Gold would be the best functional currency for the industry.

Let's extend this further. Companies can get gold loans instead of paper money loans. With a paper loan, the financier will require the company to hedge some of its gold forward to ensure that the loan is repaid. If the company banked it in gold, it would be producing the exact same asset it will use to repay the loan. There would be no need to hedge.

As you know, the main costs in the gold industry are labor, fuel, energy, steel and chemicals. If there is monetary debasement, labor will be sticky on the upside, but the costs of steel, chemicals and power all move up proportionally with gold. This makes gold a perfect hedge against rising costs.

However, if a company is forced to hedge its revenue line, it no longer has any protection against fluctuation on its cost lines. The best thing gold companies can do is remain unhedged and hold their retained earnings in gold. This allows them to keep their purchasing power for their next project. Banking earnings in dollars erodes their purchasing power.

TGR: How have public companies reacted to your idea?

RC: Reactions vary, and they are not related to the company's market cap. Some big companies think it is a great idea; others do not get it. Same among the mid caps. It is sometimes easier to talk about it with smaller companies and their management teams.

For example, I brought up this idea at the Precious Metals Summit in Beaver Creek, Colorado, in September 2012 on a panel with David Harquail from Franco-Nevada Corp. (FNV:TSX; FNV:NYSE). He went back and discussed the idea with his board. In Q4/12, the company started taking some of its royalty payments in physical gold. To the company's benefit and surprise, this converts Franco-Nevada from a passive investment company into an active company, which is more tax efficient.

TGR: How have the shareholders reacted?

RC: It is too early. They may not even be aware of the change.

Miners like has nearly 20 years combined experience in the mining industry and is lead portfolio manager for Dynamic Precious Metals Fund and Dynamic Strategic Gold Class. Named a TopGun portfolio manager by Brendan Wood International in 2009, 2010 and 2011, Cohen has been lead portfolio manager for Dynamic Precious Metals Fund since November 2000 and Dynamic Strategic Gold Class since inception, with top-performing mandates also in distribution in Europe and the United States. Cohen completed his Bachelor of Applied Sciences in mining and mineral process engineering at the University of British Columbia in 1992. In 1998 he received his Masters in Business Administration and in 2003 Cohen received his CFA designation.

DISCLOSURE:
1) Sally Lowder conducted this interview for The Gold Report and provides services to The Gold Report as an employee. She or her family own shares of the following companies mentioned in this interview: None.

2) The following companies mentioned in the interview are sponsors of The Gold Report: Franco-Nevada Corp. and Goldcorp. Inc. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.

3) Robert Cohen: I or my family own shares of the following companies mentioned in this interview: None. I personally or my family am paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.

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Written By: The Gold Report