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Gold is Gold is Gold - What does fungible mean?

Gold is Gold is Gold - What does fungible mean?

By Peter Dawe LLB (Hons) (London)

 

“A rose is a rose is a rose” is a famous saying by 19th century poet Gertrude Stein.  Of course no one really understands what it means! 

However the phrase comes into its own again when it is applied to PurePlay® Instruments.

A key part of the insight of PurePlay® Instruments is that "gold is gold is gold”, which really means that no matter what form or concentration gold is in, it is always gold, can always be refined and can always be cast into bars of stated quantity and quality, which are then interchangeable. 100 troy ounces of fine gold, whether spread out in 10 tons of gold bearing ore, cast into a bar or made into jewellery has exactly the same value in each form.

This is the essence of fungibility.  The most common example of a fungible asset is money. One coin is interchangeable with another of the same denomination.  One note is interchangeable with another note of the same denomination.

And so it is with most minerals.  One barrel of oil of a stated quality is interchangeable with another barrel of the same quality. Gold, silver, platinum, copper, nickel, coal, oil, natural gas – all are fungible.  One quantity of a stated specification is interchangeable with an identical quantity of the same specification.

This is not true of all minerals.  Diamonds are a notable exception.  One uncut diamond is not interchangeable with another.  They are not fungible.  

The reason why this insight is key to PurePlay® Instruments is that it is at the heart of the ability to sell mineral content from Proven and Probable Reserves. The Producer knows that it has say 1,000,000 ounces of gold in its Reserves. It can sell 100 troy ounces of fine gold to an Investor without having to identify which 100 ounces it is talking about, or even which mine it will come from. It sells the gold from Reserves and its obligation is to extract and refine and eventually deliver the correct quantity of gold to the correct specification on maturity of the Instrument. Because of the concept of fungibility, it is able to deliver any gold from any source which meets the specifications of quantity and quality.

If it were not for fungibility then the Producer would have to identify, upfront, the precise piece of gold that it was selling – “the gold in the last 2 m² of the third tunnel on the left at the 400m level in the South shaft." This is impossible to monitor and usually legally impossible to do. A Producer cannot sell off physical bits of its Reserves. They are immovable property, they usually are classified as land, they are subject to mining rights and they cannot be subdivided into incredibly small parcels.

However using the concept of fungibility the Producer can validly sell 100 troy ounces of fine gold from its Reserves, knowing that what it must deliver in the end is a stated quantity of gold to stated specifications. It does not matter which part of the Reserves the gold comes from. As a consequence of fungibility the Producer is not required to identify the site of the gold that it is selling. It is not running foul of the law of immovable property or mining rights law.

This also works to the benefit of the Investor. If the Producer sold an identified parcel of gold-bearing ore and then for some reason could not deliver from that identified parcel (civil unrest, nationalisation, loss of mining title etc) then delivery would become impossible. However because gold is fungible, if any of these events happen to the Producer, it simply makes up the deficit from another source within its Reserves.

So because "gold is gold is gold" PurePlay® Instruments are an elegant and innovative way of tapping into the Producer’s greatest store of wealth, which until now has been a passive asset.

Patents and Trade Marks

The Intellectual Property of PurePlay Holdings (Pty) Ltd is protected by world-wide pending Patents.

Trademarks awaiting registration are PurePlay™, Nature’s Vault™, As Good as Gold™ and Sp☼t True Value™.

Contact Details

5 Jan Smuts Avenue,Winston Park
Durban, 3610,South Africa


Tel: +27 31 7670156
Cell: +27 82 4515864
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