This hyped-up company now owns tonnes of gold – but you still shouldn't touch it

Today, we revisit a story I wrote about last week – the company that is aiming to be the PayPal for gold, Canada-listed BitGold.

There was a huge announcement on Friday. BitGold acquired GoldMoney.

GoldMoney is a vehicle to buy and sell precious metals online and store them. It has good brand awareness (people know and like it), 870 tonnes of gold and silver under storage and 20,000 customers.

It might at first look like a great deal. A game-changer even.

But it hasn’t changed my view that you shouldn’t touch BitGold.

A brief history of GoldMoney

GoldMoney was founded in 2001 by James Turk with his son, Geoff. The company was a big success.

It had a good business model, the launch coincided with the start of a rampant bull market in gold, and Turk had a strong media profile – he was charismatic, and made clear arguments about the importance of gold. Eventually, it had well over a billion dollars’ worth of metal stored, more than 20,000 customers, and was the clear market leader.

I should say I feel an immense amount of affection for James Turk. He was one of the first people I ever interviewed on my podcast – way back in 2006. A lifelong hard money advocate, he knows as much about gold as anyone.

I regard his 2005 book, written with John Rubino, The Coming Collapse of the Dollar and How To Profit From It, as one of the best investment books for the layperson that I’ve ever read. The recommendations – buy gold and (particularly) sell financial stocks – were prescient. They could have made you a lot of money.

However, his bigger vision – that the US dollar, in fact all fiat money, will collapse – has not happened. I suppose it nearly did in 2008, but that’s another story.

And since about 2011 (when gold peaked), GoldMoney’s star has waned rather. It has been overtaken as market leader by Paul Tustain’s BullionVault, which offers pretty much the same services at a lower price. BullionVault now has about 50,000 customers with 33 tonnes of gold stored (compared to Goldmoney’s 20 tonnes).

Turk eventually retired in 2013.

This deal may not be as good as it looks

At the peak of the gold mania, GoldMoney’s valuation might have been somewhere between $200m and $300m. BitGold is getting it for C$52m, using its (very highly-valued) shares.

I must say I’m not crazy about the way this deal has been handled on BitGold’s side. First, BitGold had been trading for little more than a week before this deal was announced. GoldMoney’s business model is closely related. Yet there was not even a hint of this in the regulatory filings before Friday’s news release.

Second, when the news release was made on Friday morning in Canada, BitGold’s stock was halted. Then, on Friday evening after the markets closed (the golden hour for releasing ‘not so positive’ news), another release was put out which included GoldMoney’s basic accounts over the last five years. These had not been made public before and the numbers are concerning.

$9.5m in profit in 2011; $7.3m in 2012. Great so far.

$0.3m in 2013. Hmm.

And then the humdinger – $9.4m in losses in 2014, with a projected $0.8m in losses projected for 2015. Sales have collapsed by over 75%. GoldMoney has become a loss-making business.

The explanation for the 2014 loss was “gains and losses on unhedged metal inventories”. It looks like bad bets were made on the gold price.

But my main issue is that I think BitGold’s strategy is flawed.

Gold payments systems simply will not work (I think)

There are three arms to the BitGold strategy. First the buying, selling and storing of gold. BullionVault is already doing that. It has a more proven track record and it’s doing it for less.

And unfortunately, GoldMoney’s customers will not enjoy the free gold storage that BitGold’s do. That’s no surprise – GoldMoney has 870 tonnes of metal (gold and silver) to Bitgold’s quarter of a tonne. Metal costs money to store.

Second, there’s this crossover between bitcoin and gold. I discussed this last week – Bitcoin bugs and goldbugs are two very different animals. Goldmoney already tried this with Netagio and it didn’t work. Maybe BitGold can make it work. I’m not convinced.

Third, it wants to get people using gold to make payments. Again, I argued last week this model was flawed. I’d also point out the security issues that using vaulted gold for payments raises. If people are dipping in and out of their accounts on a daily basis to make payments, that gold becomes vulnerable to all sorts of fraud, password theft and so on, when previously it was locked away.

I remember speaking to Turk in 2006. “How will we know when the time has come to sell our gold”, I asked him. His set answer to this question was always, “You’re not going to sell your gold, you’re going to spend it”.

In other words, when the world moves on from fiat, gold would become money once again. It’s a story I once bought into. In 2008, I even hounded Turk to find me some stock in GoldMoney to buy, because I thought its patented gold payments system would become some kind of standard.

Perhaps BitGold’s founder, Rory Sebag, who is only 28, shares the same youthful goldbug dream that I once had.

But the evidence of history, as I argued last week, is that gold is not a day-to-day medium of exchange, nor has it ever been. It is only ever likely to be used as a medium for high-value transactions or payments in extremis. Thus gold payments systems are inherently doomed.

Sure digital gold makes sending tiny amounts possible, but there are better moneys for smaller purchases – fiat being one of them.

GoldMoney’s patented gold payments system, by which customers could make gold payments to each other online, never really took off. It was closed in early 2012 with the stated reason being the cost of compliance.

But, worth noting, was this sentence from the email sent out to customers about the closure: Our research has proven that our customers’ use of the metal payments and currency exchange services is not significant and we trust that the suspension of these services will not be inconvenient for the majority of our customers”.

Therein lies the problem. Customers’ use of metal payments was “not significant”. People weren’t using it enough to justify it.

Maybe Sebag can make gold payments work. I hope he does. But my head says he won’t.

So all in all, in BitGold we’re looking at three ideas. Two (gold-backed digital payments) have failed, and one (storage) can be done cheaper elsewhere.

In short, this is overvalued and overhyped – avoid it

It’s a bit weird. GoldMoney’s shareholders are getting a good price. They’ll also keep some of GoldMoney’s cash (something BitGold will, in my view, soon be worryingly short of). But BitGold is making use of its highly valued shares.

And that’s the biggest problem I have with BitGold, and the main reason I would avoid it – it is absurdly over-valued and heavily promoted. Too much success has been priced in.

It hit C$8 last Wednesday (an almost C$300m market cap), though it has since slid back to C$4.30. The insiders were in at 3c. The pre-IPO (initial public offering) was at 90c with warrants at C$1.35. As soon as that all comes out of escrow, there’ll be a lot of potential sellers.

Dominic Frisby is the author of Life After The State and Bitcoin: the Future of Money.

James Turk, founder of GoldMoney, responds to Dominic Frisby’s take on BitGold: Dominic is wrong – the time is ripe for digital gold.

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