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Is This Gold’s Long-Awaited Killer App?

Gold bugs around the world got a shock a few weeks ago when a tiny Canadian start-up called BitGold bought venerable GoldMoney, the second biggest (after BullionVault) precious metals storage firm.

Now come the questions. Is this a case of a flashy tech company using its temporarily-inflated stock to buy real assets, a kind of AOL/Time Warner deal which goes sour when the new tech turns out to be a bubble? Or are these the young visionaries who finally solve the puzzle that eluded their elders?

First, a little digression: Back in the late 1990s while writing mostly about the excesses of the dot-com bubble, I was looking for a more optimistic theme. After interviewing GoldMoney’s James Turk for a couple of magazine articles, I fixated on his and others’ attempts to use the Internet to turn gold back into a functioning currency. This was a libertarian fantasy made real, allowing people to keep their spare cash in sound money while bypassing the increasingly dysfunctional, predatory banks with their hidden fees and stupid rules.

Lots of magazine articles and book proposals followed, but despite gold’s decade-long bull market, its digitization failed completely. eGold, the first mover, soon discovered that anonymity meant money laundering and was shut down by the police. GoldMoney required its users to disclose their identities, thus avoiding that legal minefield, but still ran up against regulations designed to limit the ability of alternative currencies to compete with central bank fiat. It eventually gave up, focusing instead on the boring but lucrative storage business.

Now, at the dawn of the age of cryptocurrencies, BitGold is reviving and updating the concept by storing bullion for customers and letting them spend their gold online or via debit cards. Among its cool new features is a tax calculator that figures users’ capital gains/losses for the countries that tax gold as a commodity.

It’s too soon to tell whether BitGold will succeed where its predecessors failed, but the early debate is, as you’d expect, lively. On the negative side, UK financial journalist (and author of a book on bitcoin) Dominic Frisby makes a cogent case for its probable failure. Here’s an excerpt:

Don’t touch this gold and bitcoin combo with a ten-foot bargepole

Last week, Canada saw the initial public offering (IPO) of BitGold.

It opened with a lot of publicity and a bang.

Today we consider BitGold.

We don’t ask whether you should run away – but how fast.

Bitcoin plus gold = sexy name, but not a lot of substance

BitGold is listed on the Venture Exchange in Canada with the rather handy ticker of XAU.V.

There are 36.6 million shares outstanding, of which 20 million are controlled by insiders. Based on Friday’s close at C$4.14 per share, it has a market capitalisation of around C$161m.

It has C$9m cash and, with 6.4 million warrants (3.9 million exercisable at C$1.35), another potential C$5m in the pipeline. The marketing budget this year is C$5m.

Among its early investors are, notably, Soros Brothers Investments and Sprott Asset Management.

The idea is for the company to become a PayPal for gold. You can go into a coffee shop or a grocer’s and buy everyday items with gold. You can also buy and store gold.

The company makes its money by charging 1% on transactions. For now, storage is free (although that is going to be an issue going forward – gold costs money to store).

As blogger Otto Rock notes, last year BitGold’s founders were paid in shares worth 3.3c a piece. The seed placements and pre-IPO fund raisings were at 90c plus warrants. The stock went public at C$2.70. After hitting C$4.50 on Thursday, the stock closed the week at C$4.14. Almost 701,000 shares traded on Friday.

Some people have done very well out of this already. But the business has hardly got going yet. It has very little market share, let alone profit. As someone who’s seen what Vancouver is capable of, this has set all my alarm bells off.

There’s been a lot of hype and now somebody is selling. There’s an expression for that. Can’t for the life of me remember what it is.

Frisby goes on to point out that there’s nothing preventing regulators from strangling this newborn in its crib as they did with GoldMoney and eGold, and that the concept of digital gold is inherently flawed because anyone with both fiat currency and gold would logically save the gold and spend the fiat.

These are good points. The regulators now gearing up to counter bitcoin can easily adapt to digital gold (BitGold is not available to US customers because of strict US regulations). But the idea that no one will want to spend gold is debatable. A checking account requires currency to be on deposit, where it can depreciate before being spent. Better to have that cash sitting in an asset like gold that will appreciate over time. Presented this way, a digital gold account might be an attractive combined savings/checking account for people who understand money.

And the upside of a functioning digital gold currency might be spectacular: If gold begins to flow into such accounts, the added buying pressure would send the price higher, which would make it even more attractive relative to fiat currency, leading to more buying, etc. The resulting feedback loop would be fun to watch.

So the prudent approach to BitGold is the same as for bitcoin: Acknowledge that the idea has promise, sample it if you’re so inclined, but don’t trust it with large amounts of capital until it’s been tested by regulators, the markets, and time.

12 thoughts on "Is This Gold’s Long-Awaited Killer App?"

  1. In order to maintain monetary freedom a currency of some sort that you can keep with you, not on some hard drive on another entity’s computer is required. As much as fiat currency is a poor substitute for lawful money, it is still better than a centralized currency that can revoked with the flick of switch. If you want gold currency here’s a new concept that will fit the bill (pun intended):

    http://www.peakprosperity.com/podcast/84359/new-way-hold-gold

  2. Bitgold may not liked by the Animal Farm regulators since it is directly linked to gold and the broader public. Time and markets are no threat to Bitgold, imo.
    Bitgold may not be liked by the regulators but they’ll simply have to accept gold as essential part of the monetary system. And consquently the publics’ use of it. For instance through Bitgold. Fight it and you’ll finished of. Indeed, through the force of time and through the force of the markets.

  3. BitGold is a proof-of-stake crypto-currency supposedly backed by physical gold. The phrase “crypto-currency” screams “SCAM” and even the Bitcoin crazies generally consider the proof-of-stake (as opposed as proof-of-work, like Bitcoin) crypto-currencies to be scams.

    The business model of BitGold doesn’t make sense. There is no way in hell they can be profitable with their current model.

    If I own gold, I keep it mainly as a store of value I do not spend it in coffee shops (while paying 1% for the privilege). Since everybody’s income is in fiat money and not in gold, everybody will have at least some fiat money. So, why not spend that, instead of buying gold with it (and paying 1%) and then spending this gold (and paying another 1%), all the while trusting some weird guys that talk like scammers and have no previous experience in this kind of business?!

    No, I wouldn’t touch this service with a ten-foot pole, either.

    1. If I spend my fiat and save my gold, I end with a lot of gold and no fiat.
      Then I must spend gold.

      The example of Bitcoin show an increase of spending when the price go up and the shopping reduce to the minimum when the price go down.
      This is consistent with Austrian Economics and a schedule of needs and wants.
      I save until I have enough saving to satisfy my needs and wants, then I spend for some other needs and wants, then I save more, rinse & repeat.

  4. Keeping money in gold is attractive as: 1, It gains no negative interest as many accounts in Europe do. 2. It cannot be available to be bailed in. 3. It cannot be inflated away. 4. Owners of gold accounts are not unsecured depositors in some bank. 5. Gold may yet rise against the fiat currencies.
    Legally once money is deposited in a Bank it become the property of the bank. The use via Credit/Debit Card just my get over the strangle hold banks have on all transactions. Some form of annual accounting for the gold bought and sold and at what price will be required for the countries that Tax gold transactions as Capital gain or loss.
    Under present conditions Bit gold is a great idea, however, if things in the financial world ever get back to a sane situation perhaps this will change.

  5. I’m thinking this company has appeared at this time because and only because the time is very near when gold will become a most desired currency. Anyone who has followed the shenanigans of the central banks along with China’s eager stockpiling of gold can see the writing on the wall. Timing is always tricky though and I never discount the possibility that the fiat debt charade will endure far longer than thought.

  6. The most interesting thing to me about owning gold is that it presents an alternative – or an answer – to the “age-old” question of fiat based monetary theory: How much should the money supply change as the economy grows? The assumption is that to avoid price deflation the money supply must increase as the economy grows. But only the “monetarists” and the politicians and those invested in the current banking system abhors price deflation. Everybody else likes it – well except for businesses, but that’s only because they have to deal in fiat currency.

    The supply of gold increases at roughly 2% per year, but it’s rate really doesn’t matter. All that matters is its cost of extraction. Bypassing a lot of technical detail, owning gold becomes valuable in an of itself as an economy “grows” because it becomes more valuable (the flip-side of price deflation, gold increases in price) It is like earning interest but it’s actually a capital gain. The flip-side of that is it provides a “natural” lending rate. The stronger the economy the higher the lending rate and vice versa.

    That’s the basic framework. All of this talk about providing some kind of currency based/backed by gold is detail. The most important aspect of any currency will be its integrity.

  7. They’ll need to get a bank involved. A lot of legal issues with issuance of money products/services.

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