GoldMoney taken over by bitcoin-to-gold service BitGold.
What is BullionVault's view...?
MANY gold investors will have been surprised by the announcement made last
week that one of our competitors, GoldMoney, was
being sold to BitGold, writes Paul Tustain, CEO of BullionVault.
On a personal level I am pleased for James Turk, GoldMoney's founder and guiding hand, who was already in
retirement, and with whom I have enjoyed many events and lunches. But the
deal has a number of aspects which absolutely demand comment.
The company I run, BullionVault,
publishes its audited results every year. GoldMoney
never did, and it shows us once again why transparency is profoundly
healthy.
At 00.41am on a Saturday morning UK time (after
Toronto trading closed on Friday evening) GoldMoney's recent trading history
was quietly published by BitGold. It had to tell
the stock-market what it had acquired. Those results
made scary reading.
- GoldMoney's sales have collapsed – by
78.7% over three years.
- It
lost £9.4 million in just one year – 2014.
- Its
net assets fell from £25.4m in 2013 to £13.1m in 2015.
- At
its March 2015 year-end it is still posting losses.
The first thing we should understand is how
GoldMoney lost so much money in 2014. The answer is
presumably a combination of things but mainly that they bet their balance
sheet on gold. Or, in the special language of company announcements:
"Profit (Loss) for the financial year includes
certain gains and losses on unhedged metal inventories which is not a
recurring business for BitGold."
How much exactly was lost to this is not disclosed,
but it will be a relief for BitGold's shareholders
that this part of the losses can be reined in by eliminating speculation from
the company's policies.
Of more importance for BitGold's
new and prospective customers is that BitGold
continues to advertise a business model which will offer free gold storage.
Storage is one of the most significant costs for a
substantial gold vault service, and the cost must surely be recouped for any
but a fledgling business.
BitGold certainly does offer 'free' vault storage. But it's only because BitGold was, until recently, so tiny. It had only a quarter of a tonne of vaulted gold, so it could wear
the insignificant storage cost for now.
GoldMoney – on the other hand – looks after
870 tonnes of
gold and silver, which belongs to its clients. Storing and insuring this
quantity of metal at third party vaults takes a chunk out of the monthly
budgets, and BitGold is simply not a viable
business if it provides the storage and insurance of all this gold and silver
for free.
BitGold knows this. After clarification on the post-deal conference call it
appears that BitGold will not offer its new GoldMoney customers free gold and silver storage. So that
part of the proposition headlined on their website appears likely to be
discontinued, or possibly withheld from GoldMoney
users. It is still not fully clear.
Without free storage the BitGold
trading offer is not especially attractive. 2% from offer to bid, and storage
on top? That's hardly compelling in a very competitive marketplace.
Working capital reduction
However in my view the least attractive aspect of
the deal is that the working capital in the business is being stripped,
leaving GoldMoney operating on much thinner buffers
than it has been – even since these significant losses.
After losing half of its net assets in 3 years –
down from £25.4m to £13.1m, all but $3m (£2m) of that remaining £13m of GoldMoney's capital is now being paid out to GoldMoney shareholders. So that's another £11.1m going
out of the combined business. Not losses, but a 'special distribution' to GoldMoney shareholders.
The leftovers – just £2m – will be added to BitGold's net cash which is how they get to C$12.5m of
post-deal working capital.
Yet even when (if) their warrants are exercised,
bringing in another C$5.5m that only makes C$18m BitGold
working capital. At an exchange rate C$/£ of 1.9 that's only £9.5m.
So instead of combining financial strength for the
two businesses going forward, the effect of the asset strip on GoldMoney is to reduce the capital buffers down from
£20.5m to £9.5m across both GoldMoney and BitGold businesses. With 870 tonnes
of customer metal to look after, and bold investment and expansion plans for BitGold, this is seriously light on capital.
Those BitGold expansion
plans need a closer look too. BitGold is a brand
new 'development stage internet technology business' (see the BitGold:
Listing Application,
TSX Venture Exchange, 8 May 2015)
with a remarkable stock market rating.
Its CEO, Roy Sebag, has
brought with him laudable enthusiasm for gold, and bitcoin, and heaps of
financial talent, but his company appears to be planning to offer an amalgamation
of three ideas, one of which has long been done cheaper elsewhere, by
companies with a much more solid base than he can offer, and two of which
have already failed.
- BitGold offers you the chance to buy
and own gold. According to the BitGold website
the net round-trip cost, in and out of gold, is 2%. This is not
exceptional value. BullionVault's gold round
trip costs 1%, and that reduces fast above $75,000. (I am still unclear
on BitGold's storage fee proposition and how
it will work for GoldMoney users in the long
term).
- BitGold also anticipates you will
use the service to deal in gold, currencies, and bitcoin. The problem
with this trading idea is that it has been tried very recently by Netagio – then a subsidiary of GoldMoney
– and it failed. We gold owners are a fusty lot, and after 4 months Netagio had little customer interest. Originally
financed by GoldMoney and launched
in summer 2014 the service was quietly closed
in February 2015.
- And
finally BitGold believes you will choose to
make gold backed payments, or even go shopping with a special Visa card,
both of which will deplete your gold holding as you spend. GoldMoney itself (again) tried providing a
pay-with-gold function, and gave up when they came up against the
practical truth of Gresham's Law: "Bad money drives out good"
(from circulation).
What Gresham's
Law says is that it will be a long uphill
struggle persuading people both (a) that gold is better than dollars (or
bitcoin) for storing the value of your savings and
(b) that once you have finally agreed, and bought gold, you should spend it!
This is a contradiction. And on top of that it seems there's an extra 2% fee
if you use your BitGold Visa card. Is this really
what gold savers want?
Roy Sebag said in his
conference call that he thinks the barrier to adoption of GoldMoney's
payment ideas was technological. I doubt that. And James Turk will not have
forgotten what his team at GoldMoney wrote to
customers on these subjects in December 2011:
"...we have decided to suspend the following
services until further notice with an effective date of the 21st January
2012:
- The facility to make and receive payments in precious metals to
or from other GoldMoney Full Holding
customers.
- The facility to convert directly between the various currencies.
"...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."
Gold Reserves and Payment Systems
I completely supported James Turk's suspension of GoldMoney payments services in 2011 because I have always
disliked linking vaulted gold holdings to payments services. Let me explain.
Few people leave $50,000 (the size of a typical GoldMoney account) in their current/checking account.
Most would be uncomfortable to leave a sum like that in a place where it can
relatively easily be paid to someone else. Yet BitGold
intends to let/encourage GoldMoney account holders
to make payments. For BitGold, that's the point of
the takeover deal.
But it's foolhardy to assume that no-one will ever
find out any BitGold passwords. A far better policy
is to assume that passwords will be found out, and to still be safe.
This is why payments to other people are disallowed
by BullionVault. Money (or gold) exiting a BullionVault account can only go back to the funding
source, which means if someone finds out your password and breaks in (which
will trigger the burglar alarm on your phone) the worst they can do is sell
your gold at the current market price, and send the money straight back to
the source.
In my opinion no substantial gold reserve
should be connected to a diverse payments system, least of all one
that is irreversible and anonymous, like bitcoin is. It's not failsafe.
GoldMoney / BitGold synergy
On Tuesday's conference call Roy Sebag
told us why he is taking over GoldMoney. And he
makes perfect sense based on what he knows. He is seeking critical mass for
the network effects which are needed to ignite a BitGold
payments system.
But for the reasons I have explained I believe he
will find no more enthusiasm for gold payments and bitcoin among GoldMoney users than James Turk found there in 2011 and
2014, or indeed than I would find among BullionVault
users. Then the key question becomes how much of its limited resources will BitGold expend in turning GoldMoney's
operational losses around, if it doesn't pay the rewards he anticipates. We
shall see.
In the meantime if you are a GoldMoney
customer do remember that BullionVault and GoldMoney historically offered a similar service. We
operated in very similar ways, although it now appears that BullionVault has – at least for a few years – been the
more cautious organisation. Also, where we used to
be about the same size, BullionVault now has
approximately three times the free working capital (£27m) that BitGold is proposing for their combined entity (£9.5m).
Nothing has changed at BullionVault.
We have always been more transparent than GoldMoney.
Our audited
accounts have always been published on
our site. Our Daily Audit has always proven to clients on a daily basis that their gold is
there in the vault. Also the price you pay is still considerably lower than what you pay at GoldMoney.
I believe these reasons are why over the last 36 months we have grown
relative to GoldMoney by a steady but telling 1%
per month, and why we are now about a third bigger than GoldMoney
overall.
I have appended a comparison of key indicators for
you to compare the two businesses. If you wish to know more please accept my
invitation to contact us here.
