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Bitcoin, BitGold, GoldMoney - and BullionVault

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Published : May 30th, 2015
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Category : Gold and Silver

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 GoldMoney data

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.

Gold storage

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. 

Bitgold expansion plans

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.

  1. 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).
  2. 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.
  3. 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:

"Dear Customer,

"...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.

Paul Tustain

CEO BullionVault

27 May 2015

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Settlement-systems specialist Paul Tustain launched BullionVault in 2005 to make the security and cost-efficiencies of the professional wholesale gold market available to private investors. Designed specifically to meet his own gold ownership needs as a risk-averse investor, BullionVault now cares for over US$1bn of client gold property, all of it privately owned in the client's choice of low-cost, market-accredited facilities in London, New York or Zurich.
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