The Start of a Gold-Based Financial System?

“I believe in the Golden Rule – The Man with the Gold….Rules.

~ Mr. T, American actor

Dear Mountaineers,

Over the past few weeks, we’ve had several inquiries from our clients asking us what we thought of BitGold – not to be confused with BitCoin. To be honest, it was equally new to us – we hadn’t heard of it before. When we started looking into the concept, we thought it would be yet another BitCoin derivative. But as it turns out, BitGold, which was officially launched in May, is different.

Since this seems of interest to many of our clients and Mountaineers, we therefore decided to summarize the core aspects of BitGold for your convenience and also provide you with some of our initial thoughts on this new “currency”.


What is BitGold exactly?

BitGold is an online platform that allows users to purchase, sell and store precious metals in a variety of vaults from Canada to Dubai. The platform also allows users to receive and send payments worldwide in gold. In essence, you could arguably sum up BitGold as an alternative banking system that is completely backed by physical gold. It is not a crypto-currency like BitCoin; all data and transaction records are centralized with the company, which promises to employ different security measures to try and keep the system as safe as possible.

The main benefit of this payment system is the fact that it appears to be 100% backed by physical gold and therefore brings back the “store of value” function to the money we use for transactions. In the past, there have been several gold-based payment systems. However, what stands out with BitGold is the ease, cost efficiency and speed with which transactions can be executed in comparison to traditional wire transfers.

An important and intriguing aspect of the BitGold concept is the stability of a gold-based financial system. We all understand the issues and weaknesses of a currency system that is entirely controlled by central bankers, who have the power over a purely trust-based system built on the unlimited resource of paper money. In the case of BitGold, we may be witnessing the birth of a parallel currency system with a gold standard.

As long as the internet is running and, in the absence of any security breaches, payments in gold can always be carried out using a platform such as BitGold, even when the global financial system is ”out of service”, for example during times when trading on the New York Stock Exchange is suspended.

Our world today is definitely steering in the direction of more and more being done online. The world is becoming increasingly connected and automation and electronic payments have become part of our daily lives. We can easily envision some of these payment services being based on gold, whether it ultimately ends up being BitGold or some other incarnation thereof.


Who is behind it?

The BitGold platform is run by the Toronto-based BitGold Inc. that went public at the beginning of May of this year. Roy Sebag, an investor and former portfolio manager, and Josh Crumb, a former Goldman Sachs Metals Strategist, founded the firm. We watched several interviews with the two and found that both of them seemed genuine and ideologically in line with the Austrian school of economics. According to their website, there are several well-known investors backing the platform such as Sprott Inc., Soros Brothers Investments LLC and several more.


What do we think about it?

First things first: BitGold Inc. is based in Toronto, Canada and is not registered under the US Securities Act, meaning US persons, unfortunately, cannot use the platform, at least not yet.

According to the company presentation, they are currently targeting the markets of online, cross border and remittance payments. In essence, they want to grow in markets where payments are currently not that easy to execute as well as under-banked regions. In our view, this explains their current pricing strategy where payments in and out of the platform cost 1%, but storage is offered for free. This pricing strategy suggests that either the “free storage” offered is a marketing ploy to try to quickly increase the number of users and metals under their custody, or that the platform is mainly intended as a platform for transactions, where users quickly move in and out with their funds.

It won’t surprise any of our readers when I say that we at BFI are proponents of gold, especially the stability that a gold-based system could bring to our financial system. We therefore, in principal, would consider ANY properly structured product or currency system that is backed by physical gold a good thing. Historically, governments have always abused the power that comes with the production of money. Therefore, a private institution such as BitGold issuing their private “currency” is a concept we can certainly wrap our hands around.

It is perhaps a bit too early to say if the idea and service will catch on and if this payment method will be used on a wider scale. To us, at first sight, the concept does however look like a good one, and may be the precursor of more to come.

In preparation for this review, we had a member of our team sign up for the service and buy 1 gram of gold over the platform. The registration process was quick, the Know Your Client procedure was conducted via webcam and they were able to buy gold…all in about 30 minutes time. The ease of use of the platform is quite impressive. Nevertheless, although we don’t claim to be IT specialists here at BFI, the recent attacks on BitCoin platforms and presumably secure banks does raise our concerns on how secure such a fully automated system can really be.

Our Conclusion? We like the concept. BitGold looks like a solid and certainly very interesting business model. In terms of who this service is for, we think it is a convenient and efficient platform for those interested in keeping smaller amounts of their wealth in gold, ready to be used in gold-based transactions. However, call us old-fashioned, we would have reservations when it comes to safekeeping larger portions of our wealth with a solution that relies so heavily on IT systems.

What’s most exciting about BitGold to us, is that this is yet another new gold solution that we may soon be able to employ and add to our quiver of top-notch gold-based services. Depending on what your interests and needs are, it is a new-found luxury – one that wasn’t even available just 10 years ago – that we have such a broad array of solid international, physical precious metals trading and storage solutions to choose from.

Not too long ago, we were largely limited to the metals accounts and claim accounts that banks typically offered. Today, we can choose from proven and tested products such as the Perth Mint Certificate Program, GoldMoney, Global Gold, some truly gold-backed ETF’s such as the ZKB ETF, or from a new gold fund called Bastion Physical Gold, which allows physical redemption in form of 250g bars, without any fabrications costs.

With gold currently somewhat out of fashion amongst most investors, we might sound a little too enthusiastic here. However, our impression is that, overall, gold is still very much on the rise. And, with latest movements in US inflation expectations, an impending rise in gold prices seems more and more probable.

Time to head back into the gold markets? Timing is tough. We all know that. For sure though, those with a contrarian inclination should use the suppressed gold price now to make a move. If you’d like some tips on choices and pointers on how to go, send me your questions or contact the BFI offices in Switzerland.

We’ll be happy to help and guide you, as always,

Your Swiss Mountain Sherpa

Scott Schamber

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