Many values shown in charts throughout this write-up will be in Canadian Dollars. However, the valuation section will be done in USD.
Roy Sebag, the CEO of Goldmoney, is what microcap investor Ian Cassel would refer to as an Intelligent Fanatic.
He is a hedge fund manager, an entrepreneur, a CEO, and a philosopher all wrapped up in one.
He is a polymath.
And he is obsessed with Gold.
He has seen remarkable success in the public markets, and yet the vehicle that he has established as the incubator of his entrepreneurial ventures, Goldmoney has been treading water for years.
Goldmoney Stock Chart shown in Candian Dollars
Goldmoney as it currently stands was formed as the result of the merger of BitGold and Goldmoney.com.
BitGold described itself in a press release as:
…a software service that connects free vault storage with payment networks, enabling a ‘banking’ like platform for gold. The BitGold platform has previously been operating in private beta, with invitees opening accounts, sending and spending gold by email or text message, purchasing gold in vaults around the world, and redeeming physical gold cubes.
…
BitGold is not a bank and does not take risks with a customer’s deposits, not a cryptocurrency like bitcoin, and there are no IOUs and no securitized assets like gold ETFs. As a Trusted, Limited Third Party, the platform is a software service that allows for the quick settlement of independent-physical gold trades so that a users’ gold is easily acquired and accessible across various payment networks. The platform is powered by BitGold’s patent-pending locational-gold exchange and vault management system linking vault custodians and bullion banks with real-time settlement. The BitGold technology allows users to choose where in the world they want their gold physically stored and connects the securely-vaulted gold to international payment rails such as SWIFT, Visa, MasterCard, Interac, SEPA, UnionPay, Discover, American Express and others
The ability to send or spend monetary value in gold via email or text sounds eerily similar to PayPal.
At the time of the merger Goldmoney described itself as:
a gold and precious metals vaulting business founded in 2001 by James Turk and Geoff Turk. GoldMoney offers an easy way to buy gold, silver, platinum and palladium online and safely store for customers these precious metals in five countries. It is GoldMoney’s vision that the benefits and dependability of gold and silver should be easily available to everyone, while providing its customers with assurances of integrity so they know their money is safe.
First and foremost, the Goldmoney of today stewards a strong base of assets for clients as a custodian and bullion bank. The company is a broker-dealer and always carries precious metals on balance sheet. The company has steadily seen its custodial assets grow. But as described above the company also has a payments system embedded which is based on the transferring title of precious metals.
While our technology is built and ready, the regulatory environment is going the other way, and any participants that attempt to profit from facilitating payments will discover the long-term liabilities and inherent costs regardless of their approach.
Fully compliant and waiting in the wings.
This is as opposed to flaunting authorities who can ruin your life in an instant. Crypto entrepreneurs have taken a much more precarious route that has seen immense wealth created and sky rocketing market values. Time will tell if the value of various cryptos is truly timeless. Many entrepreneurs may be temporarily protected by the ‘wealth’ investors have tied up in their enterprises and protocols. Should the crypto ecosystem collapse more broadly the freedom many crypto proprietors enjoy may prove itself to be transitory.
The last acquisition worth noting by the firm before we go into more detail on the company was its acquisition of Schiff Gold. Goldmoney issued the famous promoter Peter Schiff 1,063,000 shares for essentially half the economic value of his gold broker franchise. This deal ensures Peter is fully incented to scream from the roof tops on Goldmoney’s behalf.
Anyone reading this likely knows Peter would be screaming about the virtues of gold regardless! All the better if Goldmoney is gaining exposure from it.
Having said all that the company has cemented its role as a bullion bank and broker-dealer. The company’s profitable gold brokerage business has also funded countless entrepreneurial ventures throughout the years. Some of these ventures have been far more successful than others, while the success of the company’s newest venture still remains to be seen.
Growing Pains
The pain of complying with Anti-Money Laundering (AML) and Know Your Customer (KYC) have been felt by the company over time. These strains ultimately make the current business stronger due to robust compliance capabilities, but growth definitely slowed down whilst adding expenses to the business. This *masked profitability*. The company has stated in the past that the compliance scrutiny was unwarranted as the company is not a true bank since they do not take risks with customers precious metal holdings.
Yet, they were forced to deal with the heavy compliance costs that more justifiably regulated financial institutions are accustomed to. In 2019 Professional fees mushroomed due to “Jersey Financial Services Commission compliance costs and other process improvement work, which were not present in FY 2018.”
Service provider and Professional fees
Service Provider and Professional fees finished 2021 at their lowest combined level for the company since its merger.
When BitGold originally launched their press release stated:
BitGold’s mission is to make gold accessible and useful in digital payments and secure savings. The BitGold platform provides innovative solutions to the challenge of transacting with fully allocated and securely vaulted gold. BitGold accounts are free and convenient to open by anyone, anywhere* in just minutes. BitGold provides users with a secure vault account to purchase gold using a variety of electronic payment methods, or with currency through an ATM network. The platform also provides transaction capability including: instant cross-border gold payments, merchant invoicing and processing for gold, debit card spending of gold at traditional points of sale, conversions to a customer's external digital-wallet or bank, and physical gold redemptions.
BitGold is a Canadian corporation with offices in Toronto, Canada, and Milan, Italy. BitGold has partnered with established professionals in auditing, vault security and web security, bullion dealing, and is committed to best-practice systems for compliance with all applicable laws and regulations regarding anti-money Laundering ("AML") and Know Your Customer ("KYC").
The company’s value proposition has certainly shifted since the time of this press release. As shown above in bold text, when BitGold launched the goal was to build a convenient and free money transmitter service financed by profitably selling gold to end users. As we stated this payments service is currently shelved, though the company still utilizes the BitGold technology. As an American I can attest that the service was not easy or convenient to set up, relatively speaking. Lastly the service is no longer free. There is a minimum $10 monthly charge.
While this is a small price to pay for a user storing immense wealth with the company it is certainly a roadblock for onboarding new customers who may not even fully understand the value proposition. As my brother would say, why not buy GLD in Robinhood for free? As such the company saw serious churn as they rolled out the monthly minimum fee. And while most of its accounts closed, most of its assets stewarded remained as the Pareto Principle is economic law.
Notably all the text from the quote above that are italicized are features or capabilities that showcase the company’s prowess and ability to color within the lines while offering an alternative financial service that is quite subversive. Namely the fully allocated nature of their clients assets and their robust AML and KYC capabilities.
More recently the company exited its operations in Jersey which were a legacy of the original Goldmoney set up by James Turk. The company will operate out of Toronto on a go-forward basis and booked some charges as it has wound down its Jersey entity that duplicated costs.
The company has also folded several ventures, some of them seemingly inexplicably.
Most understandably, Goldmoney China was shut down before it really even launched due to the restrictive nature of the CCP.
But the company had enabled Crypto Currency trading and was developing an offline storage mechanism for these types of assets, seemingly profitably before shutting down the activity. The company’s ethos while showing skepticism of the space resulted in a quality offering amid much snake oil. When they first entered the Crypto Custodial business the company stated:
we made the important decision to finally enter client services in this market in a very risk-measured way, focusing on our core infrastructure expertise in custody and minimizing counter-party risk “outside of the banking system, but inside the regulatory system”. While crypto markets could be considered the antithesis of precious metals stability, our clients recognized the need for a qualified custodian in a crypto-market still riddled with banking system friction and lacking financial transparency at exchanges and other points of third-party “safe” keeping.
The company also set up a regulated peer-to-peer lender that required loans to be collateralized with precious metals, called Lend & Borrow Trust. The company folded this enterprise after increasing its ownership stake from 23% to 100%.
Some of these decisions are downright confusing.
The company has given some justification for these decisions and ultimately they seem to come down to major philosophical decisions concerning how the company wishes to carry itself in the marketplace. This is a fine enough justification. However it does leave a bitter taste in the mouth because it feels to outside observers that the company could have handled the disposition of these lines of business in a profitable manner.
Natural philosophy, natural opportunities
Roy Sebag has the words Natural Philosophy on his twitter profile.
While I may disagree with the way he unwound the cryptocurrency business his team built internally he is a first principles thinker.
He is a builder.
If you read his shareholder letters you will see he speaks of investments as seeds and profits as harvests. In interviews Roy refers to man’s need to negotiate with nature for survival. He speaks to the toil required as a part of this negotiation.
And this is why Gold is so important to him. It preserves energy. It preserves the excess of a person’s toil that they may have harvested but have yet to consume. Thinking this simply about the topic of savings is elusive in today’s age of excess.
Common sense thinking tells you that what is not produced cannot be consumed and yet we live in an age where government checks, speculation, and now inflation are rampant.
Goldmoney runs a sustainable business to its core. Part of this is the fact that the business carries no net debt on balance sheet. But it goes even further than that.
The Goldmoney business model provides unique exposure to a ROMW (Return on Metal Weight) financial model similar to that employed by precious metal streaming and royalty companies; however, unlike the majority of these companies, Goldmoney accumulates the precious metals it earns above its working capital requirements and its gold and silver grow with each passing day.
This way of thinking offers significant explanatory for the company’s decisions to exit certain business lines and go all in on others like its jewelry business Mene, which has higher margins than Goldmoney and seen nice revenue growth.
Mene quarterly revenues
Mene has been an overwhelming financial success that was incubated by Goldmoney. Goldmoney owns 36.27% of Mene, which sees it value fluctuate through time since it is publicly traded. Goldmoney also benefits as Mene’s supplier. Roy stated,:
2021 was the year in which Menē transitioned from a start-up to a sustainable business.
Mene offers 24 karat gold and platinum jewelry at much smaller markups than a household brand like Cartier.
Mene serves a strong niche and takes much inspiration from Eastern cultures that value jewelry as savings. Many of the pieces designed by the company look more like ancient relics than modern jewelry. A nod to the timeless prestige of gold that will outlive countless global brands.
Roy also started a little business outside of the Goldmoney family named Bitfarms. This is a company that has gone on to surpass Goldmoney in market cap by an order of magnitude.
Roy is no longer actively involved with the company. While Bitcoin mining may seem to be a large endeavor to your average Joe, it was simply an arbitrage between energy and the Bitcoin price to Roy.
Thinking of what is surely a logistical lift as a basic sort of arbitrage is due to Roy’s nature as a First Principles thinker. Which brings us to his latest venture, Totenpass, which Goldmoney holds a 60% stake in. But not before mentioning that Roy is Chairman of another truly interesting publicly listed Bitcoin Mining venture named Cathedra.
Totenpass is a memory card developed by Roy, Goldmoney CTO Alessandro Premoli, and Bruce Ha a former engineer from Kodak. It was developed over at least a 4 year period by using lasers to refract light off of gold and nickel. Roy goes in depth in a whitepaper which can be found on the company’s website.
In the Whitepaper Roy speaks to the unsustainability of entrusting large companies to store such mind-boggling amounts of information. This may be fine enough for the majority of internet content which is mindless and meant to grab ours and others attention.
However, file corruption, a physical manifestation of entropy is unacceptable for our most precious data.
One burgeoning use case is the cold storage of crypto and passwords to access crypto wallets. It surely makes one think about whether Totenpass was ideated from Goldmoney’s BlockVault venture. This would be a lucrative use case that could bridge the company towards profitability before reaching a mainstream audience that appreciates the product for more diverse applications.
While I am unsure of the Totenpass’ ultimate chance for success it is just another example of the moonshots embedded in Goldmoney.
Goldmoney’s core business incubates Roy’s gold projects/innovations. Understanding the nature of Goldmoney’s true earnings power necessitates the understanding that the firm is truly a founder led fintech company.
Nobody Cares
Goldmoney has a strong, but relatively tiny balance sheet with a business that is growing, albeit not in a straight a line. At ~$120 million USD market cap it is much too small for most institutional investors to take the time to study.
Revenues have been steadily growing. However, the first 9 months of this year have been disappointing to say the least.
Goldmoney Revenues
Recent volatility due to the war in Ukraine will likely result in a nice bounce for the company’s fourth fiscal quarter. While a sad truth, this is normal as the mission of the company is to act as a vessel of stability for its clients when they need it most. Meanwhile the company has maintained strong margins that it hadn’t achieved at higher levels of sales.
Goldmoney Gross Profit
While revenues have fallen sharply, this improved operating performance will benefit the company going forward.
As we can see below, despite the drastic decrease in revenue the company was able to squeeze out a reportable profit for investors. This is years in the making.
Net Profitability
Having said all this if we compare Goldmoney to the much older and also publicly traded company A-Mark Precious Metals we can understand why the company has not been rewarded. Squeezing out profits amid weak revenue is surely a sign of an improving business model at Goldmoney but A-Mark, an established and publicly traded precious metals dealer, has not seen such a drastic decline in revenue, with FANTASTIC Total Shareholder Returns to boot.
A-Mark Financial Data
A-Mark Share Performance
Given the alternatives in the market you could understand how calculating investors would be unforgiving of Goldmoney’s recent performance.
That being said some of A-Mark’s recent bottom line performance has been attributable to recognizing gains in its fantastic investment JM Bullion.
JM Bullion juices Earnings from equity method investments and Remeasurement gains
And yet the company’s gross margin dollars are larger than Goldmoney’s market cap in a thin margin industry.
Goldmoney’s investment and control over Mene will ultimately result in the company seeing similarly large gains from unconsolidated entities over time. And Mene has structurally higher margins than precious metals dealers.
Mene Gross Margin %
During the Pandemic Roy had Goldmoney hold physical metal premiums below those of other dealers in the market.
This can go a long ways towards explaining why total shareholder returns have lagged A-Mark. As a shareholder it was frustrating as this would have amounted to windfall profits in what was already a prosperous year operationally but less so in the public markets.
Understanding this is a consumer centric company building a custodial business that will earn recurring revenue helps square the circle a bit. But precious metals, like basically any physical good, can be hard to come by.
Simon Mikhailovich is on record as stating that acquiring even $10 million of gold is a herculean task. Years ago a jewelry company approached Goldmoney to acquire this critical input due to the lack of a helpful physical futures market, and this interaction is what sparked the idea of Mene.
The larger point I am trying to make is gold is scarce and it cannot seem to catch a proper bid on its own despite obvious tightness in the physical market.
How else should a business ration product but through price? And why would investors care about you if you aren’t willing to do so?
Do I really need to tell you what makes them subversive?
Goldmoney is building a financial institution that would have earned the blessing of Murray Rothbard, the political theorist and anarchist, early on.
Its puritanically conservative business philosophy may depress profits in the short-term but it keeps the lights on in the long-term. Even though Lend & Borrow Trust folded, it was an attempt to empower customers to make their own collateralized lending decisions.
Meanwhile other financial institutions have been stopped out of the commodities trading business altogether after taking large risks, with the dutch bank ABN Amro forcing its clients to sell their bullion.
ABN Amro risks catch up to them
While leverage is the name of the game for so many other financial institutions, for Goldmoney its clients trust and its owners capital is paramount.
Goldmoney will never be carried out on a stretcher.
Going further into subversiveness, the company (and Roy) unabashedly lambast Keynesian, MMT, Malthussians and other academic policy. This disagreement with Ivory Tower politicians and academics gets to the heart of the matter.
Gold is considered anti-social for the very reason that its possession tells policy makers “I do not trust you to hold my savings any farther than I can throw you!” Gold has historically acted as the limiting factor on government spending. While the aforementioned academic Keynes was searching for a neutral reserve asset, one already existed. It just didn’t stroke his ego enough due to its already ubiquitous nature.
Brilliant economists to this day make the same mistake. Michael Pettis yearns for Keynes’ bancor that would tax both those nations that hold excess foreign reserve surpluses and those with too few. Yet the ability of a foreign Government to call their gold home was always intended to act as a control on imbalances in the international balance of payments, even if it came with credit risk.
And so Goldmoney sits defiantly, offering international vaults in Singapore, Switzerland, Toronto, and New York as a safe haven from government misadventures. With the technological prowess to send payments in a more accommodating environment but the common sense to stay out of legal trouble in the current one.
Further, Alasdair Macleod who heads up Goldmoney’s research arm, was recently quoted by Luke Gromen in a highly acclaimed podcast with Grant Williams for his understanding of Basel III banking regulations, and its implications for the dollar’s reserve status.
Roy appeared with Max Keiser on Russia Today discussing how negative interest rates could have been forewarning about elite’s plans for negative population growth.
The list can go on and on but ultimately how can you be more subversive than encouraging citizens to move their savings from the coin of the realm and giant corporations to precious metals?
Perhaps by encouraging them to remove their precious data from the watchful eye of Government enabling Silicon Valley panopticons.
Compounding the Bargain
Goldmoney is a high quality compounder disguised by its entrepreneurial ventures as an unprofitable shitco. As stated above the company accumulates more precious metal onto its balance sheet with each passing day.
It’s too small for institutional capital to pay attention too.
Its not gushing enough cash to jump off the page at microcap investors.
But its balance sheet is solid and unencumbered.
Goldmoney Balance Sheet converted to USD
With an outstanding diluted share count of ~76.5 million and a ~$1.55 stock price the market capitalization of the company is under $120 million. With zero debt encumbering its balance sheet the stock trades under 1.2x book value.
Goldmoney last 9 months segment breakdown shows profitable core amid revenue declines
As I have painstakingly stated numerous entrepreneurial ventures have started-up masking cash flow throughout numerous years even as costs continue to be ripped out from past compliance issues and the merger that formed the company as it currently exists.
Core Earnings Power Model
A few notes on the model shown above. The go forward model assumes a return to growth with a simple 5% growth rate attached to FY21’s topline number and uses 2021’s gross margin of ~3%.
Operating expenses just assumes they are the same as 2021 but subtracts out $2.5 million CAD for charges taken when shutting down Jersey Operations. There is additional upside here because expenses to run the Jersey operations before shutting down have not been deducted from here. Totenpass operational expenses are also included here as well, but did not a contribute to Fiscal 2021 revenue and acts as additional upside there.
If we subtract out the highly liquid tangible equity this company is trading at under 3x its core earnings power. This is before taxes. But it is also before any upside from Mene and Totenpass.
Now a few notes on how to think about the business.
In a lot of ways revenue is more akin to a Gross Merchandise Value with Gross Margin shown the true revenue number. If thought about this way margins are much larger. This is important because revenue is not constrained by the balance sheet. Given fast inventory turns and prepaid transactions the company does not require additional working capital and should be able to push much more sales through its systems without stressing its balance sheet. While reported Gross Margins will be low, operating margins can easily expand.
You may read that statement and say, “Huh? Didn’t you paraphrase a gentleman earlier who said even finding $10 million of gold for block trades is challenging?”
The answer is that although that is true, at higher and higher Gold prices, more and more inventory will come to the surface and change hands.
In a lot of ways I think about Goldmoney as the precious metals equivalent of Coinbase. But without the reckless disregard for its customers.
Coinbase carries fraud-coins like Tether. If the Tether ponzi-fraud ever blows there very well may be hell to pay for such reckless behavior. Behavior that you would never see out of Goldmoney, which is abandoning its collateralized lending business due to perceived risk.
Speaking of cryptos, Bitcoin may have ultimately held down the gold price below where it may otherwise have gone, this means that over time the flow of gold to the historical stock could be below where it would otherwise have gone, which is bullish long-term for the price.
We therefore see our business and our group as an extension of our client activity. What they do with their wealth is what we will be doing with our capital, but with the added benefit of generating cashflow from the products and services we provide that can compound the weight of our precious metal position over time.
Goldmoney’s moat is the earnest belief in its mission and the innovation fostered by this belief, and the prudent manner with which the business is run.
Get long independence, durability, and scarcity.
Get long gold, technology, and a clean balance sheet.
Get long a superior business model to gold mining.
Get long first principle thinking.
Get long Goldmoney.
But most importantly, get long Roy Sebag.
Maybe a update might be due given the commercial real estate venture.
This is how I have felt and thought about the company dating back to 2018 when I invested.