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INTERVIEW: Capturing Real Yields With Monetary Metals

Tom Burroughes, Group Editor, 4 January 2017


A US firm that says it is developing a marketplace for earning yield through gold - potentially meeting an urgent need in a world starved of returns - talks to this publication.

What is your greatest fear as regards the US/global economy?
I worry that the dollar will keep rising, against gold and all the paper currencies. This will squeeze debtors worldwide as well as domestically in the US. Also, the rising purchasing power of the dollar could fuel quite a boom. Americans will cheer, and they will be temporarily right for the wrong reasons. It will not be a return to good times, but further capital consumption, erosion, and destruction. At the same time, it will be a soporific that will discourage political leaders or the financial industry from thinking about solutions. And when the boom turns to bust, the damage will be that much the greater.

When an investor comes to you, what sort of options do you present them with? Are there minimum investment sizes that you require? Are there liquidity/redemption restrictions and requirements?
The Gold Exponential Fund is a hedge fund that allows investors to own physical metal held outside the banking system, and earn a return by arbitraging the gold-silver ratio. The minimum investment size is $75,000. There is a two-year commitment and then annual liquidity windows. The fund accepts investment in dollars, or gold or silver. For our fixed income, we will accept a minimum of 20 ounces of gold to set up an escrow account. We bring gold lease opportunities to investors who have gold in escrow.

As you noted above, we raised just over half a million dollars in equity capital recently. We anticipate our Series A round in 2017.

Finally, interested investors may want to discuss with us the prospective issuance of a gold bond. The gold bond is going to be a disruptive technology in finance. We are confident that once the first gold bond is issued, other issuers will follow suit.

Does your sector suffer from the "gold-bug" problem, of people who seem to have almost paranoid views about life and who see gold as some sort of panacea? Do you ever turn some people away?
There are people who own gold as a speculation, believing that the price should go to $10,000 or some higher price. They believe that the only reason it’s not there now is a conspiracy to manipulate the price. There are others who look forward to a collapse of civilization, and anticipate that by hoarding gold, guns, ammo, and dried food. We do not generally expect people in these groups to become our clients. Our clients typically have a rational allocation to gold, as part of their portfolio, or they see gold as a hedge or insurance. They are attracted to the idea of owning gold and growing it.

What specific ideas do you acquire when you are on the road?
I seek to gain perspective on how different cultures perceive gold. I have to say, as an American, that Americans tend to be the least aware of gold (and those who are aware of it sometimes believe in the conspiracy theory or zombie apocalypse we discussed above). Perhaps because there have been hyperinflations in living memory in Europe, or the Swiss franc was not too long ago partially gold backed, Europeans tend to be more aware, and more sober. Also, the banking system in Europe is at risk and most Europeans know it.

Asians have a religious and/or deep cultural affinity to gold. The Latin American world has no choice but to think about currency failures as their governments destroy their paper currency with tragic regularity. It is certainly occurring right now in Venezuela and may be happening also in Argentina.

And of course I look for opportunities. For example, in our recent fundraising round, we raised capital from investors in Europe, Down Under, and in Asia as well as the US. We are talking to a European company right now about a gold lease.

Explain a bit of your background.
I was your classic computer nerd. I went to computer science school (at Rensselaer in upstate New York) and dropped out when I thought they had little else to offer me at the undergraduate level. I wanted to go build a software company, and I started DiamondWare in 1994. I had a lot to learn (I was 26 at the time), had a lot of fun, eventually building it into something quite unique that had the potential to disrupt the voice communications industry. That is why John Roese, CTO of Nortel Networks, said he wanted to acquire the company. Unfortunately, the wheels started falling off Nortel within weeks of the acquisition and they filed bankruptcy a little over four months later. There never was a chance to work on his vision, or get any capital or help from the company. The asset was sold to Avaya in Dec 2009. I stayed on for a few more years, fighting to get our 3D spatial audio technology into a mass-market product.

Back in 2008, the crisis erupted shortly after my acquisition. I was sitting in 100 per cent cash in a few too-big-to-fail banks, first wondering what is happening and how do I protect myself from it. I turned to study markets and economics, and came across the work of Professor Antal Fekete. I flew out to one of his courses in Hungary, and then started attending. I became his student, and wrote my dissertation which was examined by Fekete and Professor Juan Ramon Rallo of King Juan Carlos University in Madrid. In 2012, Fekete’s New Austrian School (non-accredited) granted me a PhD in economics.

My focus was on spreads as a way to understand underlying market structure and dynamics. Coming from Karl Menger, it is quintessentially Austrian and yet not many economists or market analysts today take this approach. I developed a theory of how the gold and silver markets work, and a theory of interest and prices. I turned the theory into a model, and being a software guy, I built software to run the model.

I left Avaya and started Monetary Metals in 2012. After developing and launching our first fund, I set out to build a brand and reputation. Now, our articles are widely syndicated, not just in the US but globally. In the UK, for example, both Sharps Pixley and the Cobden Centre websites frequently publish my content.

There is a lot of ferment at the moment around things like blockchain, bitcoin, fintech, and alternative finance (peer-to-peer lending, etc). Regardless of the merits of these things, how useful is it to a firm like yours that conventional banking is being challenged?
We see ourselves as a fintech play, and we will have more to say (and show) about this in 2017. I think there would not have been an opportunity before 2008. It is now that banks are vulnerable on multiple fronts. And of course with zero interest offered to the saver, we have a big opportunity.

Central banking, with its QE, and its experiments in managing economies, is under challenge. Would you like to make a prediction of where we will be in a decade's time? Do you think the days of central banking are peaking?
Central banking has just about reached its endgame. The very promise of what it’s purported to do should make everyone sceptical. The belief is that central banks can centrally plan us to prosperity. This is magical thinking.

The reality is that they can offer perverse incentives to consume capital. Like eating the seed corn at a frontier farm, it’s all fun and games while the feast lasts. Then comes hunger the next year as the harvest falls short. The boom which everyone loves turns to bust.

Interest rates have been falling for 35 years. Meanwhile, debt is rising exponentially. Many economists insist that rising debt is not a problem because rising GDP will outgrow it. The problem with this theory is that borrowing has diminishing returns. Decades ago, each new dollar of debt added more than a dollar of GDP. Now, in the endgame, we’re lucky to get a few pennies. This trend is irreversible, and the reason is that all that old debt has accumulated and must be serviced, hedged, leveraged, swapped, etc.

We will come to a point where gold refuses to bid on the dollar. Whenever there is a crisis, it is always the bid, never the offer, that is withdrawn. When the gold bid is withdrawn, then the dollar is finished. It is hard to say if that will happen in 10 years, it could be sooner than that or later.


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