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INTERVIEW: Capturing Real Yields With Monetary Metals

Tom Burroughes

4 January 2017

(An earlier version of this interview appeared in Family Wealth Report, sister publication to this one.)

This news service has written occasionally about the gold market and the attitudes towards this and other precious metals among the denizens of the wealth management industry. While interest rates appear to be rising - albeit slowly - in the US, it can be said that much of the developed world operates in an unusual period, with ultra-low rates in many countries and, in the case of places such as Japan and Switzerland, negative rates. Successive rounds of quantitative easing have eroded faith in government “fiat” currencies and encouraged developments such as in digital, virtual currencies such as bitcoin. A variety of organisations work in the market for holding and investing in physical gold. One such entity is Monetary Metals, a business headquartered in Arizona, US, and led by Keith Weiner; it was founded in 2012 and has 11 staff. Weiner, who has a background in computer technology, has a particular take on the state of monetary affairs in the US and the rest of the world. A recent conference in New York City that was organised by Family Wealth Report probed the issue of how to find the “Holy Grail” of uncorrelated returns, and it was mentioned by panellists that gold remains a classic element in trying to cut correlations.

This publication interviewed Weiner about his business and his views on the state of the markets. He frequently travels around the world talking to investors, and he considers his business philosophy to be international in scope. 

You had a recent capital-raising. What was the main reason you had to raise this capital? What will the capital be used for? Is there a time frame over which you intend to deploy it?
We are building our intellectual property, launching a new website with live graphs to appeal to each constituency in the gold market, growing our private equity and fixed income businesses, and general corporate purposes. We will publish on our website daily gold forward and gold lease rates, which the London Bullion Market Association stopped publishing in 2015. We plan to raise more capital when we hit our milestones.

What would you say is unique or specific about MM as a business?
There are currently two basic gold investment products. One is the metal itself. Gold has no yield, so people bet on its price (including ETFs and futures, which just add leverage and counterparty risk). The other is gold mining shares. They offer high risk and the promise of high return, and have delivered on the former in recent years. Monetary Metals offers the asset in between: a yield on gold, paid in gold®. Our unique approach is not about selling the gold at a higher price, but using the gold to earn more gold. We are developing the gold yield marketplace™, not for buying and selling gold but to connect gold investors seeking a yield with corporations and institutions who need gold capital and can pay in gold for it.

Why did you set up the firm?
I sold my previous company - DiamondWare was a software company that developed 3D spatial voice audio technology - to Nortel Networks in August 2008. I watched the markets crashing from the sidelines, but with great alarm. I studied economics at first to learn how to protect myself. But I came to realise how serious the crisis is. If I wanted only to make money, it would have been easier to just start another software company. I had built a team of stars and superstars, I had access to capital, a great group of advisors, and it is my background and first passion.

But I want to help the world rediscover how to use gold as money. The key to this is not payments, but interest. People may be happy to be paid in gold, but they don’t want to pay out their gold. Interest is the key to circulation. Monetary Metals mission is to make it possible for anyone who wants to deposit gold to earn interest on it, in gold.

What, in essence, are you selling?
Earning interest is a universal human need. Everyone who is working for a paycheck needs to compound interest on their savings, or else they can never accumulate enough to retire. Retirees need interest, or else they consume their principal and live in fear of outliving their money. Pension funds, annuities, insurance companies and others depend on interest or else they are all bankrupt. Unfortunately, we are in a zero- or negative-interest world (notwithstanding the current correction). Forget inflation, this is the real failure of the dollar and other paper currencies.

In addition, the paper currencies tend to fall in value. The Federal Reserve has a policy goal of 2 per cent debasement per annum. So even if one could earn 2 per cent, one is still just treading water. If they can’t get a yield, then they’re forced to consume their capital. That is most obvious in the case of the senior citizen who is spending down his bank account. Less obvious is that speculation in asset bubbles is a process of conversion of one person’s wealth into another’s income. The former would never spend it, but the latter does.

Obviously, we are selling a return in money which cannot be debased. This fills a need that is not being filled any more. More abstractly, we are selling a paradigm shift. When people earn interest on gold, it is easier to think of the amount of gold they have rather than its dollar exchange rate.

What do you see as the potential for what you are providing? Are there capacity limits and, if so, why do they exist? Is your business scalable?
Today, we run a hedge fund called the Gold Exponential Fund. This could grow to a billion dollars under management, but that is not the limit of our vision. We have exciting ideas for other funds.

We also offer gold fixed income investments based on the true gold lease. We provide gold to businesses who need it in exchange for interest on the gold. Based on data from the COMEX gold futures market, we can estimate the market size for this at about 40 million ounces ($46 billion).

The largest market, by far, is the bond market. I am on the Arizona House of Representatives Ad Hoc Committee on Gold Bonds. The purpose of this committee is to explore the issuance of a sovereign gold bond, backed by Arizona’s tax revenue on gold and other mining. The bond market is huge. Monetary Metals is in discussions with other states, and sovereign governments around the world.

You have very specific views about banking, money and credit that do not necessarily fall into an easy-to-define category. Does this cause any sort of issue in marketing, or do people like what you are offering when they understand it?
It is a challenge in writing about my economics and in policy advocacy (which I do under a 501(c)3 tax-exempt organisation, the Gold Standard Institute). However, a for-profit business that depended on that kind of educational effort would not succeed. Education is too slow and too expensive. So we are not trying to do that.

Monetary Metals is offering its clients a simple value proposition. For investors, it is a yield on gold, paid in gold. For business users of gold, it is gold financing, simplified™. Our conversations are all about how our offer benefits the client. They don’t have to know or care about economics.

What has been the reaction from the financial industry? Have you come up against any scepticism or even hostility? Have you been pleasantly surprised and found some converts? Any examples?
Our approach, unlike most in the gold space, is not at all antagonistic to finance or banking. We think we can offer something unique and important to the industry, and we seek to develop relationships to mutual advantage. This is nothing special, just “business 101” thinking. So far, we have partnered with a broker-dealer and investment bank.

We learned something very interesting. While most pension funds cannot own gold metal as an asset, they could own a gold bond. This makes sense, as holding a commodity comes with many problems—and it does not generate a yield. A pension fund is not supposed to be betting on asset price bubbles. However, a bond with a yield is a different story. And of course historically, pension funds and insurance companies were buyers of gold bonds.

Most people are not yet open to the idea of a yield on gold. Many of our friends in the gold community are sceptical about “fractional reserve gold”. They believe gold should be locked down in the vault, always 100 per cent available for withdrawal. Of course, there is no yield without moving the gold out of the vault. This segment is willing to ignore yield, and anyways they are more interested in betting on the price action. Many in mainstream finance don’t see why gold matters (though major wealth management advisors often recommend a 3-5 per cent portfolio allocation to the metal). All of that said, we have a ton of investor demand already.

In the wealth management industry, there is hunger for real yield and concern about being pushed up the risk curve. Have you made a point of talking to organisations such as family offices, discretionary wealth managers, etc?
We are starting to approach them now. A lot of work had to happen to get us to the point of being ready.

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.