Friday, 25 March 2016


Peter Schiff wrote a scathing denouncement of BitGold in an article. We reprint that article here and below it reprint a rebuttal from BitGold co-founder Roy Sebag. Peter makes many fine sounding points but please keep an open mind until you read Roy's thorough rebuttal.

This is an original commentary written by Peter Schiff for SchiffGold.

Gold is not only the world’s best performing asset so far in 2016, but it’s also off to its strongest annual start since 1980. A key difference is that 1980 was the end of a bull market, while this is the beginning of a new one. Actually, it’s the beginning of the second leg of a long-term bull market that began over 15 years ago, which I believe will be even more powerful than the first.
But today, I am warning potential gold buyers about another gold ripoff.
This case comes from a recent Canadian startup called BitGold, operated by GoldMoney Inc. One of the services BitGold provides is prepaid debit cards that customers can use to access gold purchased from and stored by the company. Now that is a great idea. The problem is that BitGold claims to be the first and only company in the world providing this service. The truth is there are several other companies offering gold-backed, prepaid debit cards, including my own company, Euro Pacific Bank, that first began offering them over three years before BitGold copied the concept. In fact, my bank even offers silver-backed prepaid debit cards, a service not currently provided by BitGold.
I find it hard to believe BitGold isn’t aware of existing prepaid gold-backed debit cards, but they have no problem marketing theirs as being the first and only one in the world. My guess, however, is their real intention is to deceive investors into purchasing the company’s over-priced stock. If investors think the company provides a unique service, they are more likely to overlook huge current losses. The hope is that by being the only company providing an innovative service that those losses will eventually turn into profits. But since BitGold does not have the first-mover advantage it claims and is not the only player in a market that I think will be even more competitive in the future than it is today, I do not believe BitGold’s business model will ever deliver the kind of profits investors expect.
However, one difference between BitGold and my bank is that while BitGold accepts American customers, my bank does not. So if you’re an American, and you like my idea of having gold that you can carry around in your wallet and spend using a pre-paid debit card, then BitGold is a viable alternative to my bank. But my concern is for those Americans who may fall victim to another marketing deception being perpetrated by BitGold.
BitGold claims that customers can redeem their gold in popular sovereign coins or reputable bars – the same coins and bars you can also buy from my company, SchiffGold. In addition, BitGold claims to be the lowest cost way to purchase these products. The truth is that BitGold is potentially the most costly way to buy these products. As such, if your ultimate goal is to take physical possession of sovereign gold coins or bars, BitGold is the last vendor you should consider buying from.
Let me explain why. BitGold’s claim that its customers can redeem their gold in sovereign coins or bars is grossly misleading. If you buy gold from BitGold, you are buying a fractional interest in larger bars that the company stores on behalf of all of its customers. If you want to take actual physical delivery of sovereign coins or smaller bars, legally you are not redeeming anything that you already own. What you have to do is sell your fractional interest in those large bars first, then use the proceeds to purchase sovereign coins or bars from a separate company that BitGold has partnered with. So this process is not a legal redemption of gold that BitGold has been storing for you, but a brand new purchase of gold coins or bars that you never owned, from a completely separate company! This distinction is huge, and BitGold seems to be going out of its way to conceal the implications from its customers.
To understand the true cost of buying through BitGold, consider the example of “redeeming” ten, one-ounce Canadian Gold Maple Leafs. Let’s assume the price of gold is $1,300 per ounce when it’s originally purchased, for a total cost of $13,000, but then rises to $2,000 per ounce by the time the customer wants to redeem it. The customer would have been charged a 1% fee of $130 when he first purchased his gold. Then he would pay another 1% fee to sell his gold. But since the price of gold has risen to $2,000, the 1% fee on the larger $20,000 value would have also risen to $200. BitGold also adds a “redemption fee” of 0.5 of a gram of gold, which in this case tacks on another $32. BitGold’s partner then charges an additional 2.2% for the purchase of the coins. So the total cost would be $802 over the initial spot price of gold, or 6.2% of the original purchase price (not even including the hefty shipping and insurance fees). By comparison, SchiffGold sells these coins for 3-4% above spot – typically with free shipping. So rather than being the lowest cost way to buy gold coins, BitGold is actually about twice as expensive as most of its competitors.
If BitGold were only twice as expensive as its competitors, it would not be that bad. But the ticking time bomb that BitGold is not disclosing is that when customers sell their gold on the BitGold platform to purchase sovereign coins or bars, the sale is a taxable event. This revelation is huge, and will add an enormous tax cost that will dwarf the already hefty markup charged by BitGold for selling you the physical bullion being redeemed.
The US government taxes any profits realized on gold sales at 28%, provided that your holding period is greater than a year. If it’s less than a year, the gain is taxed at the ordinary income tax rate that can be as high as 39.6%. On top of that, there is another 3.8% added for the Obamacare tax, bringing the total tax bill to 31.8% for long-term gains and 43.4% for short-term gains. But if you live in one of the 41 states that also imposes an income tax, you are looking at a combined tax rate closer to 40% or 50%, depending on your holding period!
Using the above example, assuming a holding period longer than a year, this tax bombshell adds approximately $280 per ounce to the cost of the purchase, for a total extra cost of $2,800 for 10 Maple Leafs, representing 22% of the original purchase price. So the true cost to buy from BitGold in this example is 28.2% (6.2% paid to Bitgold and its partner, and 22% paid to federal and state tax collectors), as opposed to the 3-4% cost to buy from their competitors, like SchiffGold. Now if you don’t have the extra $2,800 lying around to pay the tax when you “redeem” your coins, you would only be able to redeem 8.6 ounces of physical gold out of the 10 ounces you originally purchased. The other 1.4 ounces would have to be sold to pay your tax bill. Also, since $676 of the $802 charged by BitGold and its partner is not assessed until you buy your coins, if you did not set aside those funds, the total amount of gold you will actually be able to afford to redeem will be fewer than 8.3 ounces.
Of course, the higher the gold price rises, the bigger your tax bill grows, and the more of your gold will be surrendered to the taxman to pay it. Say you take delivery of your gold when its price has risen to $5,000 per ounce. Your tax bill at 40% on the ten ounces originally purchased when gold was selling at $1,300 per ounce rises to almost $15,000. That exceeds the $13,000 you originally paid for your entire purchase! If you don’t have the cash, you would only be able to redeem 7 ounces of gold out of the 10 you originally purchased. You would then need to sell 30% of your gold just to pay the taxes to redeem the other 70%. Of course, this assumes tax rates have not gone up. In an economy where gold is selling for $5,000 per ounce, and given the growing size of the national debt, my guess is that future income tax rates will be much higher than they are today.
In fact, if there is hyperinflation and tax rates also go up, and you try to “redeem” your gold from BitGold, there will be very little actual gold left to redeem. If the price of gold rises to $100,000 per ounce, and the tax rate also rises to 70% (maybe as a result of some kind of windfall profit tax on “evil gold speculators profiting while others suffer”), your tax bill would be almost $700,000. As such, you would only be able to redeem 3 ounces of gold from your original 10-ounce purchase. You end up paying 70% of your initial gold purchase in taxes, and your $700,000 tax bill is over 50 times higher than your original cost to buy your gold!
Now with true hyperinflation, the future price of gold could be much higher than that, and at one point in American history the top income tax rate was 90%. I agree that this is a worst-case scenario, but one of the reasons to buy and hold physical gold is protection against worst-case scenarios. But under a worst-case scenario, having gold stored at BitGold will be virtually identical to having no gold at all. So if you think the price of gold is going up, and you ultimately want physical delivery, buy your gold from SchiffGold and take delivery now. Don’t buy from BitGold expecting to take delivery later, as after taxes there may be very little gold left to deliver.

Roy Sebag Response to Peter Schiff’s Questions About BitGold

Since launching BitGold in May of 2015 with no users, no assets under custody, and just 16 employees in Toronto, we have grown to over 800,000 users, $1.7 Billion in gold and precious metals under custody (including the assets of GoldMoney which we acquired), and over 53 employees. We have raised close to $70 million in capital from leading institutional and high net worth investors and as far as I know, maintain a liquidity position and balance sheet which is substantially more robust than any private gold bullion storage provider, coin dealer, or investment firm. We took the unusual step of going public on the Toronto Stock Exchange for the sole purpose of providing quarterly transparency and best-class corporate governance, allowing our members to view our financial health as audited by a Big-Four Auditor (KPMG) and peruse in the commentary and discourse provided by an independent board, an audit committee, and accountable management with significant shareholdings. 

Of all these things though, the point I am most proud of is this one: through our company, hundreds of thousands of users that have never purchased gold before are opening accounts, and we believe that 50% or more of our customers had never bought physical gold before. 

They are opening accounts because: 
- Gold has never been so accessible and frictionless 
- The technology of our platform offers new use cases and utility 
- We promote a message of long term savings and utility, not a get rich quick or end of the world sales push.

In other words, our business has allowed the gold category to expand beyond its traditional market, a business based on technology, utility and hope, not the tired retail gold market full of fear and greed. That was always our mission, to empower people with democratic access to gold. We knew that the math behind why gold works as money would do the rest in time. As former British Prime Minister Benjamin Disraeli once said: “The greatest good you can do for another is not just to share your riches but to reveal to him his own” 

While we have been busy with the above we have, from time to time, received correspondence from members and shareholders with various hit pieces and attack blogs. My co-founder Josh Crumb and I have been attacked by BullionVault, Dominic Frisby, WeUseCoins, and a plethora of other incumbents or “thought leaders” within the gold space. 

Each time I am forwarded one of these hit pieces, I find myself scratching my head. Having followed these companies and individuals for many years, I thought their motivations for entering the gold market were altruistic, a discovery of what was right vs. wrong which imbued in them a responsibility to share this timeless wisdom with others and help fuel a movement towards a more meritocratic monetary standard, one which measures the value of human labour and time transparently, equally and fairly. With the exception of the BullionVault piece, where they specifically targeted our financial integrity and attempted to incite fear in GoldMoney customers, I chose to remain quiet and not answer the others. I found my time was better used focusing on the business and enabling our users to derive the benefit and utility from our network over time. Recently, Peter Schiff posed some questions about BitGold with respect to the ultimate cost of redeeming gold coins via the platform. Over the last day I have seen an escalation in misinformation being spread about BitGold and I believe that gold ownership is already a widely misunderstood undertaking which should not be further complicated either by obfuscation, misrepresentation or miscalculation. The misinformation has been specifically targeted at scaring our customers, questioning the integrity of our business, and waging a “search content” war so that they can promote their own business or discredit ours when customers look for our rapidly growing business over the internet. The irony of course is that none of their businesses have ever been as well capitalized, more transparent through public filings, or have had more satisfied customers than our own 10 month old service. It is very clear that in a year or two they simply won’t matter, their fear mongering and hit pieces will be seen as dead wrong, just more road kill on the SEO super highway. 

Detailed Rebuttal to Peter Schiff’s Argument 
Peter Schiff lays out an argument founded on an inaccurate and incomplete understanding of our business. For the benefit of our customers, I will work through the arguments made by Peter Schiff. Our focus has always been on an internet-scale, mass market service. Much of our product and marketing strategies are modeled on businesses like PayPal, we’ve never been concerned with small scale competition in retail gold products as that has never been our target market. Mr. Schiff says that he doesn’t care about the “$50 account” because there is no profit in it, but that is exactly why we built the business the way we did, so we can reach the scale that every holding matters and we can democratize access to gold for everyone. Mr. Schiff starts out by saying that the BitGold Network and Platform allow ownership of gold in as little as .01 .9999 Fine Grams or $.04 Cents because the ownership of the physical property is a fractional share. This is Schiff’s first error. Had he spent the time to read through our Terms of Service or the Prospectus filed with the Toronto Stock Exchange relating to Aurum, our patented physical gold settlement system, he would note that while Aurum does in fact automatically make a market in increments of .01 grams, allowing gold to be used in day to day economic transactions, it also (and this is the key) automatically allocates “buckets” of physical bars to specific users as they reach the corresponding physical threshold. Most importantly, Aurum does this under a 100% pure gold accounting standard in line with LBMA guidelines. In other words, if one bar is .995 and the other is .9999 or .9995, Aurum is adjusting and reflecting your ownership on the BitGold platform as a physical interest in the pure gold content. This is critical for the reasons I will set out below. There are three physical thresholds: 

Physical Threshold 1 = BitGold .9999 Fine 10 Gram Cube

Physical Threshold 2 = LBMA/COMEX .995 1 KG Bullion Bar 

Physical Threshold 3 = LBMA/COMEX .995 Good Delivery Bar (400 Tr. Oz) 

As you begin your journey with the BitGold platform, you are working your way towards achieving allocated ownership towards one of these thresholds. 

Let’s use an example where someone owns 8.5 Grams of gold. That person owns the physical property right over 8.5 pure grams of gold though in reality the specific bar will likely be a 1kg Bullion Bar at a specific vault of their choosing. But remember, we are talking about a physical property right and we are talking about gold, an element that can be easily physically divided into any increments. This is important under insolvency, where a 1kg bar could literally be divided into as many increments are required to satisfy each interest. Or, and this is important, for the purpose of exchange like for like gold interest. Let’s go back to the fellow with 8.5 Grams. He has now added more funds and has grown his balance to 10.5 grams. He now chooses to redeem in the first physical threshold of 10 grams. Aurum is exchanging his interest in 10 pure grams from a 1kg Bar into a physical 10 gram Cube leaving him with a 0.5 gram position in the 1kg Bar. The 10 gram cube is not a taxable event and is a redemption par excellence of his physical interest. Thus, Mr. Schiff’s analysis is incorrect as far as this use case is concerned. 

Let us review another example. Now we will assume that a user builds a balance over time equating to 1,000 grams. At this stage, that user owns the entire 1kg bar which means he may redeem that entire 1kg bar and once again, this is not a sale, it’s a redemption of his physical interest. This example also holds true for larger balances. 

The last example which I will mention is redemption into sovereign coins. Here, a user will elect to essentially sell their physical gold property in a specific bar or cube and use the proceeds to purchase a coin. There is obviously a tax event for jurisdictions that tax capital gains on fine bullion (not every jurisdiction does and it’s imperative that members consult their own legal and tax advice on this matter). And, aside from one’s views on the merits of capital gains taxes in general, what’s wrong with that? For someone that has benefited from the exposure to gold over time to choose to convert a portion of that gain (pre or after tax) into a totally new physical product, there will be other benefits derived. BitGold never claimed to offer the sale and storage of specific sovereign coins. We offer a gold payments and savings network. The service for converting your gold balance into a sovereign gold coin is akin to selling a blue house for a red house. You are no longer owning the same property right. An exchange has taken place. This misses the point though because in reality, nobody sits on a long-term balance of gold and then decides to cash into sovereign coins once they have achieved a massive gain. The logical thing to do would be to either sell gold and diversify into something else (you have already benefited from the gold gain) or, redeem into 10 gram cubes or 1kg bars if the objective is to redeem the physical interest. A conversion from our standard bars and cubes into a separate product is by definition, an indication by the member that there is a desire to own a specific something else and thus are willing to pay the additional fees and expenses associated with that desire. 

I will go over this one last time using Mr. Schiff’s own math and example so it’s crystal clear: 

Let’s assume Gold is trading at USD $1,300 a Troy Ounce or USD $41.8 per gram. You deposit USD $13,000 worth of gold representing 308 Grams after paying the 1% deposit fee. You are now the owner of property representing 308 grams of pure gold at a specific vault location. 

Time passes and the price of gold rises to USD $2,000 a Troy Ounce or USD $64.3 per gram. Your gold balance of 308 grams is now worth USD $19,807. You now decide to redeem your physical interest. Your choices are as follows: 

1) Spend or convert the 308 Grams into something else at which case a capital gain event would likely be triggered meaning that only your gain of $6,807 would be taxed at whatever the law in your jurisdiction states. 

2) Redeem your property in the form of 30 individual 10 Gram Cubes in which case 300 physical grams would be redeemed leaving you with 8 grams which could either be spent, or saved triggering no taxable event. 

If members take the time to compare that all-in cost to any other alternative, they will immediately see the stark differences and cost savings achieved on the BitGold platform. Again, this is precisely why the market has overwhelmingly supported BitGold and what led to such a large influx of users. Remember, BitGold is not just about buying and selling gold. It’s about using the gold. With BitGold, you get free storage, free insurance for the entirety of the period you would own the gold. The most important use case though, would be your ability to use the gold by paying others in gold for good/services or earning gold through the platform by invoicing in gold for your time and labour. 

I don’t believe Mr. Schiff has spent enough time on our platform to understand the global attributes which make gold the perfect money. Mr. Schiff assumes that there is no economic benefit to be derived from maintaining a transactional gold balance and periodically spending that balance. If one fully comprehends that gold rises over time vs. fiat, why would one not want to ensure maximum exposure to gold vs. fiat while converting only limited amounts of gold over time in relation to the fiat. That, is what BitGold provides and we are in fact the first ones to have cracked the code. Let’s take a step back though, why is Schiff forgetting that not everyone on the planet has access to a currency which even temporarily gains vs. Gold such as the USD. A perusal of the below statistic from our latest research report shows that Gold priced in currencies relevant to 4 billion people, has been at or near an all-time high for 80% of the time over the last 40 years. That is likely why 80% of our members are outside of North America.

Here we show through proprietary research that the gold price, as measured in currencies other than USD, hovers at within 30% of its all-time high for nearly 84% of the time in currencies affecting 53% of the world’s population. Put differently, to 3.75 billion, gold is almost always the best currency to be using.

In summary, there are a plethora of use cases for utilizing gold as your foundational currency even when incorporating taxes on the long-term gains. The math works for the majority of the world’s population and that is what investors have been attracted to with respect to GoldMoney Inc.

This brings me to my next point, criticism of the BitGold business model. 

BitGold is a Gold Network Powering Gold Payments and Savings 

If one spends time studying business case studies such as Paypal, Amazon, or even Costco, he would understand the concept of building long-term networks, moats and customer relationships by providing a lower cost service. He would understand the concept of embedded operating leverage which is why Mr. Market awards Amazon a $267bn valuation though the P/E Ratio is nearly 500. 

Mr. Schiff also calls out our business model as being bad for shareholders, though to my knowledge he has never disclosed a long or short position in GoldMoney Inc., and has never sought information on our business model from management or any of the bank analysts which cover our stock professionally and independently. Mr. Schiff calls out customer acquisition strategy (bonuses and referrals), affiliate marketing, and covering the upfront costs of products like the prepaid card (just as a bank does with its onboarding products). Again, we are not modeling our business on one-off sales to unknown clients buying overpriced gold coins, but investing in long-term customer relationships. Our “loss” is not a loss on our business transactions, it is a customer acquisition investment so we can build out a global network scale, lowering the cost and increasing the utility of everyone on the network. 

Mr. Schiff states that Paypal never lost money pursuing this strategy. The facts are quite different. As an early stage public company, according to their old S1 filings from 1999, PayPal lost over $200 million dollars just in the few years they were a standalone company before they were bought by Ebay. As a person involved in financial services, we would expect Mr. Schiff to understand these concepts unless his intent is simply to scare customers away from our business. 

Though its been only 10 months and only $10 million has been spent to date, it should be obvious to any intelligent investor that the value of BitGold Corp. and the BitGold network is not found in the backward looking IFRS reported income statement which includes substantial non-cash items but rather, the forward looking customer lifetime value and network rents. What is the value our 800,000 members derive from our network? What is the economic utility? Is it higher or lower than last year? We no longer need to market to them, we no longer need to convince them to use the network. Once they trust us, once they derive benefit from the platform, their activity and thus our revenue grows. This has been demonstrated via empirical data and transaction velocity on the network. Mr. Schiff misses another obvious point. BitGold Corp. is just one half of GoldMoney Inc. which also owns the GoldMoney business, founded in 2001, which is very profitable. An analysis of our public financial statements shows that GoldMoney free cash flow helps to offset the growth capex at BitGold. This trend will continue even though it is entirely within our capabilities to reduce our marketing spend and increase our operating leverage if we so desire. Finally, there is no rush for us to do anything but focus on growth. GoldMoney Inc. has a net worth of over $100 million and cash and liquidity of nearly $70 million. At our most pessimistic burn rate, we can continue operating in the manner we are for two decades, yet even that conclusion omits the fact that our investor base is deep pocketed and well aligned with our mission for democratizing access to gold. Over the next year, we will continue to grow our offline efforts via TV commercials and even flagship branches in several key cities. We are not in this to generate high margins on the backs of our customers. We are in this to change the world.

 The increased attention we are generating, even if not always positive, is a necessary part of bringing gold back out of relative monetary obscurity in the mind of the public. Once the public realise that gold COULD be money again, they will begin to ask whether gold SHOULD be money again. Given that logic, the laws of physics and the lessons of history are all on our side, we are confident that the question, once asked, will answer itself in the affirmative. 
I won’t lie, Peter Schiff has had his moments. My favourite by far was his takedown of Occupy Wall Street Protests in 2008. Peter has the stamina and drive to evangelize the truth like no other. That is a very valuable and important quality. 


Roy Sebag 

BitGold Corp. Founder 
GoldMoney Inc. Chief Executive Officer

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