by Doug Casey, Casey Research:
Justin’s note: There’s a huge opportunity right now…
Crisis Investing chief analyst Nick Giambruno says there is a new kind of digital asset that marries cryptocurrencies and gold into one powerful new financial tool: gold-backed cryptos. If you missed his essay on this idea back in October, catch up here.
Dozens of these gold-backed cryptos are now sprouting up. And the potential is enormous.
Investing legends Casey Research founder Doug Casey and Rick Rule – president and CEO of Sprott U.S. Holdings – are both excited about the huge potential of gold-backed cryptos as well. Nick recently interviewed the two on the subject, and today and tomorrow I’m sharing their fascinating discussion…
Nick Giambruno: Rick, you’ve been in the resource market for decades. We recently discussed how you’re looking very closely at gold-backed cryptocurrencies. This is where the resource market is intersecting with blockchain technology and decentralized databases.
What made you interested in gold-backed cryptos?
Rick Rule: Well, first we believe that the potential audience for gold and cryptos is very similar. The people who believe that there should be mediums of exchange that aren’t government-sponsored will adopt both cryptos and gold.
Second, we saw how the distributed ledger could make the inefficiencies of the gold trade go away, to the benefit of all users.
Third, we saw a circumstance where there was a proliferation of crypto products that were in and of themselves faith-based currencies, floating abstractions. Dogecoin is an example that started off as a joke, and then got a bid.
We believe that using the distributed ledger technology to make gold trading more effective was something that the market wanted, and secondly a logical extension of the Sprott brand, which is in some investors’ minds synonymous with precious metals. We already manage well in excess of $4 billion in exchange-traded precious metals on the New York Stock Exchange, and thought an extension of our brand to a crypto product was a logical thing to do.
What was holding us back was the technological capability internally to cause that to occur, and when IEX [Investors Exchange] – the sort of flash boys guys – came into the equation and in fact approached us about being their partner in enabling distributed ledger and blockchain technologies in gold, that was just an offer too good to pass up.
Nick Giambruno: Doug, you’ve talked a lot about sound money over the years. How does a gold-backed crypto play into your notion of sound money?
Doug Casey: Very well. One of the disadvantages of gold is that it’s hard to transport. While today it’s not illegal to cross borders with gold, in two separate countries on two separate continents when I was carrying about a dozen silver one-ounce coins and both times they stopped me at the x-ray machine and examined them. No problem because it was silver and they weren’t worth anything, but if they had been gold it would’ve been a problem.
So it’s not illegal to transport gold, but it’s becoming inconvenient to do so. I think that a gold-backed crypto will kiss that and make it better.
Nick Giambruno: Doug, do you think gold-backed cryptos are a logical evolution of cryptocurrencies?
Doug Casey: Both logical and necessary. Knowing that your digital money is redeemable for a specific and fixed amount of gold somewhere is a huge advantage. Gold-backed cryptos are going to be huge. The best of both worlds.
Nick Giambruno: Rick, you mentioned that the blockchain helps eliminate some of the inefficiencies of traditional gold warehousing companies. Can you elaborate on that?
Rick Rule: Sure. If one of your readers wanted to go out and buy, say, 10 ounces of physical gold, the spot price is the reference price. But the truth is at many bullion dealers they’ll pay a 3% or 3.5% markup.
Should they change their mind two hours later and decide to sell it, they wouldn’t get spot on the sell side either. They’d get a 3% or 3.5% markdown, meaning that the simple act of buying and selling 10 ounces of gold can cause the investor to experience 7% or 700 basis points of friction.
On top of that, one often pays to store and insure that gold, and they also pay for shipping and receiving.
If you eliminate the vast bulk of those transaction fees, you can see the incredible increase in economic efficiency for buying and selling gold through a distributed ledger, through the blockchain.