Reflections Over 2020

Wow, it has been a heckuva year! One thought leads to another on this sunny-but-cool January 1.

Having watched a few seasons of Forged in Fire, I’ve gained an appreciation of how difficult it is to pound and grind a lump of steel into a blade, even with power tools. There are many ways for it to go wrong. And “wrong” generally means catastrophic failure—a crack in the metal that will cause it to break into pieces when hit.

That led to thoughts regarding an advantage, in Medieval warfare, to using an axe compared to a sword.

If you could swing your axe against a sword blade, you’d have a good chance to break it and thus disarm your foe. Then I thought about rapiers and foils, which were much lighter and springier. Then I had the first “a-ha” moment.

When guns first came to the battlefield, they weren’t very accurate. However, when a bullet did hit someone, it punched right through his armor. There was no point (pun intended) in wearing heavy steel anymore. And once soldiers were unarmored, there was no point (pun intended again) in carrying big, heavy swords.

So swords evolved into the lightweight poking weapons everyone is familiar with from Princess Bride (and The Three Musketeers). Those weapons could easily put a hole in a man that would take him out of the fight, if not kill.

Battlefield Weapons & The Gold Standard?

And this leads to an interesting thought experiment. Suppose you went to a post-gunpowder battlefield and counted up all the deaths that were caused by thin stabbing weapons vs by bullets, you might find that 90% of them (I am rough-guessing here) were the former. If one tried to interpret this statistic the conventional way, one might conclude that guns and gunpowder were not a significant factor in those battles.

One would be wrong.

Guns may not have dealt the mortal wound in most cases. But the presence of guns caused the absence of steel armor. The absence of steel armor caused the sword to become much lighter, and increasingly specialized for stabbing rather than hacking.

Where would one see this exact sort of error in economics? It comes up in the question of how important is redeemability in the gold standard (to the extent that the gold standard comes up at all, which isn’t often). If one counted up all the holders of gold-redeemable bank notes, one would find a (far) lower percentage of those who redeemed them, than of battlefield casualties caused by gunshot wounds.

Does this mean that redeemability does not matter? Absolutely not.

As the gun caused everyone to change their behavior, so does redeemability. Not everyone redeems his paper for gold. But the fact that everyone has the right to do so, causes the banks to conduct their affairs more conservatively.

The rare bank which gets too greedy and operates without due caution finds that there is a run on its paper. It goes bankrupt. Its shareholders lose everything. Its bondholders may lose something (but if the accounting is honest, it is shut down before the depositors lose a penny).

Economists should take great care in forming conclusions from statistics.

Goodbye, 2020

Wow, it has been a heckuva year, I must say it again!

At the beginning, we scheduled a date for Monetary Metals annual shareholders meeting held in Scottsdale, AZ. I booked travel to Australia and Southeast Asia in February, visiting four countries and returning February 29.

At the time I set these dates, I had not heard of Covid. When I flew out in early February, I thought Covid was a thing only in China. Airports in the US and in Australia were operating normally, and the crowds were normal. Also, in hotels and restaurants in Sydney and Perth. Not so in Asia. Changi airport in Singapore was a ghost town, and the restaurants in the attached mall, Jewell, were devoid of any customers but me.

The airplanes I flew between Singapore, Thailand, and Malaysia were 80% empty. The airports all had temperature scanners that they made everyone walk through. As did the hotels in Singapore and Malaysia.

When I got home, I focused on the shareholders meeting. Other than one investor who lives in China and who could obviously not travel to the US, only one person cancelled. We had about 50% of our investors attend a face-to-face meeting. A good turnout, even without a developing pandemic.

The event was March 7. Saturday.

The following Thursday, March 12, I believe it was, began the first lockdown order in Arizona. If our meeting had been scheduled one week later, it would have been cancelled. And we would have had to scramble to do something on Zoom, lose the money for the restaurant where we had a great dinner party for the investors.

Whew!

Impact on Business

Later that month, two things occurred. First, we experienced a big increase in client accounts and client investment. While we had been growing at a good rate prior, the lockdown served as an accelerator.  Secondly, a key member of our team contracted the virus and was down for almost two months. We held it together—thanks to everyone on the team stepping up!—but it was a tough period.

Since lockdown, I have not travelled. In 2018 and 2019, I was on the road (mostly overseas) more than 50% of the time. I made Executive Platinum on American Airlines and Emerald on Oneworld. In 2020, other than a two-day trip to meet a client in Las Vegas, I’ve at home here in Arizona. Let me just say that Las Vegas is no fun in its current half-lockdown state. There is absolutely no reason to go, unless you’re desperate for a chance to lose some dollars.

I will get the Covid vaccine as soon as our central planners allocate a shot for me (which will be much slower than when companies in a free market would have sold it to me). I will get whatever “vaccine passport” they give out. But I sure hope that international travel does not mean 12-hour or 17-hour flights wearing a mask the whole time!

In August, Monetary Metals raised $1.3 million in an equity capital raise. We grew our existing gold and silver (and platinum) leases, we added new leases, and we introduced a product that will pivot the monetary system: the first gold bond in 87 years.

Pivoting the Monetary System

And that is a simple way to understand what we are doing: pivoting the monetary system. Our whole approach is based on a simple idea. Pay interest on gold, in gold. And there’s a simple idea behind that. People will prefer gold interest on gold, over paper interest on paper (not to mention the Fed has all but won its War on Interest, and there is not much interest to be earned on paper anyway).

If you had a choice to be paid $190,000 in ten years, or 100 ounces of fine gold, which would you choose? The Fed is promising 2% debasement per year. Assuming they deliver exactly what they promise, that $190,000 would be worth about 81 ounces (admittedly this is an oversimplification). We think most people would make the same choice.

A yield on gold, paid in gold® is our registered trademark, and brand promise. It is a disruptive innovation, not an incremental change.

What Is a Disruptive Innovation?

An ordinary innovation, called by Clayton Christiansen in The Innovator’s Dilemma a “sustaining innovation” is like most product improvements you see in the market every day. For example, flat screens have higher resolution, higher contrast between dark and bright, and higher frame rates. And lower prices. Cars have more features like backup cameras and warnings for lane departure, following too closely, etc.

Sustaining innovations are what the mainstream customer wants more of. And will sometimes pay more to get, such as a bigger screen or more horsepower.

Christiansen defines a “disruptive innovation” as one that incumbent companies in the industry cannot respond to. If an upstart simply cuts cost, the established vendors will cut their cost too. A price war is not a way that a new entrant can win.

A Disruptive Example

Disruption is like judo. It uses the established company’s strength against them. For example, take our business. Clients place their gold in a Monetary Metals account, and we present them with opportunities to lease their gold and earn interest on it, paid in more gold.

Clients have the choice to invest in a particular deal, if they find the return suitable. Or they may choose not to invest their gold, in which case it stays in their account (with no storage cost). Our account statements show balances in ounces, with interest earned in ounces.

Could a mainstream bank do any of this? A few hold gold for select ultra-high net worth clients, but this is not a service they advertise. They want to encourage their clients to invest in equities, bonds, and properties. They don’t encourage clients to question the dollar itself, which gold—especially when it pays a yield—does. They prefer to think of gold as, at best, a volatile commodity. “Sir, would you like to open a futures account? You can bet on the gold price with more than 10:1 leverage.”

Every conventional financial firm denominates its account statement in dollars. To use gold as the unit of account is a paradigm-shift, which is typical of disruptive innovation. And of course, it encourages clients to think of their gold, not in terms of its dollar price but simply how much they’ve accumulated.

Established companies have such a hard time with disruptive innovations, because they perceive them as cannibalizing their existing businesses. It is not just that gold earning 2.5% more gold in a one-year lease competes against a one-year bank CD, in which dollars earn 0.3% more dollars.

It is that thinking of one’s wealth in ounces brings a different perspective than thinking of everything in dollars. Even if one knows that the dollar is designed to lose value, the dollar financial institutions are invested in keeping everyone invested in dollar thinking.

A funny thing happened to this (once) crazy idea. I no longer spend most of my time and energy thinking about how it would work, how to reach people with the idea, and developing abstract theories.

Now, it’s just business execution. Now, we just have to deliver the product, publish the press releases, conduct due diligence, meet investors, etc. And launch a podcast (The Gold Exchange). As any growing business at this stage does.

And speaking of which, if you will excuse me, I need to get back to work. Here’s to a fantastic 2021!

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