I last wrote about BitGold (XAU.V), which is now called Goldmoney, most recently in a blog post on 26th May. In the linked post I expanded on my view that the company had a great product from the perspective of customers, but a very over-priced stock. I concluded that at some unknowable future time the “it’s a great product with smart management therefore the stock should be bought at any price” bubble of enthusiasm would collide with the “it will always be a low-margin business and therefore deserves a low valuation” brick wall of reality. Although the stock price has since dropped about 20%, the valuation of the stock still appears to be extremely high considering the profit-generating potential of the underlying business. It is therefore fair to say that the bubble of enthusiasm hasn’t yet collided with the brick wall of reality.

Every month, Goldmoney reports what it calls “Key Performance Indicators” (KPIs) of its business. These KPIs seem impressive at first glance and seem to justify the stock’s market capitalisation. For example, the company reported that at the end of August it had C$1.5B of customer assets under management (AUM), an amount that is several times greater than its current market cap of C$235M (55M shares at C$4.27/share). However, unlike a mutual fund that charges a fee based on AUM, Goldmoney charges nothing to store its customers’ assets (gold bullion). This means that the larger the amount of Goldmoney’s AUM, the greater the net COST to the owners of the business (Goldmoney’s shareholders).

This is an important point. Based on Goldmoney’s current fee structure, it will always lose money on customers who use the service primarily for store-of-value purposes. Under the current monetary system this is where PayPal has a big advantage over Goldmoney. Nobody views their PayPal account as a long-term store of value, but many of Goldmoney’s customers view the service as a convenient way to store their physical gold. They don’t want to spend their gold, they want to save it.