In This Episode
With markets continuing to recover this week after an epic selloff that included the worst December since The Great Depression, Dan revisits his initial 2017 warning, when he first reported that a genuine stock market mania had arrived.
Dan looks briefly at three blue chip stocks, then talks about the Extreme Value recommendation he made public on the podcast weeks ago… The company is performing well. With the business rapidly unfolding expansion plans in China, bouncing off a multi-year low valuation, Dan “thinks we’re golden with Starbucks.”
The talk turns to Facebook, and rumblings that up to half of the 2 billion accounts in existence could be fake. Dan admits it would still be a great business with one billion accounts, but that more bad news would likely push the stock down—especially if it comes out that CEO Mark Zuckerberg knew about the situation but didn’t act quickly enough.
Dan then turns to this week’s podcast guest. Fraser Buchan is the co-founder of Tradewind Markets Digital Gold Company.
Fraser has spent most of his career in the precious metals industry. And now he’s founded a company that is revolutionizing the gold and silver market. During the interview, you’ll learn how Fraser’s company – Tradewind Markets – has created a technology that’s behind the safest, most secure and lowest cost way we’ve ever found for individual investors to own physical gold.
When he describes the advantages his technology has over gold ETFs – including no management, administrative, or storage fees – Dan marvels at how he’s disrupting an industry.
Dan concludes, “You’re just sucking out the cost and giving the end user a phenomenal deal… you’re like the Amazon.com of gold.”
2:00: Dan revisits his September 2017 warning in front of a Stansberry conference that “this market is manic and is not going to end well” – with one FAANG stock in particular now defining the mania.
9:30: A few weeks ago, Dan revealed an Extreme Value pick, Starbucks, on an episode of Stansberry investor Hour. Now, the stock is continuing to pop – here’s why a company that’s already so well-established here has so much more room to grow. (Extreme Value readers are already up about 30%.)
15:04: Dan explains why the $3.4 billion sale of its water business won’t save General Electric. “They’re gonna need to move that decimal point to move the share price… they need to come up with $34 billion to convince the world there’s not a bankruptcy in the future.”
16:01: Speaking of bankruptcies – Dan brings up the embattled utility company PG&E, still reeling from the horrible press it received in the wake of California’s wildfires, now issuing a flurry of raises for its executives, pushing one salary up to $575,000. “Man… I’m in the wrong business!”
19:30: Dan brings up the recent woes of Caterpillar, and how this famous blue chip is a much riskier business than people think. Its business model actually forces the company to compete against its own installed base. And even worse – this cyclical company is directly in the line of fire of any China slowdown
21:21: Dan brings on this week’s podcast guest, who he met just last week in San Diego. Fraser Buchan is the co-founder of Tradewind Markets Digital Gold Company. Fraser has a background in precious metals production, investing, and sales having previously worked in the Canadian capital markets. Fraser has been involved in founding several precious metals companies, including NewCastle Gold, a publicly traded development company.
23:14: Fraser explains how his company was founded around four years ago after he and his team observed some concerning trends in the precious metals market. “And I think they’ve only amplified in the period since.”
27:29: Dan asks Fraser if he can go online, using his digital precious metals company’s technology, and instantly begin buying and selling silver and gold stored at the Royal Canadian Mint. “Absolutely,” Fraser replies. “Our technology is a business development platform, meaning we form the backend of technology solution for different types of dealers… that ranges from people like Kitco, APMEX, and Sprott.”
29:43: If gold investors want to buy gold at the click of a mouse… what’s wrong with gold ETFs? Frazer explains why ETFs can cut it for exposure to gold pricing. “Where ETFs become problematic is, you’re exposed to the credibility of financial institutions. Secondly, ETFs don’t allow investors to take physical possession of the metal… our platform solves for that.”
34:14: Frazer reveals one of the biggest advantages to using a digital platform. “Because there’s no management structure, there’s no trust, there’s none of the infrastructure you need to maintain an ETF, we don’t charge management or administrative fees.”
37:08: Dan marvels at Frazer’s ability to cut the expenses of gold ownership for investors. “You’re like the Amazon of gold.”
48:27: Dan pulls out a mailbag question from an anonymous reader who asks why last week’s guest could “get worked up over a pyramid scheme” when participation in them is voluntary. What’s the moral or financial distinction between investing in suckers who fall for Herbalife’s business, and users who buy tobacco knowing it could kill them?
NOTES & LINKS
Announcer: Broadcasting from Baltimore, Maryland all around the world, you're listening to the Stansberry Investor Hour.
Tune in each Thursday on iTunes for the latest episodes of the Stansberry Investor Hour. Sign up for the free show archive at InvestorHour.com. Here is your host, Dan Ferris.
Dan Ferris: Hello everybody, and welcome back to another episode of the Stansberry Investor Hour. I'm your host, Dan Ferris. I'm the editor of Extreme Value, a value investing service published by Stansberry Research. All right. Let's get to some news items before we bring on today's guest, who I can't wait to talk with.
Now, those of you who have been listening to the last several podcasts – you know that I'm not Porter, right? [laughs]. And Porter used to do the podcast. So we've got a lot of feedback, a lot of e-mails: "Where's Porter?" And really I don't know [laughs]. I don't know exactly where he is. But I do know that he's off working on some other projects and we're going to keep you up to date just as developments arise. However, I do know one little thing. One of his projects is a podcast. I don't know what it's about. I don't know when it's going to start. But I know that's one of the things he's working on that's taking him away and is one of the reasons why I'm here and he's not.
So, having dispensed with that, let's talk about some news. Okay. So, starting in September 2017, or even earlier than that – starting in May 2017, anybody who reads Extreme Value knows that I started saying, "This stock market is manic and it's not going to end well." And then a few months later in September 2017, I gave a presentation at our annual Vegas conference and I called out Facebook in particular. I listed a bunch of stocks. I listed – or a few really – Facebook, Nvidia, Amazon, Google, as the kind of things that people are just completely in love with, can't imagine the business doing anything but growing gangbusters forever. They'll pay any price to hold the stock. You get the picture, right? Just manic, manic type names. And one of the really manic names of the last several years has been Facebook of course.
And I started saying, "Something is going to go horribly wrong with this company" just because, as I said at that time – I called it the largest surveillance operation in history. Because that's what it is, right? That was part of the gist of Apple CEO Tim Cook's comment to the effect that if the product is free, you are the product. And that's how Facebook is, right? You get on, it's free to use it. But you're the product because they're constantly doing things with the information, your personal information. Even if it's just selling you stuff based on the personal comments that you trade back and forth with your friends on your Facebook page. But we know they do more than that, right? The Cambridge Analytica scandal from a year ago? We know that your information goes from Facebook and mysteriously, so Mark Zuckerberg would asset, winds up in the hands of others.
Okay. So I said, "This is not going to end well. Regulators are going to come in. Something's going to happen here." I wasn't even really terribly specific. I just knew it was like too good to be true. It was the typical kind of end-of-cycle story. And sure enough – well, of course, I look like an idiot as the stock continued to rise. It was like $175 when I started saying that, and I think it hit something like $224 in early 2018. And it was like: Dan was wrong for a month, wrong for two, three, four, five months, whatever.
And then, wham, it was down 10% on some regulatory type concerns. Then things went along okay, and then, wham, biggest – down like 19% in one day last July. Biggest market-cap loss in history, something like $123 or $125 billion in an instant. Snap. Gone. $125 billion. Boom. In an instant. Because why? Well, because they announced that the thing wasn't growing like a weed as much anymore. The revenues were slowing down.
So that brings us to now. And I should pull up a Facebook quote to see – that thing was 220-something at the top. Now it's like in the 140s today. And the story that I'm looking at from last week is from a former Facebook guy who – now he works for – actually I'm not exactly sure. I think he works for Plainsite.com. There's a website called Plainsite. They put out a lot of good research. It was mentioned by a recent podcast guest, Chris Irons, as a good place to go for really good research.
So this guy, Aaron Greenspan, put out this report that basically says that 50%– as much as 50% of Facebook's users are fake accounts, just bots – or I don't even know the terminology they use anymore – that are just running around randomly clicking on things to make it look like it's a real account. So they use a little random algorithm to click on things. Because Facebook, when it sees a really distinct pattern of clicks, then its anti-fake-account algorithm kicks in and shuts down the account. So the fake-account people apparently know how to get around that and this guy says as many as half of their accounts. And Facebook is constantly touting this two billion monthly active user. Two billion people. And that's the appeal to advertisers.
If none of this is fake – or even if it is – it's still a billion people, and it's still the most incredible – it's one of the most incredible businesses ever created. And if the two billion aren't fake, it's bigger than communism and capitalism and Islam and just everything that humans have ever done. It's the biggest thing humans have ever done in history. And of course it's a cash-gushing business, incredible business. But I think it would be really bad – probably it'd be really bad for the share price if it were verified that – especially if it's verified that – if they're investigated and it gets out maybe that Mark Zuckerberg knows that there're a lot more fake accounts than they're saying. I would guess that that would be real bad for the stock price, which is already down substantially off the high in the 220s, and is now below 150.
And of course that means that – it would still be a good advertising platform with a billion monthly active users. But obviously not as good as with two billion. And that's what they tout to their advertisers. So this could be really bad. Again, this is in the category of no-brainer, endlessly growing wonderful business that [making sounds of hesitation] kind of don't turn out to be quite as good as everyone thought. So this doesn't surprise me at all because I spent months – in 2017 especially, in 2018 – reading books about what happens in market crashes.
John Brooks was an old journalist in the finance industry and anything by John Brooks is really good. There was one book I read called Once in Golconda. That was about the 1929 episode. Great book. Teach you a lot about the type of thing you can look for near the end of a long bull market. And another book he wrote called The Go-Go Years taught me how to look for this stuff and just got me smelling around at these no-brainer companies that everybody's in love with for trouble. You know?
Nobody's looking for trouble at Amazon. Nobody's looking for trouble at Google. Nobody was looking for trouble at Facebook when I started warning people about it. And of course now share prices are way down, lots of bad news. Some people even think that Zuckerberg shouldn't be in charge anymore and that really he and Sheryl Sandberg are not doing a great job. So maybe that'll change. I'll bet the stock would go up if those two got fired, huh? So there's that: Facebook. Right? Big, big end-of-cycle story.
Now, last week of course I was a little – I had lots of bad news. Maybe it wasn't last week. Recent podcast. I had lots of bad news and I was desperate to deliver some good news. And of course I did reveal on the podcast some several weeks ago – I don't remember exactly when it was – one of our Extreme Value picks, and it was Starbucks. Great business. And the analyst who worked with me in Extreme Value, Mike Barrett, identified this thing. We had been talking about it throughout the year. I saw a really good presentation on it last summer. And we finally got to it in the August 2018 issue of Extreme Value. And it's done really well ever since. And they put out an earnings report last week and the shares jumped and it's doing really well.
And it doesn't surprise us because we identified some things – people were skeptical about the business because it's very mature in the United States. But it's not mature elsewhere. And the potential in a place like China is enormous for coffee shops. And they already have thousands of them there. But the potential is for thousands and thousands more. Because the density is very different. Actually I don't have the numbers off the top of my head but the good thing about investing is: if you have the approximate number right, if you have the story right, you are golden. And I think we're golden with Starbucks.
So say it's like 1 Starbucks for every 20 or so people in the United States and it's like 1 for every 5 or 2 or 3 – some really low number – in China. It's like that. So there's huge potential there. And of course China's – it's slowing down but it is a growth story, continuing to be one, and probably will continue to be one for many years to come. And Starbucks I think is one of the better ways to take advantage of that.
And last week the stock shot up quite a bit in a couple days. I think it shot up from like $64 to $66 or so. And it's around $66 or so today. Almost $67. So, yeah. Starbucks is basically coming true. And the analyst who works with me, Mike Barrett, identified this thing – finally last August he was like, "You know something? This thing is trading actually" – if you look at the numbers the way we look at them, which is a little different – the valuation was kind of at a multiyear low. And it was just kind of this wonderful business – where else do you go? If you want to go get coffee, what's the first thing everybody says? "Is there a Starbucks around here?" And of course in the United States, the answer's always yes. Because we're saturated with Starbucks here. But there isn't always a Starbucks around in other places. But they like to have them. So there's potential for thousands more of them.
So there's some good news, huh? Starbucks is doing well. We got one right in Extreme Value. We like to do that. And there's potential good news – the story in GE is that they're restructuring their spinoff in a deal that will kind of get them about $3.4 billion in cash. And I think the shares popped a little bit on this news but not much. It's still below $9, still like $8-something per share. And we've been talking about this off and on for several weeks now, and I started – I don't know if you remember: when I very first started doing the podcast maybe November or something, we were talking about GE and I said, "I don't really see the pessimism in the bond market. I don't think the thing's going to go bankrupt."
And then of course, over the subsequent weeks after I made that statement, I had to turn around. Because when I first started looking – if you look on Bloomberg, there's something like 450 different GE-related debt issues. And hardly any of them – I think one was trading below 70 and just a handful below maybe 80. And most of them were up in the high 90s. You know? Which is close to par. Par is 100, right? So if you're 95 or above – not a whole lot of pessimism baked into that price for a bond. But now there's maybe a dozen in the 60s, trading below 70. And trading below 90 is a few dozen.
So, once you get down into the 80s and the 70s, that's real pessimism. And that's people who are senior to equity holders saying, "Hold on a minute. Sell this darn thing. Get rid of this thing at any price because we don't want to get stuck holding the bag if we're a junior credit and GE has a real serious problem and maybe some subsidiary or another declares bankruptcy and we're hosed," right? And that continues to be – it hasn't seemed to have changed much, from the numbers that I look at on Bloomberg, in the past week or two.
So I think they have well over $100 billion in debt, and another $3.4 billion in cash doesn't make a whole lot of difference. They're going to have to come up with another – they're going to need to move that decimal point to move the share price. They're going to need to come up with another $34 billion in cash, not $3.4 billion, to get those bond prices back and to convince the world that there is not a bankruptcy anywhere in GE in the future. So, that situation is ongoing. I don't think it's a value stock. I think it's an avoid stock. And it could wind up as a zero. It's too hard to figure out right now. You just throw in the too-hard pile, too dangerous, don't worry about it.
Speaking of bankruptcy, of course PG&E, the embattled California energy utility, right? There was all these fires. They got accused of causing them. And sometimes you just – things are so complicated that you declare bankruptcy just as a way of segregating all the potential claims and being able to do business over here and being able to take care of all the liabilities over here as just separate matters. So I think that's the nature of this bankruptcy with PG&E. However, there was a story that – I can't believe this is going to stand. The headline is "PG&E is giving a gas executive a raise ahead of its bankruptcy."
So some executive is getting a raise. "How bad can it be? A few thousand bucks. Who cares about this?" No, no, no, no, no. This guy – let's see. His name is Jesus Soto, Jr., PG&E's senior vice president of gas operations – is getting a $75,000 raise. His annual base salary will become $575,000. Man. I'm in the wrong business. I need to go work for a public utility company, preferably one that does something really horrible and has to go bankrupt [laughs]. But it's just insane to me. And I have to wonder: will this stick? Does it really have anything to do with anything? Like I said, it's kind of a technical bankruptcy. I think. I believe that's the nature of it. Where they're going to isolate the claims and liabilities that will result from all this California fire business and then just run the business, be able to carry on with the day-to-day operations.
So maybe because of that it's okay that Mr. Soto now makes $575,000 instead of a mere half a mil. I mean, like I said, I'm in the wrong business. I need to get into public utility business apparently. So, you know, there's good news for Jesus, good news for Starbucks, bad news for Facebook. And unfortunately I'm probably going to tilt towards more bad news over the next – as long as the market stays elevated – and it is elevated. We're still within 10, 11% of the most expensive moment in history. So, yeah. I'm going to have all kinds of news like Facebook.
Matter of fact, I saw another news item. I mean, I just remember it. I don't have it in front of me. But I saw another news item this morning about Caterpillar. And Caterpillar stock got hit 6% in pre-market trading because – why? Because they had a slowdown in revenues in China. And of course China is like the big commodity story. Caterpillar makes these giant yellow machines. And when people think that – if people want to go long commodities but they want to buy a blue chip name, they buy Caterpillar. And I don't see Caterpillar that way at all. I think Caterpillar's a must riskier business than people think. Not just because it's a giant company that depends on a highly cyclical industry. It's highly cyclical and it's the capital equipment, right? These enormous yellow machines.
But these enormous yellow machines – they last a few years and they're extraordinarily expensive. So there's an aspect of Caterpillar that kind of drives me nuts, that I don't think I could ever buy it: they're basically competing with their own installed base all the time. I don't know how the technology changes in giant earth-moving machines but digging a giant hole in the ground with a giant bucket and with a giant truck with giant wheels and a giant engine and a giant bed – you pick up the giant scoop of dirt and put it in the back of the truck – I don't know that that changes a whole lot over the years. So I feel like Caterpillar's always competing with itself. And now the revenues are slowing down in China.
So I guess what I'm saying is there's all kinds of leverage, and leverage goes both ways. There's leverage when things are good and leverage when things are bad but I think that situation of competing itself kind of mutes the good and can make the bad times really bad. So, for what that's worth, I think this slowdown-in-China story is kind of – it'll create some problems.
So, our guest today is a fellow who I knew about his business but I only met him last week in San Diego. And I'm very excited for him to tell you about his company and what they do and why it's just the coolest thing in the industry. Okay. His name is Fraser Buchan, and Fraser is the Co-founder of Tradewind Markets digital gold company. Fraser has a background in precious metals production, investing, and sales, having previously worked in the Canadian capital markets. Fraser's been involved in founding several precious metals companies, including NewCastle Gold, a publicly traded development company. And Fraser previously worked with GMP Securities, an independent Canadian investment bank and broker dealer in Toronto and London in Institutional Equity Sales.
Fraser Buchan, welcome to the Stansberry Investor Hour, sir.
Fraser Buchan: Thanks for having me on, Dan. I really appreciate the opportunity.
Dan Ferris: All right. So, I think on this podcast today, Fraser, I just want you to be able to explain to our readers exactly what you do and just, in a nutshell, for – or, I'm sorry, our listeners. I keep calling them our readers. They are our readers, too. Fraser's company does something really awesome. If you like to buy and sell gold and silver, they've come up with a technology that makes that much easier and makes the cost, the fees, and the storage and everything much lower. And I think I'm going to leave it at that. And maybe, Fraser, you could just tell us how you came to start this company and exactly what it is that you guys do.
Fraser Buchan: So I would start by saying that Tradewind was born of a relatively simple idea: that it should be easier and less expensive to invest directly in physical precious metals. When we started this business almost four years ago, we observed some I guess you could say concerning trends in the precious metals markets that I think have only amplified in the period since then. The first is that demographics appeared to us to be very unfavorable. So the average gold buyer is old and becoming less active, and that's percolating through the businesses that serve the physical precious metals ecosystem. We saw businesses that I think were in many ways struggling to replenish their customer base. Traditional products became less popular, I think driven in part by how expensive they could be, by the friction associated with the cost of storage and insurance.
And really that all led to difficulty in attracting a younger generation of investors to gold and silver. I think what we saw was: for younger investors seeking assets outside of the traditional ecosystem, or financial ecosystem, a migration to products like cryptocurrencies. So all of this told us that the gold and silver market was I guess failing to innovate and it was resulting in some fairly large systemic issues that weren't going to solve themselves.
From our perspective, this was a huge opportunity. So we set down the path to building a precious metals market driven by two things: one, a focus on a better experience for the end investor, and, two, using new technology in every way possible to deliver that result.
So, a little bit more on I guess the principles that drive our business. When we made the determination to build a digital precious metals market, we had I guess three driving principles or three questions we wanted to answer. I think the first and probably most important principle is trust. So delivering new technology to the gold market, we have to be very sensitive to the fact that the trust of the end investor is the single most important consideration. That's why we chose to work initially with the Royal Canadian Mint. So in our marketplace, on our platform, the Royal Canadian Mint is the sole counterparty for physical gold, they guarantee physical delivery, and they legally trust our blockchain as a source of truth for who owns metal.
The next layer of trust is our founding partnership of shareholders, the first of which is Sprott, which I think will be familiar to many of your listeners and readers.
Dan Ferris: You bet.
Fraser Buchan: They're one of the most trusted names in the precious metals industry. And the other partner was – or is – IEX, a U.S. stock exchange that really is built on one principle, which is protecting the end investor in the equities markets. So we felt like that core partnership between the Royal Canadian Mint, Sprott, and IEX was a great foundation for delivering a better product.
Dan Ferris: Right. And just for the listener, if you read the book, Flash Boys by Michael Lewis, that's the story of why and how and who created IEX. So pretty serious partners here. Fraser, maybe we can get at this the other way. And you've kind of explained some of the background of it. But right now, your technology is live, and there are different ways, depending on what kind of a user I am – right now, if I want to, I can go set up an account somewhere and I can buy and sell silver and gold, stored at the Royal Canadian Mint, online, digitally. Can I not?
Fraser Buchan: Absolutely. Yes. You can. Our technology is a business-to-business platform, meaning that we form the back end, the technology solution, for different types of dealers that want to offer a digital product to their customers. That ranges from people like KitCo, APMEX, and Sprott who face retail and high-net-worth customers, through to bullion banks and dealers like Dillon Gage, CNT, and A-Mark that face institutional IRA type customers. So we've built a really broad network of dealers that service the end investor, depending on what business model they themselves have and what customer base they're specifically targeting.
Dan Ferris: Gotcha. So our listener is going to be a retail investor. But if I'm a retail investor, I can find my way to a company that uses your technology but I'm not dealing directly with you. Right? I'm not dealing directly with Tradewind, right?
Fraser Buchan: That's right. So if you're a retail investor, I would direct you to institutions like KitCo, Sprott, if you have a brokerage relationship that you want to maintain and you want to integrate this into your existing portfolio, or one of the platforms that we're really particularly excited about is OneGold, which is a business that is built and operated by APMEX. And for those of your listeners that might not be familiar with APMEX, they're the largest online e-commerce platform for physical dealing in North America. And they've built, in OneGold, I think a phenomenal front-end user experience. It makes it very easy for people to open up, fund an account, transact in gold and silver, add spot pricing. It's an extremely efficient platform. I would encourage anybody to go and check it out.
Dan Ferris: Right. But, Fraser, if I'm an investor and I want to buy gold, can't I just buy the gold ETF? It's the same thing, right?
Fraser Buchan: It's a good question. If you simply want financial exposure to gold pricing, the ETFs in large part can service that. Where I think the ETFs become problematic is that you're first of all exposed to the credit of financial institutions. So you custody your share certificate with a financial institution. And then in the case of GLD, the largest ETF, the metal is vaulted by a bank. Those are two points of connection with the financial ecosystem that you might not want if you're a traditional gold investor.
Then I think secondly, and probably more importantly, the ETFs don't allow the end investor to actually take physical possession of the metal if that's their desire. Our platform really solves for that. In the first case, you face the Royal Canadian Mint directly, which is a sovereign entity. There's no credit risk. And then, secondly, our platform enables you to take physical possession of the metal at the click of a button. You can swap your digital precious metals into physical products, if you want maples or buffalos or any product that was held by one of our dealers. Or you can actually go directly to the Royal Canadian Mint for physical delivery in the event that that's your desire.
Dan Ferris: I can just knock on their door? I can knock on the Royal Canadian Mint's door and say, "Hey, I'm a VaultChain account holder; give me my metal," basically?
Fraser Buchan: Yeah. So the Royal Canadian Mint legally recognizes the Tradewind blockchain as a source of truth for metal ownership. So they have a legal obligation to deliver that metal to the end beneficial owner. We don't expect that most investors will want to deal directly with the Royal Canadian Mint. More likely we expect that they'll fulfil physical delivery through the dealer that they've accessed our platform with. In large part because that's the business model of people like KitCo and Miles Franklin and other retail-facing dealers. But in the event that there is some type of issue in the marketplace and it turns out that the end investor does actually need to go directly to the Royal Canadian Mint, that's all provided for. The end investor's ownership of metal is never impaired. It's direct and immutable.
Dan Ferris: Right. And this is – if I own ETF – well, if you own the ETF, you can get physical metal, can't you?
Fraser Buchan: You can if you're one of the 14 or 15 different authorized participants, all of whom are banks and financial institutions. So for people who are making markets or institutions that are making markets in GLD, there is an ability to move the physical gold in and out. But for the end investor, it's a financial instrument. You cannot take a position in GLD and instruct your dealer or custodian to deliver you that metal.
Dan Ferris: I see. So, like you said, a way to basically speculate on the movement of the gold price but not a way to own gold for an individual investor at all really.
Fraser Buchan: That's right.
Dan Ferris: You don't own physical metal when you own the ETF. That's interesting. And I know there are publicly traded trusts as well that may be a step better than that. But with those you can only redeem in, what, 400-ounce bars or something? It's a little difficult for the smaller investor [laughing].
Fraser Buchan: That's exactly right. And what we see typically with those products is expense ratios and storage fees that make them relatively inefficient.
Dan Ferris: Right. And we're talking – like what's the difference? So if I buy a physical – a publicly traded trust or even an ETF, I imagine there's some kind of storage baked into there somewhere. What is the basic difference, just ballpark difference between storage and fees there and storage and fees if I go through a OneGold account or a KitCo and use the VaultChain platform?
Fraser Buchan: It's a good question. This is one of the really big advantages to using a digital platform. Because Tradewind – because there's no management structure, there's no trust, there's none of the sort of infrastructure that you need to maintain an ETF, we don't charge management fees, there's no administrative fees. And in the case of our gold product, we actually don't charge a storage fee either. So, to the end investor, the cost of carry is extremely low. There's really only one point of cost for the end investor and that's at the point of acquisition. So using OneGold as an example, OneGold offers VaultChain gold and silver at a small premium to spot. That premium is split between the dealer and ourselves, and then the end investor owns physical metal in a Tradewind account and they have an extremely low cost of carry from that point forward.
By comparison, the ETFs charge between typically 40 basis points – which is GLD, by far the largest – up to almost 100 basis points in carry. And that in large part is driven by the requirement for a management company, for an ETF sponsor, and to pay all of the financial institutions that service that product and take it to market.
Dan Ferris: So, what I found just incredible from what you just said – what struck me as incredible is that one can get ownership in physical metal and redeem – with redemption capability for the individual investor, stored at the Royal Canadian Mint no less, and not pay storage. I mean, it's got to be baked in somewhere somehow, doesn't it?
Fraser Buchan: It is. It's baked into that cost of acquisition, which again is relatively low. But when we set down the path as a business to launching our first product, we really wanted to make it as attractive as possible. And as part of our incentive structure, Tradewind took on this cost of storage at the Royal Canadian Mint. So we actually, out of our transaction fees on the platform, pay for storage so that we can offer to the end investor an extremely low-cost solution.
Dan Ferris: Wow. You know, Fraser, you're like the Amazon.com of gold. It's amazing. Because what have they done? They've sucked the margin out of every retail product that you can name just about. And that's what you're doing. You're just sucking all of the cost out and giving the end user a phenomenal deal it sounds like to me.
Fraser Buchan: Well, I certainly appreciate the comparison. Yeah. That's at the heart of our business. What we're ultimately trying to achieve here is to deliver a much more efficient and secure solution for the physical gold and silver investor. Because what we saw in the marketplace was a set of conditions that were making it relatively unattractive for new investors to enter the space. I mean, that was the opportunity: to deliver something that was easy to use, intuitive, low-cost, and had the added benefit of being able to pull the metal out at any time and having that ability baked into the product that no dealer, no intermediary could interfere with it.
Dan Ferris: Wow. No intermediary interfering. There's a lot of places in my life where I'd like you and your friends to take over and get all the intermediaries out [laughing]. So, let's see. One of the things that you mentioned is that the Royal Canadian Mint of course – they have to – and they have – they recognize the VaultChain blockchain as – what is it? Legal title? How did you put it?
Fraser Buchan: As a source of truth for ownership.
Dan Ferris: Source of truth for ownership. I can't imagine that process took five minutes.
Fraser Buchan: So, to answer your first question, yes, it definitely took a number of iterations to get to the point where we could merge the Royal Canadian Mint's custody model with our technology. And it was certainly the first instance of a blockchain being used to manage title to hard assets anywhere in the marketplace. So it was a relatively complicated process. But I would say that the Royal Canadian Mint was actually incredible to work with. They bought into our vision and they really took the time to understand the technology, to work with us. They turned into really the ideal counterparty for the platform, and we're delighted to be working with them.
Dan Ferris: Right. So what I'm thinking is: of course gold doesn't take up a whole lot of space, but I know you did mention, when we talked last week, the possibility of adding other vaults if this thing really grows and you want to offer different products maybe in different locations or something like that. And I'm wondering: what is the – I don't even know what to call it – the vault ownership market? Are these all kind of big, slow, bureaucratic institutions? Are they all government-related institutions? Is the Royal Canadian Mint related in any meaningful way to the government in Canada?
Fraser Buchan: The Royal Canadian Mint is a Crown corporation.
Dan Ferris: A Crown corporation.
Fraser Buchan: Right. So it's guaranteed by the government of Canada.
Dan Ferris: Okay. So I guess my question is: is this what you expect to find? Are these the other kind of vaults? Like will you have to redo this process where you go for, I assume, months and months back and forth, many iterations? I'm just curious about the difficulty of growing your business, you know? If I say I think you're the Amazon.com and everybody's going to want to do this, is there enough gold in the Royal Mint to last a while, and if not, do you need to hook up with other vaults, and how hard is that?
Fraser Buchan: Yeah. It's a really good question. I think that it's becoming easier. Certainly our first integration with the Royal Canadian Mint has paved the way. And, sorry, just as one kind of final point on the mechanics of the program, we're not limited at the Royal Canadian Mint by any physical capacity. Because any institution that's using our platform has an ability to move physical metal in to then sell it to their customers or maintain accounts for their customers or to pull physical metal out. So we're not limited by any one institution. Any of our network of institutional clients can move physical metal in to create liquidity and to keep pricing very attractive.
To go back to your point about other vaults, that's absolutely on our agenda. We chose the Royal Canadian Mint because we thought that it was the best possible counterparty for the physical gold and silver investor in North America. But we recognize that as we move the platform into new geographies and new jurisdictions that end investors may want to work with different depositories. We will absolutely launch a physical depository in the U.S. in 2019, and we're working with a number of different depositories in Europe to identify the logical location and counterparty in that location. So our vision is to roll this solution out across all the markets that care about physical investing and to really listen to the end beneficial owner and the end market in terms of choosing who we should work with.
Dan Ferris: That was just kind of something I was curious about. Because this is new, and you've been around the block, Fraser. You know when things are new and there's a whole new set of relationships, there may be some risk. And I was just curious of what the future looked like in that way for you. But getting back around to the end user. So we've established that I can go to KitCo, I can go to OneGold, I can go to my Sprott broker maybe if have a relationship there. And I can buy relatively small amounts of gold, smaller than what institutions buy. I'm going to pay a lot less in fees. It's stored at the Royal Canadian Mint. If necessary, I could actually show up there.
What I'm wondering next is: what about the other end of the transaction? When I sell. Not redeem. When I sell. People wonder about tax treatment. Everybody wants to know about tax treatment. And is it meaningful that the mint is in Canada for a U.S. investor? Does that mean anything to his tax situation? I know you can't give tax advice. But what's the general story there?
Fraser Buchan: Sure. I would start by saying that our platform is, in the jurisdictions that we operate, a physical gold platform. So the assets being traded are spot physical gold and silver. And we've gone through relatively extensive legal reviews of our technology and our platform to ensure that everything we're doing is consistent with operating a spot market. So from that perspective, we tell our dealers and we tell our end users to consider this to be a spot platform and to handle taxes and regulatory issues accordingly.
Dan Ferris: I see. Look, folks, we don't give tax advice. Fraser doesn't give tax advice. If you do this, seek professional tax help. I guess that's always the answer. I was just sort of curious about the general viewpoint on it. So, Fraser, we're getting towards the end of our time now. If there's something you want to leave our listeners with, is there any last parting thought that you want to leave them with? I think this is a dynamite way to buy physical gold and silver. What would you like to leave us with?
Fraser Buchan: Sure. I would say that when we set down the path to building this business, we made a conscious decision to only work with partners that had a long-term vision that aligned with our own. As I discussed at the outset, that started with Sprott, IEX, and the Royal Canadian Mint. But we were lucky enough to expand our network of shareholders to include Goldcorp, Agnico Eagle, IAMGOLD, and Wheaton Precious Metals, all of whom invested directly in the business and have adopted the platform as a differentiated mechanism for taking their production to market.
And I would say generally what that has told me and what we've seen in the market in other places, in other conversations, is that there's a really strong appetite through the entire supply chain to see a change in the way that the precious metals market works. And I think that's incredibly exciting. It's in some ways an endorsement of our approach, and I think it foretells of a future that looks different and certainly looks better I think for people who care about precious metals and precious metals investing.
Dan Ferris: Beautiful. Fraser, thank you so much for coming onto the program and explaining what is just – it's like one of the most exciting things in gold and in precious metals. And we have a lot of listeners who are very interested. I bet people are going to – I bet they're going online right now as they're hearing our voices. So, thanks for telling us about it, and we'd love to have you back sometime and see how this is going in several months or a year or something.
Fraser Buchan: Fantastic. I would welcome the opportunity. And thanks for having me on today.
Dan Ferris: You bet, man. Thanks a lot. And we'll talk to you soon.
All right. That was really great. Fraser is a great guy and it's a great company, great product. Really cool. Okay. It's time for the mailbag. Remember: your feedback is important to the success of our show. All you have to do is e-mail us with a question or comment at [email protected]. We read them all and we try to respond to every single one, even the hurtful ones. And this week looks like we have two of them. And the first one is from paid-up Alliance member Sean S. "Hey, Dan, I enjoy listening to your show and you've had some interesting guests too. I have to call out Chris Irons as an exceptional case. I thoroughly enjoyed listening to him because he sounds so much like me, and so much of what he says is exactly what I think too. He's very entertaining too at the same time. Keep up the great work, Dan. Best regards, Sean S."
Thank you, Sean. I totally agree. Chris Irons was a great guest. Look, folks, if you haven't listened to that episode, go to the archive right now and listen to it. He's very very entertaining and very knowledgeable. I mean, I could've talked to him for another hour about all kinds of specific stuff related to investing. He was really well-informed and just hilarious sometimes.
Okay We got another one here, and it is from nobody I can tell. I guess we didn't get his name. So Anonymous then says, "Dear Dan, so, your guest got worked up about a pyramid scheme? Here's the problem with that. A pyramid scheme is completely voluntary. As long as a sucker is born every minute, someone will buy the hope that Herbalife is selling. Works that way in the financial sector: tobacco, alcohol, et cetera. They're selling products that're bad for your financial or physical health. It's not different with Herbalife. Think about religion. Talk about fraud. But shorting the Catholic Church after the corrupt Renaissance popes was a bad bet. Hope is a good business.
"What is the legitimate function of companies like Herbalife? They provide a financial education where parents failed. And who decides when a business model is too 'pyramid-y'?" in quotes. Government, the greatest fraud in history. Bill Ackman was a fool for taking regulators on as business partners. It's the biggest criminal gang in society and you're going to put your faith in them to do the right thing? Looks like Mr. Irons, along with Ackman, got their own education through a painful short. I just hope eventually he learns the right lesson."
Okay, there's good points in there. I think one of the points I like that you've made here is: yeah, having the government, the biggest criminal gang in history, enforce the pyramid-y-ness of various schemes – that is a fair point. I wouldn't call religion fraud. You said religion and then you mentioned the Catholic Church after the corrupt Renaissance popes. I think religion speaks deeply to a lot of people because it is simply a method of dealing with living in a world we don't understand. And also to me religion is poetry. I mean, I love the Bible to death but maybe that's another topic for another day.
You make a lot of good points here. And just for the listener, Chris Irons discussed Herbalife last week, just to make that clear. And he went into great detail about it for a long time. He knew a lot about it. So another reason to listen to that episode is just to learn a lot about how Herbalife works. But pyramid schemes and Ponzi schemes, which apparently are slightly different – I will say this: you want to know when you're in one. And I think it's okay to have some rules somehow in society – and you're right: maybe the government isn't the one to try to enforce them. And maybe they're not even enforceable. Maybe we should just have them as conventions. If we have a society in which it's normal for everyone to be very forthcoming and very transparent about things like investments, that's probably better than one where everybody's getting screwed.
Although I will say this: you're right to a degree when you talk about Herbalife being a place where people get a financial education. Because that's exactly what ought to happen, right? What ought to happen is that people – they put money into something – they love the story, they put money into it, they lose it all, and then they say, "Boy, I'll never do that again." And they think about all the things they were told and all the things they expected and the way they behaved, and then from then on through life, maybe they're a lot more conservative about investments, and maybe they learn to save money and take better care of it. I agree with that.
Exposing investors to the full brunt of risk rather than trying to lull them – the government lulls us into this false sense of security with organizations like the SEC and even deposit insurance, FDIC. Those things – they seem like great ideas but they actually encourage more dangerous behavior. You know?
And my analogy for this is: if you're driving in a car – and we've got all these safety requirements in cars, one of which being seatbelts – everybody's got a seatbelt on so we behave one way. How would we behave if there were no seatbelts and every car came with a six-inch metal spike sticking outta the steering wheel pointed straight at the driver's heart? How many fender bender accidents do you think we would have then? How much speeding and tailgating and dangerous driving would we have then? People would behave very differently if the risk was right in their face.
And I think what you're suggesting is to get the government out of it, let people be exposed to the full brunt of the risk and learn their lesson, and I think you may be right. I think this is – it starts out as a bit of a rant but it ends up being a pretty decent reflection and a pretty decent look into – pretty decent insight, I should say, into human behavior. So I thank you for this question, Anonymous. We didn't get your name. But it's really a great question. Thanks very much.
And, you know, that's it. That's another episode of the Stansberry Investor Hour already. It's called an hour and it goes by in a minute it seems like. So, be sure to check out the revamped website. And you can listen to all of our episodes there and you can see transcripts of the show. And you can enter your e-mail to make sure that you get e-mailed with all the latest updates. Just go to the same address: InvestorHour.com.
Okay. That's it for this week. Love us, hate us, just please don't ignore us. And tell your friends about us too, man. Thanks for listening. I'll talk to you next week.
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This broadcast is provided for entertainment purposes only and should not be considered personalized investment advice. Trading stocks and all other financial instruments involves risk. You should not make any investment decision based solely on what you hear. Stansberry Investor Hour is produced by Stansberry Research and is copyrighted by the Stansberry Radio Network.
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