Crypto Is Coming For Your Gold

The Facts

First, the facts. Tether bought a big chunk of Elemental Royalty. Elemental is my largest single position in my portfolio.

Tether bought 33.7% of the shares in Elemental. They bought an option to acquire Alpha 1 shares which would bring their total to 47.7% if they exercise that option.

Maybe I'm overthinking. La Mancha invests in early stage mining investments, they aren't in the business of holding publicly traded mature companies long term. They realized their profits so they could recycle that money back into new investments. Probably a similar story with Alpha 1, who sold an option to acquire their Elemental shares as well.

Tether Background

Tether is the most successfull of the stable coin companies. Almost the entirety of their business is $USDT which they aim to trade at a 1:1 with the US dollar.

Overall it seems to work. They publish quarterly audits of their assets to build confidence that they could continue to actually give you a dollar per token if it came to that, but mostly people just trade them like dollars. If you live in a country like Argentina it's probably safer than hoarding US dollars under your mattress where someone could steal them more easily. And if you live somewhere like Argentina you probably don't have access to a bank that will safely store your dollars and give you interest.

Tether Profits

That's $130 million in PROFITS per employee. That's wild.  So how do they make their money?

There's currently $155,038,253,887.80 in $USDT and Tether charges 0.1% for issuing or redeeming tether to dollars with them. So right off they got $155 million just on issuance fees. But the more interesting part is that all of that circulating $ is actually theirs. They call it reserves, but it belongs to them.

They issue quarterly audited reports of their "reserves", also known as how much they own.  Here's a rough breakdown from the last one:

US Treasury Bills, Overnight Reserve Repurchase Agreements, Term Reverse Repurchase Agreements, Money Market Funds, Bank Desposits, Other country treasury bills, corporate bonds, precious metals, bitcoins, etc.

They are making money off the interest of the deposits. And it's a LOT.

Now they are expanding. Stablecoins for Euros, Ozzie Dollars, Yen, Mexican Pesos. And Gold. Which brings us to...

$XAUT

The diversification away from the US dollar to other currencies isn't just expanding market, it's protection against the US dollar loss of status as the world's reserve currency. Gold is one of those replacements as a reserve currency.

You can buy gold on exchange traded funds like $GLD or $GLDM today. The way that model works is that those companies have gold in trusted vaults in Switzerland or the US or Australia or somewhere. They make money by charging management fees. You can theoretically redeem your shares for gold, but it's almost always easier to sell the shares for dollars worth around the amount of the gold your shares have a claim on.

But that assumes you have access to a broker. It's also hard to use as a real currency. Putting gold on the blockchain is convenient.

How will $XAUT make money for tether? Well, there is a 0.25% fee if you buy or sell tether gold directly with the company and there are fees if you want to withdraw your $XAUT in the form of physical gold bars. But you can trade $XAUT on the secondary market and only pay network transaction fees (ie gas fees)/ But overall that's small potatoes. They don't (currently) charge an annual custodian fee like the gold ETFs.

I feel like Tether was kind of forced into this product that isn't very profitable. You can't earn interest on your gold sitting in a vault. But stablecoin gold is a threat to their $USDT cash cow, so they needed to have an offering.

Paxos GOld (PAXG), Perth Mint Gold TOken (PMGT), Digix Gold Token (DGX), Kinesis Gold (KAU), and Meld Gold all kind of forced Tether's hand.  They weren't going to be able to charge a custodian fee and be competitive.

So, how can they make money on gold, and how does buying Elemental fit into that?

Why Owning a Gold Royalty Company Could Help $XAUT

Most of what I write here will probably be wrong. But when you are at a potential paradigm shift it's worth exploring options.

Beyond The Vault

$USDT "reserves" include things that aren't physical dollars in a vault and nobody seems to mind. Corporate bonds for example are really claims on potential future dollars.  You need some ready cash for short term redemptions, but some amount of assets that people think will be worth more dollars in the future then they are accounted for now seem fine.

Franco Nevada has the concept in their asset handbook of "Royalty Ounces".
https://franco-nevada.relayto.com/e/2024-asset-handbook-hg395h8baqvft/JtvNF8MV4

If you have a 2% NSR on a producing mine with 2Moz of M&I then you have 40,000 M&I royalty oz. They break them down by proven and probable, measured and indicated, and inferred.

Franco has long argued that royalty oz are better than oz in a vault. Oz in a vault don't grow, while historicaly the mines Franco has royalties on not only have paid more than the royalty oz to Franco, they have at the same time grown the royalty oz.

Franco also has the concept of Gold Equivalent Oz (GEO) so you can figure out the similar impact of Silver or other metals that might be produced by your gold mine.

If tether is able to put gold royalty companies or just gold royalties in their "reserves" for their gold stable coin they now can make a profit off the "reserves" that they couldn't with gold bars in a vault. This is probably similar to corporate bonds or Treasury Bills backing part of their dollar stable coin.

Cheapest Way To Buy Gold

Let's say I tasked you with buying gold over the next 10 years to put in a vault in Switzerland. How would you go about it? Could you get a discount to just buying every day on the spot market?

Let's imagine that there is a gold royalty for sale, but the buyer wants payment today in gold. The royalty has the expected royalty payments in the next 5 years:
year 1: 0.5 oz
year 2: 0.5 oz
year 3: 0.5 oz
year 4: 0.5 oz
year 5: 0.5 oz

What would you pay for that today on ounces of gold?  Well, there's some uncertainty so you probably wouldn't pay the full 2.5 oz and break even. You take all the risk and get no profit. You'd easily pay 0.5 oz as the chances you get at least 1 year of expected returns are high and you'd make 500% returns in just 5 years if everything goes to plan.  Maybe you'd pay 2 oz now and then in 5 years you'd get 2.5 oz total and that extra payoff is worth the risk.

Pretty quickly you've arrived at an interest rate where your expected returns compensate you for the risk you are taking and the capital your are tying up.

In this way royalties are a bit like a bond, but demoninated in gold instead of dollars. It's a bit different on the terms. If you close the mine you don't default, if the mine grows the amount you owe increases, etc.

If you can buy royalty ounces at a cost less than an ounce of gold now it make sense to buy the royalty ounces and then put the gold in a vault as it comes in.  It's cheaper than buying gold every year in the spot market.

What's Next?

Does tether buyout the rest of Elemental's shareholders? Do they start investing in other gold royalty companies, gold royalties directly, or gold miners? Do the other crypto companies start doing the same? Do gold denominated loans or gold demoninated smart contracts start to become common?

I don't know. What I do know is that a company with twelve digits of assets just decided to come play in my tiny sandbox. If you are playing Texas Holdem and a rich guy who made his money in oil and just learned to play poker shows up to the table you cancel whatever plans you made for later that night because it's time to make some money.

Welcome to my table Tether, let's deal the cards.