The financial wizards are hard at work so far in 2010. On the heels of the annual Davos summit, central bankers and finance ministers from around the world have been on world tour — from Sydney to the Arctic. There would appear to be a lot of fingers in the dam right now as national economies try to wean themselves from government stimulus. Herewith are a couple of major developments to watch in the coming weeks along with the implications for domainers.
Precious metals, notably gold, is what some economists call Armageddon Insurance. Mathematically, for gold to function as a global currency, it would need to trade in the range of $3,000 to $5,000 per ounce — well above the current level of $1,077 which is already more than the intrinsic value. In other words, the trading price is partly about intrinsic value, but mostly it is a bet on the viability of traditional national currency systems as an enduring store of value.
What is interesting about precious metals as a store of value is that most of it is held in the form of paper rather than physical metal. The typical paper forms are (1) Exchange traded funds like GLD, (2) long or short commodity contracts, and (3) shares in mining or resource companies. In recent days there has been chatter about the breakdown of the physical market for bullion. Here is one relevant analysis about the Breakdown in the Gold Market.
Although not being covered in the mainstream press, many mints and dealers are reportedly out of stock and backordered of physical precious metals. In other words, supply is greater than demand when it comes to the physical good. Unlike fiat currencies, or paper contracts, one can’t conjure up more physical supply of a rare metal. New supply has to be discovered, mined and processed. This is a development worth watching.
Greece — why it matters
In other news, pay close attention to recent movements in Greek’s Sovereign debt. This is more significant than Iceland’s national bankruptcy. It is a test case for the future of the Euro as a currency union. It is part of the larger PIGS story, which stands for Portugal, Ireland, Greece and Spain, all of which are pushing the boundaries of EMU membership compliance. The below picture tells the story of a nation whose credit card is in the process of being shredded:
For the moment, there is more rumor than news. If Greece is bailed out, as is now being rumored, the whole thesis of EMU fiscal guidelines (e.g. 3% maximum deficit as % of GDP) is completely out the window; member nations will have been granted an implied license for moral hazard. STRATFOR did a good analysis of why Greece matters, and notably why Germany is stuck between a rock and a hard place.
Domain names as asset class
The implication here is that as the global economy struggles to resume a sustainable and endogenous growth track, the fundamental risks are still largely unchanged. At the same time, the list of attractive alternatives to the US Dollar is shrinking — this at a time when the US Dollar is not all that attractive! The silver lining for Domainers is that the online economy is healthy, capital efficient and increasingly profitable.
Premium domains have many of the characteristics of being a desirable alternative asset class. Over the last several weeks, I have had a series of discussions with asset management groups and hedge fund managers about the “Domain names as asset class” thesis. The light bulbs are going on and for a growing percentage of these fund managers, there is serious consideration of domain names as a store of value in uncertain times.
Why does this make sense? Simple. Domain names can be priced in any currency, operated from anywhere, and owned by anyone. In other words, domain names are a portable store of value that can be transferred instantly across the globe from one owner to another. They can even be owned anonymously. This message of “Domains as an asset class” is an important one to reinforce as it is key to moving beyond intrinsic value and unlocking speculative value.
For more on the topic of domain names as asset class, see my prior post on why “Domains are better than dollars“.