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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.

roller coaster

Precious Metals
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:

greek spread

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“.


Comments (9)

  • Leonard Britt
    Twitter:

    February 9, 2010, 4:33 pm

    Interesting to hear that. The question would be whether hedge fund managers considering investing in domains are going to be strictly focused on .COM traffic domains or whether they would consider alternative TLDs with branding and SEO potential.

    Reply
  • Rob Monster

    February 9, 2010, 4:45 pm

    Leonard – interesting question.

    Since I know you have an amazing .TV portfolio, I will infer your question to mean that you wonder if there is an asset story around a portfolio of non-COM domains.

    I think the answer to your question in your case is yes. Largely because it is a very complete portfolio of .TV domains that can be bundled into a network. This has both strategic value and speculative value.

    Incidentally, check out Slideshow.com. We just released it. The back-end is all executed in Silverlight, which is ideal for rendering video media across platforms. I will ping you soon about a .TV network.

    Reply
  • Snoopy

    February 9, 2010, 7:10 pm

    “there is serious consideration of domain names as a store of value in uncertain times.”

    ///////////////////////////

    Clearly that hasn’t been the case looking at how the domain market has performed over the last few years. Domain name are about a risky as you get (which is why alot of people invest in them), a million miles from being comparable to gold or US dollars.

    Reply
    • Rob Monster

      February 9, 2010, 7:28 pm

      @Snoopy – No suggestion here that domains will compete with physical PMs as a store of value. The point I am making is that for an asset manager or hedge fund, domain names are another form of DIVERSIFICATION and risk management. It belongs in a balanced funds basket of assets, since domains are the raw land of the Internet economy which is growing far faster than the offline economy. Even if just 1% of a fund’s core asset holdings were in the form of managed domain portfolios, the implications for domains as store of value would be enormous.

      The other point is this. While he Pioneer stage of domaining has been amply lucrative for many, it is running out of gas. Why? Because the historical economic model — parking — is becoming less viable. The current practice of parking premium domains is akin to grazing cattle on an oil field. It was a windfall while type-in ruled the day. The Pioneers can no longer rely on milking the cattle because the fields are barren, yet most Domainers don’t know how to drill for oil or transport it across the country. Pardon the analogy and stereotype, but I believe it is pretty accurate.

      Bottom line: Changing the core Domaining model from parking to development is the key to unlocking the value of domains as asset class.

      Reply
  • Leonard Britt
    Twitter:

    February 9, 2010, 7:24 pm

    Related to my previous post, quite often from a development vantage point .COM domains tend to be more fully priced by domain registrants whereas .Net domains also can be positioned very well in Google and are widely recognized (I have seen numerous cases in my portfolio where the equivalent .COM is priced ten to twenty-five times my .Net). Other extensions such as .Info or .TV can be developed and still make sense from a branding vantage point depending on the topic (a .info I have developed saw two minutes 16 seconds average time spent on the site during a recent Adwords campaign due to the videos).

    Reply
  • Ramsay

    February 13, 2010, 10:18 am

    Mooooving into development is the ticket alright! It’s been my plan all along. But for me, it’s also an enigma. Building room additions comes naturally. Building a good website is like learning εγγυητής (Greek word for ‘bond’) and harder than drilling for oil.

    That’s why Epik kicks butt Rob. You’re artfully surfing a tsunami and helping other tag along. With your economic and geo-political acumen you’re surfin’ with a nice long board.

    The only sector that is up (other than government hiring, money center bank bonus pools and military firms) is internet shopping. Both for information and stuff.

    I understand gold (and even more so silver! 16- 1 historical ratio, should be even less now). But that’s no trick. A paper note is just that. When the world’s paper notes are allowed to be issued by private individuals at interest, anyone with any sense can see the writing on the wall. It took a while, but the big banksters own, and are now foreclosing on, the planet. They have a love – hate relationship with the internet. It advances their global agenda but, for now, allows someone to register domains like ‘Eat The Bankers First.com’. I rejoiced the other day when I saw this one become available. Bumper stickers coming soon! :-)

    Thanks for the great info Rob.

    Reply
    • Rob Monster

      February 13, 2010, 12:19 pm

      @Ramsay – Thanks for the kind words. A few comments:

      - Domain development is indeed hard. We have gotten a lot better at it but certainly have the battle scars from learning how to do it in a capital efficient manner. Gone are the days when entrepreneurs could raise money on a concept and lose money for an extended period of time while validating a sustainable business model. The margin for error is much smaller now. And for this reason in particular, it is very advantageous to be able to develop domains using a platform-based approach that can quickly bring a domain to profitability.

      - Beyond getting to profitability, businesses need a compelling “reason to exit”. To move beyond simply existing, the business needs a “soul” that fundamentally defines why the site exists. For what purpose or benefit will the site be developed. That “spark” is the much tougher problem for most people to solve.

      - The mechanics of translating the “spark” into a well-executed business model is one that does not per se require a great deal of organic development. For a big enough idea — preferably paired with a great domain name — sometimes an acquisition is the preferred path to critical mass. Personally, I believe there is huge scope here for accelerated growth of domain development. In speaking with companies across the country, it is apparent that a tremendous number of small businesses are winding down right now. Small companies need an edge. A great domain IS an edge.

      - As for precious metal valuation ratios, there are a few indicators that I think are interesting to watch. You mention the gold:silver ratio. The other one is Dow:Gold ratio which is worth watching. It has been as low as 1, and as high as 43. It is about 10 now, and falling. I would not be surprised to see it fall to a long-term bottom of 4, e.g. a Dow of say 12,000 would correlate to $3,000 gold. See this chart here: http://home.earthlink.net/~intelligentbear/com-dow-au.htm

      And while I believe that the 4:1 ratio will happen, there are many ways you can get there mathematically, including both inflationary and deflationary scenarios. That’s why, personally, I rather develop domains than ride a roller coaster where someone else is operating the throttle. There is a value for a developed domain name and that value can be priced in a range of currencies at that point in time when a buyer comes to the conclusion that they would like to own it.

      Reply
  • The shell game « Epik Blog

    April 8, 2010, 11:49 am

    [...] I believe the more you research, the more you will agree that Domains are better than Dollars which I have explained here and here. [...]

    Reply
  • The Parthenon is for sale « Epik Blog

    April 28, 2010, 5:29 pm

    [...] the Unexpected. I stand by my theory that Domains are better than Dollars which I argued here and here.  And even though your personal financial advisor might beg to differ on this advice, I would use [...]

    Reply

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