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Trying e-gold

I've been mulling over the idea of opening an e-gold account for several years. I finally went ahead and did it. As a dyed-in-the-wool goldbug, you may be wondering what took me so long.

First, what is it? It's an electronic currency, 100% backed by physical gold, safely stored and audited. (It's theoretically redeemable in physical gold, but practically only in 400toz bars worth about $200,000.) Austrian economics is well-known for advocating a return to the gold standard and for explaining the problems in fractional reserve banking (buy a book or read it in PDF). A 100%-reserve gold currency is exactly what I'm looking for.

So, ahem, what took me so long? The trouble with using gold as currency is that few people are doing it. It is, in a very practical sense, like using a foreign currency. Most individuals and businesses don't use it. However, its popularity has grown a lot since it was introduced in 1996. Yes, it's been around for a long time — this is not some fly-by-night operation.

The thing that finally made e-gold practical and desirable is eBay. Gold enjoyed a long history as currency, and online auctions are giving it a new breath of life.

UPDATE 2006-01-15 00:25:25 UTC: eBay has moved to prohibit e-gold, and I talk about this situation here.

Sellers are eager to be paid in e-gold because transactions are final. Once you've been paid, you've been paid — period. Payments can only be made if sufficient funds are available, and they cannot be reversed. The seller's financial risk is eliminated. Gold is also an excellent international currency, letting people avoid fees associated with currency exchange (provided they spend the funds again as gold, instead of converting it to a government currency).

What's the catch? Why isn't everyone doing this? And — ahem — what took me so long?

There are fees. You'll be charged 1% of your balance annually (e.g. 1 gram if you have 100 grams) to maintain your account, and there are also small transaction fees (paid by the recipient) that vary according to the size of a transaction. In my estimation, these fees are very reasonable. If you had $1000 worth of e-gold, the maintenance fee is $10/yr. The fee for spending $100 is about 85¢ at the current dollar price of gold. (The fee for spending $1 is about 5¢.)

It was never the e-gold fees that bothered me. What bothered me was the fact that conversions to or from government currencies were expensive. There are many companies offering this service, but the cheapest is OmniPay (which is actually affiliated with e-gold). Their bid-to-ask spread is 4%, centered at the spot price of gold. So if you're trying to buy e-gold with dollars, you'll pay 2% over spot, and if you're trying to sell e-gold to get dollars, you'll get 2% less than spot.

That always sounded like a hefty exchange fee, until I recently thought about increasing my investment in physical gold. (Asset allocation and all that.) I was surprised to see that although my local coin shop has a narrower bid-to-ask spread, it's centered significantly higher than the spot price of gold. Gold coins are currently trading at a several-percent premium over spot gold. Right now it's actually cheaper to buy e-gold than to buy gold coins!

So, that's what I'm going to do. It's also nice that in e-gold form, I have the option of spending my gold in small amounts. You can't easily make small transactions with gold coins.

Why did I use the future tense — "that's what I'm going to do"? Because OmniPay verifies your postal address by sending you something in the mail. So I'll have to wait for the postman.

I frankly don't expect to be making a lot of e-gold transactions. But I plan to use it whenever possible — instead of alternatives like PayPal or credit cards even if they have no fees — simply to encourage the use of gold as money. Gold money is something I strongly believe in, and I'll be happy to use gold as money and not only as a hedge against the dollar.

If reading this has interested you in e-gold, go ahead and create an account. It's completely free to create an account — there are never any fees unless you have a nonzero balance or make transactions.

If you think you might use e-gold in small quantities, be aware that OmniPay has a minimum order size of $1000. If you don't want to buy that much e-gold, you'll have to go to one of the other market makers that have higher percentage fees but allow smaller orders.

(Full disclosure: e-gold has an incentive program, so if you open an account through one of my links (except that one!), I'll get 10% of the spend fees associated with your transactions. Thinking about all those half-cents makes my eyes twinkle.)

Tiny Island