Digital Gold for a Digital Era

Gold - Shutterstock photo
Credit: Shutterstock

The long-term price stability of Gold as an asset-class is time tested, which means all portfolios would be wise to have some exposure to the precious metal. There are a number of ways that investors can add the precious metal to their portfolios, each with varying degrees of convenience and utility. The most obvious is to take physical possession – where an investor acquires bullion and stores it themselves. However, this comes with storage cost and certain risks, which can make it difficult to later resell gold at spot price.

What we see many investors attracted to nowadays, are gold products such as derivatives and gold ETFs which allow them to merely trade on the price of the asset, or vaulted gold, where a dealer will hold the precious metal on behalf of the buyer, or otherwise back the price stability of gold, allowing the buyer to take possession at a later date, or buy it back.

Fundamentally, none of these methods leverage the properties of gold that make it so valuable – the introduction of the gold standard sparked a chain reaction that saw its use as a medium of exchange greatly diminish. The traits that were once so attractive – scarcity, fungibility, durability, portability and divisibility – still exist, but in a digital setting, the bar is set higher for portability. With the rise of internet banking and cryptocurrencies, it’s much cheaper for anyone to near-instantly transmit value across the world.

Many now measure their wealth in dollars and, indeed, other fiat currencies. But a dollar is little more than a blend of easily-accessible material – or nowadays, a string of digits stored in a bank’s database. The problem with this is that it’s simply too easy for entities to create more out of thin air, devaluing the entire supply as a result. In a worst-case scenario, reckless printing of fiat currency results in hyperinflation, which may have devastating impacts on local economies and the functioning of societies (look to the recent example of Venezuela ). Over hundreds of years gold has proven to maintain its purchasing power in times of such crisis, devaluation of fiat currencies and inflation.

Gold, like all asset-classes must adapt with the digital times. The very technology that underpins cryptocurrency (that is, distributed ledgers, or blockchains) can be deployed to ensure that the oldest asset known to man can maintain its dominance in the digital space. In an era where tens of thousands of dollars’ worth of value can be sent across the world for mere cents, it makes little sense to purchase a 10 oz bar, pay for insurance and shipping, and wait weeks for it to arrive at its destination.

The premise is simple, and not unlike the model we see used for stablecoins, which are pegged to any number of real-world assets: an issuer will maintain a reserve of gold, and issue tokens that represent ownership of a fixed amount – if, for instance, the reserve is made up of 10,000 oz and 10,000 tokens are distributed, each can be redeemed by the holder for an ounce of gold.

Tokenization, whereby an asset is represented digitally, presents a tremendous opportunity for the gold industry, and has the potential to bridge the gap between physical gold and the demand for digital accessibility.  It can be divided up in small fractions of an actual bar and sent around the globe for only a nominal fee paid to the blockchain network. Where ownership of vaulted gold cannot be easily transferred, tokenized gold can change ownership at the touch of a button. While institutional products like derivatives are limited in their uses, and often only referencing the gold price rather than the actual bullion, tokenized gold is incredibly flexible and fully-backed by the physical metal.

With tokenized gold, everyone from the average consumer to major institutional players can gain access to bullion markets instantly. Whether to exploit its historically sound store-of-value properties in order to safeguard their wealth, or to trade it against traditional gold products.

This new era in digital gold offers vast improvement on the original standard – where tokens cannot be counterfeited, the supply is publicly auditable, and the asset-class is made available to the same conditions for all purchasers.  This means if you were to buy an ounce of gold for your niece, you would access the same purchasing conditions and advantages of gold that a fund would, that invests significantly more capital.   The playing field for accessing gold markets will become level.

This is a sentiment shared by Richard Hayes, Chief Executive Officer of The Perth Mint, who recently said, “The digitization of gold via a public ledger is a natural progression for the global commodity markets. It will promote gold as a mainstream asset, enhance its accessibility, and offer greater liquidity, transparency and auditability of the real assets backing this type of digital token.”

About the Author

Andreas Ruf is CEO of InfiniGold, the developers of The Perth Mint’s GoldPass, a full-service gold investment app that allows The Perth Mint customers to securely buy, store and sell physical gold via digital certificates. InfiniGold is the issuer of the Perth Mint Gold Token (PMGT), a digital asset that allows users to conveniently trade and hold physical gold stored at The Perth Mint on public blockchain in a trusted and cost-effective way.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.