By Wes Kaplan, Head of Marketing, Tradewind Markets
Gold is one of the oldest and most notable trading assets known to humankind. Even before the creation of the modern gold standard in 1717, investors have been responsible for the custody of their own gold, whether that means in a hole dug in a backyard or in a well-protected vault. Throughout history, investors have traditionally invested in gold through physical gold bars and collectible gold coins, but the process of securely handling gold has always been a tedious task for new and experienced investors.
Not only is the safekeeping of gold a time consuming and physical endeavor, but also transporting gold from one place to another presents challenges — this year alone has amplified the shortcomings of physical processes associated with gold investing. Flaws in distribution channels arose during the COVID-19 crisis and increased speculation caused by political uncertainty and vaccine developments led to extreme volatility. It’s not easy to quickly respond to major price fluctuations when doing so requires physical transportation of literally tons of metal.
With so many external factors affecting the commodities market, investors want a smarter, more efficient way to continue to invest in the yellow metal. The introduction of gold ETFs and gold futures into the precious metals market has provided more technologically advanced means of interacting with gold. However, the lack of direct ownership of the underlying physical gold, variations from gold spot prices, and limited trading hours make ETFs and futures less attractive to certain investors. So, how can investors continue to obtain, settle and trade gold without sacrificing the important characteristics that make it such a valued portfolio asset?
Going Digital is The Answer
Digitized gold is one of the smartest, most efficient, and logical ways for investors to own gold, whether it be through digital tokens, fractional gold, or digital ownership of physical gold. By digitizing gold, investors determine where, when, and how they would like to obtain, settle, and trade their assets — flexibility that was unavailable to the investor in the past.
What is Digitized Gold?
At its core, digitized gold is a means of ownership that allows investors to purchase physical gold held at a designated location in a digital manner; investors then prove ownership of their gold through digital records.
Through those digital records of ownership, which in many cases take form as clear records of title on a blockchain, investors purchase gold that is stored in secure -- and in certain instances sovereign -- vaults. For example, some companies with programs for digitized gold products store client assets with entities such as the Royal Canadian Mint and the Perth Mint.
Traditionally, investors had to make the decision to store gold in their home, and become responsible for the custody of their metal. With digitized gold, investors now have the ability to establish a clear title of ownership over physical gold without the need to take physical possession of the metal. Therefore, while investors still technically maintain ownership of their investment, they are not responsible for the storage, security, insurance, or transportation of that gold.
Options for Investing in Digitized Gold
There are multiple options for investing in gold, beyond the traditional gold bars and coins, that allow for investors to access their gold in a digitized manner.
Digitized gold is simply physical gold that is traded electronically but is custodied at a third party storage facility and distributed via a network of reputable dealers and wholesalers. This first option for purchasing gold in a digitized manner allows for investors to obtain investment grade gold while avoiding common entry barriers into gold investing. This is done by buying digitized gold from institutions that leverage private permissioned blockchains to meet the level of detail needed to digitize physical metal seamlessly.
Investors in digitized gold also have the option to enter the market in a low cost and low risk manner through fractional investing, an attractive characteristic to investors looking for flexibility in their assets. This past summer we saw gold hit record highs, reaching upwards of $2,000. For many new investors, that’s a hefty price tag and highly discouraging. With fractional gold, those interested in entering the market aren’t forced into buying a full ounce and can own smaller portions of precious metals at the same price.
A second way of purchasing digitized gold is via tokenized gold products. These tokenized gold products are available via public blockchains, which allows them to integrate with a broader digital asset ecosystem. Unliked digitized gold, you own a token that can be redeemed for physical gold, rather than the underlying asset. In addition, for those looking to own less than a traditional ounce of gold, gold tokens, cryptocurrencies backed by physical gold, are also an ideal and flexible option for owning fractional quantities of gold. Blockchain, a common denominator in these options, provides the necessary technology to grant investors this unique option, alongside the ability to convert digitized gold to physical gold at any date or time.
What Isn’t Digitized Gold?
Often brought into the digitized gold conversation, ETFs and gold futures are the oldest and most well-known options for investing in gold without obtaining physical custody of the metal. Although, by definition, ETFs and gold futures are not digitized gold, they are means of interacting with gold in a digital manner. Gold ETFs allow for investors to invest in gold-backed assets, while gold futures represent a contract, between buyers and sellers, where a purchase price for a quantity of gold is predetermined for a future date.
However, neither ETFs or gold futures fall under the definition of “digitized gold,” and therefore, do not share the same beneficial characteristics and digitized gold options.
What Makes Digitized Gold Smart?
Without the need to physically acquire and move investment grade physical gold bullion, with digitized gold, investors can settle trades digitally 24/7 without relying on constraining market hours — a first for the precious metals industry. This access given to owners of digitized gold allows for traders to leverage their holdings as collateral in order to generate a yield.
While gold trades in high volumes on a daily basis, it is difficult to take gold as collateral unless gold ownership records are in a digital format. Digitization of gold allows for the collateral taker to determine who owns the clear title to gold, where the gold is located, and from where the gold may have been sourced. This then gives the collateral taker a boost of confidence, as should they need to liquidate the position, they could do so by executing a sale.
Digitized gold products also tend to have significantly lower custody fees which makes it not only a good collateral asset, but also a more cost effective investment.
Another unique characteristic of digitized gold is that it is able to contain information on provenance, providing buyers with access to transparent data prior to purchase. Environmental, social, and governance (ESG) standards are becoming a major topic in the metals market, with many labeling gold the latest conflict commodity. With digitized gold, the capability exists to tag digital records of ownership with a detailed log of data regarding a buyer’s gold, including but not limited to where the gold was sourced and which ESG standards the mine adheres to. This factor alone is enticing to new investors who want to make a smart and ethically informed investment.
Digitized Gold’s Future
There’s no question that eyes have been on gold and the broader precious metals market during recent months as the global pandemic, economic uncertainties, and U.S. election have caused a great deal of buzz and movement. There is no better time for investors to reevaluate their investment plans or for new investors to evaluate their options when it comes to exploring the precious metals market.
Key market participants and industry players have already launched digitized gold product options available through leading dealers, making digitized gold options more available to investors. As the industry faces a truly pivotal moment, digitized gold, a true combination of emerging technologies and one of the world’s oldest commodities, has all of the right characteristics to become the smartest way to own gold.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
