Gold is one of the oldest stores of value, intertwined with the history of money itself. Gold coins were some of the earliest types of currency, and until the 20th century gold was the basis of national currency in the form of the Gold Standard.
Although most currencies have now moved to a fiat system, many investors still purchase gold bullion in the form of coins. The price of gold is subject to excessive volatility compared to other assets, but it tends to have an inverse relationship with the value of the stock market. For example, the S&P 500 lost over 50 percent of its value between 2007 and 2009 during the global financial crisis. During the same period, the price of gold steadily rose. For this reason, many investors purchase gold as part of a diverse portfolio that will hold its value regardless of market conditions.
Not Necessarily an Easy Investment
Despite the benefits, investing in gold comes with its own set of challenges. The first is that buying into the gold market isn’t necessarily as easy as it sounds. Buying physical gold comes with security challenges when taking physical delivery. Gold jewelry and bullion are generally sold with a considerable markup between 40% — 50%, meaning you’ll pay well above the market rate. Your gold will need to appreciate in value by quite some way before you start to make any profit from it.
You’ll also need somewhere safe to store your precious metal. If you already have a safe at home, this may not be a problem. However, if you don’t, then using a safety deposit box at a bank will also come with inevitable costs. Banks charge a fee for renting the box itself, and it’s most likely that you’ll have to pay separately to insure the contents.
An alternative means of investing is to buy into a mutual fund or exchange-traded fund (ETF). However, many of these funds aren’t tracking the price of gold in the purest sense. For example, the Midas fund invests in stocks and bonds of companies involved with the business of precious metals. This includes miners, processors, and distributors.
The value of these companies may not always directly correlate with the value of gold itself and may be subject to influences unlinked to the price of gold. For instance, if a mining company is implicated in an industrial accident, its stock could fall dramatically even if the price of gold is going up.
Another way of getting direct exposure to gold without physically owning it is to buy the certificate. Currently the gold certificates are issued by the company which is backing them. There should be equal amount of gold backing the certificates as the company claims. The problem is that those certificates are not really representing the gold, they are as reliable as the company backing them. So investing in gold certificate is not the same as buying physical gold.
Besides the buying part, selling is also not as easy as one thinks. There is limited liquidity if you own the gold physically, and it involves a transaction cost to sell through an intermediary.
Overall, investing in gold still have some challenges and barriers, which could be solved by blockchain.
New Opportunities with Digital Gold
In the era of blockchain, digital gold has emerged as an opportunity to invest directly in gold while avoiding many of the challenges of owning physical gold. Digital gold is essentially a blockchain-based digital token technologically similar to Bitcoin, but unlike Bitcoin the token is backed by a real-world value, the equivalent amount of physical real gold reserves.
In this way, the owner of digital gold doesn’t need to take custody of their investment because it’s held in a vault by the token issuer. This makes digital gold cheaper to handle than physical gold, plus the owner doesn’t have the headache of organizing storage and insurance.
Investors already have an opportunity to get into digital gold through offerings. Singapore-based Digix was one of the first companies to start offering digital gold. Now, competitors have started to enter the market, such as Paxos, which launched its Pax Gold token in September of this year.
In the case of Pax Gold, each token is backed 1:1 by one fine troy ounce of gold. The offering is regulated in the US, and Pax Gold token holders can be redeemed at institutions such as Bullion Exchanges in New York.
Liechtenstein-based company FineToken is soon releasing gold token on CoreLedger’s platform, where investors can easily purchase gold in the form of tokens. The physical gold is stored in former military bunkers in the Swiss Alps, under Swiss jurisdiction. Storage, auditing and insurance are covered in this case. The price per token is close to material price. Compared to buying physical gold, it is more convenient and cost-efficient to buy a gold token.
Digital gold even offers some additional benefits compared to its physical counterparts. Digital tokens can be split into fractions, offering investors the opportunity of fractional ownership of a gold bar or coin. In the case of FineToken, the smallest tradeable unit is one thousandth of a gram.
Enhancing Security and Traceability
Perhaps the most significant benefit of digital gold is that investors can benefit from the security and traceability of blockchain transactions. By trading gold, all the documentation travels from owner to owner with each transaction. The gold can be authenticated by a specialist, and this authentication will be available for as long as the gold is in existence. Each transaction is digitally signed and timestamped. There is no possibility of buying “fake” digital gold.
This traceability also offers benefits within an industry that isn’t as glamorous as the end product itself. The New York Times recently published an article outlining how the gold industry is already exploring the use of blockchain to help combat issues such as child labor and gold derived from areas of human conflict. By putting gold on the blockchain, it’s possible for an investor to verify that the gold they’re purchasing is ethically sourced and sold.
Traditional gold investors may need some time to come around to the idea of digital tokens over a tangible asset. However, when considering the challenges of the gold industry for participants and investors, the benefits of digital gold are quite obviously apparent. Therefore, it seems like only a matter of time before gold traded on the blockchain evolves from being an exception to becoming the new standard.
This article is brought to you by CoreLedger.
As a prominent blockchain infrastructure provider, CoreLedger is making blockchain technology simple for businesses to use. With CoreLedger’s offerings, clients can readily tokenize their offerings with fast-to-implement resources that will allow them to modernize their services. Thanks to our in-house developed software solutions and experienced blockchain specialists, CoreLedger is ready to help you make your next move with blockchain technology.