For a long time, gold was money. In fact, it has been since 635BC, when gold coins were standardised in Asia Minor or the Asian part of modern Turkey. In an instant, gold became the go-to store of wealth. Across the Mediterranean, gold money enabled the democratisation of wealth and laid the foundation for modern commerce. And gold remained so until Richard Nixon changed the rules in August 1971 when he ended the gold convertibility of the dollar. From that fateful Sunday onwards, the fiat money we hold was all we were going to get. There are those who still wait for the gold standard’s return. For me, the idea of gold as money is dead.
But gold’s role as a store of wealth remains as relevant, if not more so, today as it has ever been. HelloGold wants to democratise access to gold to the man in the street in every emerging economy.
Democratisation of modern investment products began as early as the 1860s in the UK with the introduction of investment to give “the investor of moderate means the same advantages as large capitalists”. This was followed by open-ended mutual funds in the 1920s and by passive investment products in the 1970s. And now we have exchange traded funds (ETFs). Each subsequent financial innovation led to lower running costs which enabled investors with smaller amounts to invest.
One of the most innovative products that emerged in the last 15 years was the gold ETF in 2003 — physical gold in the form of an exchange traded security. Prior to the launch of these ETFs, there was huge scepticism that there was demand for such a product which enabled the retail investor to buy 1/10oz or 1/100oz at spot. Many argued that investors only wanted the physical gold and would never consider gold-backed securities. They were wrong beyond anyone’s wildest imagination — at one point during 2011, the World Gold Council’s SPDR Gold ETF had more under management than its equivalent US stock market product, SPY. Fast forward, nearly 15 years later, the physical gold ETF universe has over US$90b[1] of gold under management and make up a third of investment demand for gold. Physically-backed gold ETFs as a group are now the fifth-largest holder of gold, falling just behind the sovereign nations of U.S.A., Germany, Italy and France. The introduction of the ETF gave people access to the gold spot market in equity form for the first time. Suddenly, gold could be traded just as easily as buying shares of any stock. Before the ETF, investors could not easily invest in gold. They could buy coins or bars, but due to the issues like storage and acquisition, investing in gold was not at all liquid, transparent or efficient.
If the ETF has been so successful, is there a meaningful role for a gold-backed token? The answer is yes.
1. Many people do not buy securities
In the US, arguably the most developed financial market in the world, less than 50%[2] of Americans do not invest directly or indirectly in securities. Assuming that participation levels in emerging markets are, at best, no better than the US, there remains a large portion of the population that do not have the ability to invest in gold through an ETF.
2. Transaction sizes remain beyond the reach of too many
In the same US survey, more than half of those who do not invest through the stock market said it is because they do not have enough money to do so.
With a gold-backed token, investors will only need the equivalent of a fraction of a dollar to buy gold (ERC20 tokens work to 18dp). Everyone can save.
3. For people living in markets where there are no gold ETFs listed, buying and selling gold ETFs is cumbersome
For these investors there are too many hoops to jump to benefit from investments in the Gold ETF. First they need to open a trading account, including all the KYC that goes with it. Second transfer funds. Third convert funds into foreign currency. Fourth buy and sell in a different time zone. Fifth convert back to the local currency. And sixth, finally transfer back to the checking account. Each step will take at least 1 working day to complete with various costs, fees and commissions. It’s a daunting and boring process for most.
4. Gold ETFs are not available in all markets
Without the benefit of a broker with access to international markets or sufficient capital to apply for an account with an international online broker, many are unable to access the right exchanges to buy a gold ETF. With a gold-backed token, the man in the street needs only to have a mobile phone..
If ETFs brought gold to the mainstream securities investor, digitising gold into gold-backed tokens has the potential to democratise gold for the man in the street. Gold-backed tokens will remove the final barrier to wealth preservation for everyone. It will mean that people’s ability to save through something other than cash will be simply a function of their desire to save through gold. It will not be because they do not have access to the right product because they live in the wrong country or because they do not have enough funds to save.
[1] World Gold Council, ETF data 2017
[2] http://www.bankrate.com/investing/did-you-miss-the-stock-market-rally-youre-not-alone/
