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Digital Gold Assets Are Coming

By September 29, 2023November 1st, 2023featured articles

Gold can be bought in two ways. The World Gold Council may soon provide us with a third way: digital gold tokens tradeable on the Internet using blockchain technology.

Investors have always been able to buy physical gold bars, take delivery and store them at home or, for a cost, in a third-party vault or safe.

Alternatively, in more recent times, investors have been able to buy certificates from specialist gold brokers backed by gold bullion stored in safes or bank vaults or, for better liquidity, gold funds available on the stock market also backed by gold bullion held in bank vaults and known as exchange-traded commodities.

Due to gold’s unique physical and monetary attributes, it is the only currency to have acted as a universal store of value stretching back several thousand years. No paper currency in history has ever acted as a store of value for long.

Gold is in limited supply, does not perish with time and its density and rarity have meant that small quantities can contain significant value thus offering mobility for savings. Gold’s divisibility, reflecting its consistency and malleability, means that it could be fractionalised, which made it acceptable for settling trades in goods and services in times gone by.

Gold offers no income but its alternative use value – for jewellery and in complex industrial applications – points to its cost of production being a reasonable yardstick by which to judge its base intrinsic value.

In the investment game, gold is, in my view, the fifth asset class sitting alongside equities, fixed income government bonds, inflation-linked government bonds and bank deposits. Equities are for growth and the other four assets offer protection from the major economic risks of deflation, inflation and recession as well as political disorder or wars in that order.

In more politically stable regimes of the world, gold offers protection against governments’ temptation to print their own currency to finance overspending, which is then reflected in inflation. Think today! However, good quality equities and property also offer inflation protection, so that gold is more of an option than a necessity in politically stable regions.

Gold’s independent value and transportability are critical in politically unstable regions of the world. Today, think Venezuela, Argentina, Russia, Turkey, Syria and many other countries where the government routinely destroys the purchasing power of its citizens currency.

In a recent conversation with David Tait, CEO of the World Gold Council, he explained some of the hurdles that the global gold industry must overcome in order to deliver a digital gold token or coin backed by gold bullion and tradeable over the Internet.

A surprising fact, perhaps, is that the production of gold lacks standardisation and regulation across the globe. There are different gold bar sizes (weights) in different countries. A lack of an over-arching regulatory framework for the industry means that the production of sub-standard gold in smaller mines often in politically unstable regions with little environmental oversight is rife, often making use of toxic materials and child labour.

The World Gold Council’s aim is to create a database where accredited gold miners and gold refiners record their gold production with the actual gold being stored in bank vaults. Working in tandem with the London Bullion Market Association, this should see an international system of gold bar integrity being developed and recorded in this database.

This standardisation and integrity of gold within the database opens the way to the fractionalisation of gold with blockchain technology being employed to record the changing ownership of the gold within the database.

Eventually, it is hoped, as non-accredited gold miners are excluded from the new industry-wide database, it should make it increasingly difficult for them to actually sell their gold, which could eventually lead to their disappearance.

Digital gold should open the way for anyone in society to hold gold as a currency in any amount alongside euros, dollars and sterling and as an asset in traditional stockbroking accounts and on investment platforms alongside shares, bonds and many other alternative assets or in ‘wallets’ on your mobile phone, tablet and/or personal computer.

The recent trend towards cryptocurrencies has a legion of fans. In contrast to gold, cryptocurrencies can be created artificially, so that their greatest problem as a store of value is their likely infinite supply. Digital gold tokens may well make cryptocurrencies redundant.