Crisis-Driven Demand: Gold-backed Tokens Are The New Gold 2.0
Gold-backed cryptocurrencies have been rewarding investors with returns of both gold and digital assets minus the drawbacks of physically holding the precious metal.
This article is a followup to my recently published piece that explored the viability of stablecoins as a scalable alternative to general cryptocurrencies.
Uncertain waters
World over 2020 has started off with a bang. Right at the beginning of the year, we saw the escalation of tensions between Iran and the United States which led to rumours of an upcoming war; the United States impeachment trial sprang into full throttle; Brexit and now the Coronavirus pandemic.
2020 is as good as cancelled for most people.
Countries around the world are rolling out wartime-like emergency measures to fight COVID-19. The IMF has already said that the world is facing the worst economic crisis since the Great Depression of the 1930s. With millions of people losing jobs since this novel pandemic began, many are left wondering how the global economy recover? On top of that, economic experts concur that the global economy is likely to further contract by 3% this year as countries around the world shrink at the fastest pace in decades.
Increased Worldwide Demand of Gold
Gold has been traditionally regarded as an eternal measure of value since times immemorial. Gold still remains an acceptable yardstick of wealth that layers any world’s powerhouse foundations, leverage that caused wars and changed the global political landscape throughout the ages.
Fast-forward to today; the COVID-19 global pandemic is proving to be the black swan event of all black swan events.
Investors have been clamouring for the safe investment havens amid the recent market downturn and it looks like the U.S dollar has been the king of the global foreign exchange markets. But gold is actually outperforming against the greenback. According to Bloomberg data, this year gold has risen by 5.3%. It may even go higher.
Gold has been in short supply recently because it’s usually shipped on commercial flights whose movement has been curtailed recently due to border and airspace closures worldwide.
It seems like its not only individual and institutional investors that have been driving the demand for gold upwards. In December 2019, Russia’s Finance Minister Anton Siluanov said his country could consider investing part of its National Wealth Fund in gold as the country strongly regards investment in gold as more sustainable in the long-term compared to investing in financial assets.
As the US Congress explores a $2 Trillion Economic Stimulus Package as well as various stimulus packages being announced worldwide, I am reminded of Goethe’s 1831 drama Faust. In the drama, the devil convinces a struggling emperor to print and spend vast quantities of fiat currency as a short-term fix for his country’s fiscal problems. As a result, the empire ultimately falls and descends into chaos.
In the near future, If we happen to face a systemic banking system financial crisis due to coronavirus, gold will do incredibly well, mainly because of the fact that gold is outside the traditional fiat currency fractional reserve banking system. If there is global debt deflation, gold will do extremely well.
Gold-backed Crypto Tokens: The Alternative
The market is currently experiencing an increase in demand for physical gold fueled by sourcing supply chain issues.AS a result, the precious metal has increased in price per ounce. For most investors, bitcoin and other cryptocurrencies have become the safe-haven-of-choice. Despite being highly volatile, cryptocurrencies are also highly liquid, easy to access, and easy to store. However, other investors prefer something a bit more traditional–namely, gold. In its unavailability, it seems like there is only one alternative. Gold-backed cryptocurrencies.
The increased interest in these gold-backed cryptocurrencies is evident in the fact that the trade volumes of most such assets have also increased in recent days, according to market data from CoinMarketCap. Holders of gold-backed cryptocurrency tokens enjoy being able to own gold while avoiding the drawbacks associated with physical gold, including storage costs and limited accessibility
“We’ve all seen unprecedented volatility in the markets the past few weeks, so naturally people are looking to safe havens like gold,” Paxos executive Walter Hessert commented recently. “As blockchain-based tokens, gold tokens offer holders the greatest level of control and accessibility outside the financial system.”
Theoretically, gold-backed stablecoins provide investors with the benefits of both gold and digital assets, without the drawbacks of physically holding the precious metal.
In many ways, the nexus of the stable and universally-recognized and accepted valuation of gold with the security as well as the accessibility of the blockchain does seem to be a perfect marriage: gold, with its historically proven price stability, is seen by many investors as the ideal partner to volatile cryptocurrencies.
Gold and blockchain technology share some important characteristics which include scarcity, lack of counterparty risk as well as a non-inflationary nature. Gold is a fully fungible asset and a globally recognized store of value, this makes the precious metal an ideal candidate for tokenization.
At the same time, in the digital asset market, there is a big demand for the secure storage of value. Blockchain-based infrastructure is becoming more and more crucial to a new generation of financial services that require stable assets as collateral and transfer of value. Besides fiat-backed stablecoins and multi-asset projects, gold seems a clear candidate.
It is also important to note that the gold market itself is an estimated USD 20 trillion-dollar market, largely dominated by over-the-counter and interbank trading. This makes it an ideal market to target with a digital asset technology that promises better credit quality, transparency, and cost-efficiency.
Best Performing and Most Promising Gold Cryptocurrencies
Digital Gold (GOLD)
GOLD is a digital crypto asset issued out by Digital Gold Ltd Company. The token is the first stablecoin with 100% liquidity and is backed by physical gold enabling users to invest in physical gold. This is achieved using an ERC-20 Ethereum-based GOLD token with the ticker, (GOLD). 1 GOLD is equivalent to 1 gram of physical gold.
Physical Gold is bought by the St. Vincent and Grenadines incorporated company every time a token is issued and the gold is safely stored in a safe depository in Singapore. The GOLD token is a safe, convenient and fast solution that is designed for a wide variety of purposes: from investments and portfolio diversification to secure transactions and gifts to your loved ones
The company used its own funding to purchase the initial 7,200 grams of 99.9% purity gold, which were then placed in BullionStar’s secure vault — a well-known Singapore-based provider of asset storage solutions. To ensure compliance and trust an around-the-clock audit process is conducted by BullionStar, as well as independent audits to confirm that the gold is physically present in the vault.
Subsequently, 7,200 tokens were issued to correspond with the amount of gold owned by DIGITAL GOLD, thus 1 token per each gram of the precious metal. The tokens are freely available for purchase to all individuals and businesses, including private investors, speculators, and hedge funds.
Investors who wish to buy or sell GOLD tokens can utilise the Digital Gold Marketplace platform where they are only required to fill out a form on the website. The system will automatically launch a smart contract after the transaction is complete and the tokens will be issued automatically. The purpose of the Marketplace platform is to facilitate the process of each transaction for instantly buying or selling gold tokens thereby making the process more efficient.
Beside the website-based marketplace platform, prospective investors and holders can also utilise cryptocurrency exchanges such as Cryptex, Livecoin and Bitforex where the Gold token is also currently trading.
Current Price: $57.00
Launch Date: July 2019
Launched by: DIGITAL GOLD LTD company, St. Vincent and Grenadines.
Blockchain: Ethereum
For more info: Digital Gold Website
Tether Gold (XAU₮)
Tether Gold (XAU₮) is a digital crypto-asset offered by TG Commodities Limited. XAU₮ is available on the Ethereum blockchain as an ERC-20 token and also on the TRON blockchain as a TRC20 token.
Each XAU₮ represents ownership of one troy fine ounce of physical gold on a specific gold bar. Therefore, holders have undivided ownership rights to gold on the specified gold bar(s). The allocated gold is identifiable with a unique serial number, purity and weight. At any time, XAU₮ holders can check the details of the gold bars associated with their address through the Look-up website.
Holders of XAU₮ can make a redemption request in the form of physical gold so long as holders have completed TG Commodities Limited’s verification process and hold the required minimum number of XAU₮. The holder’s physical gold can be delivered to a location of their choice in Switzerland or the holder can request that TG Commodities Limited attempt to sell the gold and receive the cash proceeds from that sale (less TG Commodities Limited’s fees).
However, it’s worth noting that Tether, the company behind Tether Gold, has come under fire in the past regarding its auditability, with claims that only 74% of the Tether stablecoin is actually backed by USD.
The question of whether each XAU₮ token is really fully backed by gold remains unanswered.
Current Price: $1,712.69
Launch Date: January 2020
Launched by: TG Commodities Limited
Blockchain: Ethereum, Tron
For more info: XAU₮ Website
Pax Gold (PAXG)
The New York-based exchange and stablecoin issuer, Paxos, launched a gold-backed crypto-asset called Pax Gold (PAXG) in September 2019. Each of the ethereum-based tokens encapsulates the legal title to a physical bar of gold stored in the Brink’s London vault. Pax Gold has also been approved by the New York Department of Financial Services.
“It’s not a representation of the commodity, it’s the actual legal title to it,” Paxos CEO Chad said when the token was issued. “This is the exact point of the blockchain, the exact premise, that you can now make assets easily moveable and divisible and not be tied to a manual, physical process.’’
Each PAXG token costs the same as an ounce of gold and can be redeemed for a physical gold bar at Paxos’ partnering institutions such as Bullion Exchanges in New York. Paxos plans to expand the list of its global partners from the traditional commodities industry only so as to ensure users can claim real gold even if they’re not in London or New York. As a result, SALT, the crypto loan startup now offers PAXG-backed loans as well and these are available in fiat or stablecoins such as PAX, TrueUSD or USDC.
Current Price: $1,745.91
Launch Date: September 2019
Launched by: Paxos
Blockchain: Ethereum
For more info: PAXG Website
Perth Mint Gold Token (PMGT)
The Perth Mint Gold Token (PMGT) is backed by gold in the Western Australian government’s Perth Mint.
The purity and weight of the gold backing the PMGT token are guaranteed by the Australian government, with the mint issuing digital gold certificates through the GoldPass app. These certificates are then used to back PMGT tokens with each token is backed by the certificates on a 1:1 ratio and is traded on exchanges like KuCoin.
PMGT tokens are issued with zero fees for custody, storage, and insurance making them cost-effective gold assets and a competitive alternative to traditional gold products, like gold ETFs and banked gold transfers. PMGTs are also fungible with traditional gold markets.
Operated by InfiniGold, the amount of gold backing each PMGT can be verified in real-time against the balance of GoldPass accounts published by the Perth Mint. That means that holders do not have to wait for monthly audits to see that the tokens are 100% fully-backed.
It is important t to note that although PMGT holdings are fully redeemable for physical gold, liquidity is minimal.
Current Price: $1,719.97
Launch Date: October 2019
Launched by: InfiniGold
Blockchain: Ethereum
For more info: PMGT Website
DigixGlobal (DGX)
DGX gold-backed cryptocurrency tokens are provided by Singapore-based DigixGlobal, with each token representing 1 gram of gold held in vaults in Canada and Singapore. The Bullion Association fully accredits and insures the vaults.
DGX tokens effectively make gold bars divisible, redeemable, and transferable through merely buying and selling the tokenized digital representations. The creators of DigixGlobal designed this process to digitization democratize access to gold,
There is a 1% fee to exchange the tokens for physical gold, and the company assumes the demurrage fee, which is the cost of storing the gold. Digix Gold tokens are very thinly traded and have a market cap of just under $6 million.
Current Price: $56.75
Launch Date: March 2018
Launched by: DigixDAO
Blockchain: Ethereum
For more info: DGX Website
While it is true that gold-backed stablecoins are still a small component of the pegged cryptocurrency market, with USD-backed stablecoins remaining a much larger part of the ecosystem. The current pandemic induced crisis that is facing us today coupled with the pending rampant currency-printing-driven inflation, gold-backed cryptocurrencies might just change this order.
The article above is written from an independent perspective and does not constitute financial advice. Independent financial advice should be sought before deciding whether to invest in any financial product.
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