The Blockchain technology enables tokenization of gold. What does it mean for the precious metals market?
Usually, investors consider precious metals and cryptocurrencies as substitutes, as the value of both asset classes depends on the level of faith in the national fiat currencies. However, a few cryptocurrencies backed by gold exist, potentially creating some synergies. For example, there is OneGram, which is a sharia-compliant cryptocurrency backed by gold. It means that each token is backed by one gram of gold, held in a vault at the Dubai Airport Free Zone. Another such a currency is ZenGold. As these tokens will be minted into existence only by the purchase of actual bullion, one token will always represent the ownership of physical gold stored at the Shanghai Gold Exchange. GoldMint, which is built on a private blockchain and issues tokens backed by physical gold or ETFs using the current price of gold set on the LBMA exchange at the time of sale, also looks interesting. And even the CME group will offer tokens backed by gold (Royal Mint Gold) in cooperation with the British Royal Mint. There are also others: Digix, which tokenizes gold via Ethereum, or Hayek, called in honor of the Nobel laureate, to name just two (a complete list of gold-backed cryptocurrencies is here).
The main advantage of gold-backed tokens compared to other cryptocurrencies is that they reduce the exposure to downside risk, as investors can exchange these tokens for gold. Hence, investors should not lose all their money in the case of a market crash, as the value of bullion serves as the floor price (the price of gold-backed cryptocurrency is always at least equal to the spot price of gold). And when compared to investing in physical bullion, gold-backed tokens may offer higher comfort of trading.
However, there are also drawbacks. Investors have to pay premiums over the spot gold price in order to cover the companies’ expenses. And there is always counterparty risk, resulting from the fact that someone has to store gold somewhere and promise to exchange tokens for the underlying metal.
The bottom line is that tokenization of gold is on the rise. This is good news for the precious metals market, as it could increase demand for gold. And the whole idea of gold-backed tokens is fascinating, as it could potentially revolutionize gold trading. Although there are some synergies, the marriage between cryptocurrencies and precious metals will not be quick and easy. Some doubts remain: cryptocurrencies are decentralized, while gold must be stored by some central authority. And why should investors buy gold-backed cryptocurrencies and pay a premium, just to have tokens pegged to gold at a fixed rate? Another issue that the gold market is actually quite liquid, so the main alleged benefit of tokenization (increased liquidity) is somehow controversial. It should be wise to monitor the links between cryptocurrencies and gold, but investors should take all these gold-backed tokens with a pinch of salt (some of them just look as marketing vehicles to attract new customers).
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Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.
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