Bitcoin-bugs often stake the claim for the numero-uno crypto as ‘digital gold’ but the real stuff might flip the argument in a new effort to transmute the precious metal into an online commodity.
Launched late last year under the auspices of the World Gold Council (WGC), the ‘Gold247’ project is an ambitious plan to turn the physical asset class into a trusted, always-on digital investment.
“Gold247 transformation is focused on three pillars of work: integrity, accessibility and fungibility. These three pillars are underpinned by the digitalisation of gold and the digital transformation of the gold market’s infrastructure,” the WGC blurb says. “This initiative aims to enhance trust in gold, and as a consequence, unlock substantial demand.”
Andrew Naylor, Asia-Pacific (ex China) WGC chief, said while Gold247 is still in the early stages, the industry group is working with two specialist technology firms to develop pilot database systems that are currently in testing phase.
In May this year the WGC invested into the Swiss aXedras Group, which is building a blockchain-based “digital supply chain solution for the precious metals industry, and to immutably document gold from the mine to the end-user”, a release at the time said.
Naylor said ultimately the digital gold universe might be underpinned by multiple and interoperable technology providers working together to bring a new level of efficiency to the market.
“In many ways the gold market is already very efficient,” he said.
However, institutions generally benefit more from the current gold market over-the-counter trading system than retail investors.
Gold has, of course, been configured for exchange-traded funds (ETFs) that give both institutional and retail investors on-market access to the asset.
The gold ETF trade, again dominated by institutions, has spurred demand for the precious metal but Naylor said a direct digital route to the pure product should broaden the investor base more effectively.
And it hasn’t been a great year for the gold ETF market, according to new WGC figures released early in November.
“Global gold ETFs saw a net outflow of 59t (US$3bn) in October, the sixth straight month of declines in holdings,” the WGC report says. “But October’s outflow was less pronounced than September’s (-95t) as the gold price held relatively steady. Headwinds from persistent dollar strength and rising yields were partially offset by higher inflationary concerns.”
Despite the flaccid US dollar-denominated price and dwindling ETF flows, Naylor said demand for gold is up almost 30 per cent year-to-date as traditional jewelry markets surge.
He said the varying sources of demand both as a useful industrial material in jewelry or technology and as a financial asset point to the “unique” features of gold as an asset class.
The jewelry trade accounts for about 36 per cent of global gold demand, technology 7 per cent or so while the rest is split between institutional and retail investors (collectively, 40 per cent) and central banks (17 per cent).
“There’s no other asset class that has both pro- and counter-cyclical features,” Naylor said.
In US dollar terms gold has fallen from about US$1,800 at the start of 2022 to a low of US$1,630 early in November (bumping up to US$1,740 or so last week) despite a bout of raging inflation that the asset class is supposed to buffer against.
Naylor said gold, which famously produces no income, has been held down by rising interest rates but the asset has appreciated more for investors in non US dollar currencies.
Historically, he said gold has performed well as an inflation hedge but it also continues to be held as financial disaster insurance in many portfolios.
Gold does appear in some NZ portfolios – consultancy firm, MyFiduciary, for example, includes the asset as part of an alternatives basket – but enthusiasm is muted: for example, the Reserve Bank of NZ has a gold-free balance sheet.
If the digital dream comes true, however, Naylor said the prospect of accessing verifiable gold (sustainably sourced as per new environmental, social and governance industry standards) in fractional quantities online might open a new era of popularity for the asset.
“[Gold247] is a really ambitious plan,” he said, with a long time expected between concept and implementation. “… But the technology is available today.”
The Gold247 project, Naylor said, might even be a complement rather than replacement for digital assets that share some of the same superficial features (held outside the banking system, scarcity) and terminology such as mining.
“Gold demand is completely different from crypto,” he said.
Or, as Jeroen Blokland, former head of multi-asset at Dutch quant shop, Robeco, noted in a 2021 article on the topic: “… perhaps the most important thing to consider is the fact that bitcoin might not be digital gold, and that there is huge uncertainty surrounding bitcoin’s future compared to asset classes that have a much longer history.”
As crypto stares down a new crisis of confidence this month post the collapse of linchpin exchange, FTX, gold may yet win the rush to claim the digital gold throne.