For centuries, gold has been a cornerstone of human finance, serving as both a tangible currency and a reliable store of value. Even in our increasingly digital age, investors continue to flock to this precious metal, viewing it as a safe haven when other asset classes face turbulent times. This year has been a particularly strong testament to gold's enduring appeal, with a surge in investor interest driven by geopolitical uncertainties and, more recently, concerns about a potential "AI bubble" bursting.
Gold prices recently surpassed the significant $4,000 per ounce mark, experiencing a subsequent dip, but the yellow metal is still on track for its most robust yearly performance since 1979. As of Thursday, gold was trading at approximately $4,198 per ounce, or around £3,181, a figure below its October peak.
The Rise of Digital Gold
In today's hyper-connected world, innovative avenues exist for investors to gain exposure to gold without the traditional burdens of physically hoarding bullion or safeguarding valuable coins. Digital gold has emerged as a popular alternative, allowing individuals to participate in the gold market without the complexities of owning and storing physical assets. The latest evolution in this digital landscape is the tokenisation of gold, attracting a growing number of investors. But how exactly do these gold tokens function, and do they truly offer the same security as their physical counterparts?
Understanding Digital vs. Tokenised Gold
Digital gold provides a mechanism for investors to gain exposure to gold without the direct purchase of physical metal. Instead, investors acquire a specified quantity of real gold, which is then securely stored by a third party, with ownership meticulously recorded in a digital format. A prime example is The Royal Mint's 'DigiGold' service, which enables customers to purchase fractional amounts of gold held securely in their vaults. This allows for investment based on value rather than strict weight, offering greater flexibility.
Mike Oswin, Global Head of Market Structure and Innovation at the World Gold Council, elaborates, "Digital gold allows customers to invest in gold through digital channels, with the physical gold securely held in a vault on their behalf. Crucially, all forms of digital gold are backed by physical gold, whether it's allocated to an individual customer in the form of a specific bar or coin, or pool-allocated across multiple investors. In both cases, full legal ownership of the gold must transfer to the customer rather than remain with the dealer."
Tokenised gold, on the other hand, represents a further refinement. It provides a digital representation of each unit of gold, recorded on a blockchain. This technology imbues tokenised gold with enhanced transparency and security benefits. Many investors are already familiar with gold Exchange Traded Funds (ETFs), which offer indirect exposure by allowing investors to own a share in a fund that holds gold, rather than owning the gold itself.
Larry Fink, Chief Executive of Blackrock, recently commented on the transformative potential, stating, "The tokenization of financial assets will mark the beginning of a new era for financial markets." Supporting this sentiment, the World Gold Council reports that approximately 26% of investors express a high likelihood of investing in gold token products.
Faisel Ali, founder and managing director of Gold Bank London, highlights the transparency offered by tokenisation: "You can see transactions on the blockchain, but you're still trusting someone else to hold the gold." Some providers offer the crucial feature of physical redemption, allowing customers to convert their digital holdings into physical gold bars or coins if they so choose. Tether Gold, for instance, permits customers to redeem actual gold in exchange for their tokens or to have it sold on the Swiss gold market for cash proceeds. Redemption typically incurs a fee, such as Tether Gold's charge of 25 basis points (0.25%) on the gold price at the time of redemption, in addition to delivery costs.
Why the Surge in Tokenised Gold?
The appeal of tokenised gold has been undeniable, with prices per token surpassing the $4,000 mark last month. While it often trades at a slight discount to physical gold spot prices due to factors like custody, redemption costs, and market structure, its accessibility is a key draw. Tether Gold, a prominent tokenised gold asset, is currently trading around $3,999.55 per token, with each token representing and being backed by one troy ounce of gold.
Current figures from Coingecko indicate that approximately $3.6 billion worth of tokenised gold is in circulation, with a daily trading volume exceeding $1 billion. This growth is fuelled by a dual demand: more investors seeking exposure to gold and a preference for the advantages tokenised options offer over other digital gold formats. A significant 34% of US investors consider the ability to fully redeem tokens for physical gold as "crucial to building trust."
Ali explains the current market dynamics: "People want safety and a hedge against instability, but they also want convenience. So tokenised gold sits in the middle. It's bringing new investors into the space, which is great for awareness."
Advantages Over Physical Gold
Digital gold, including tokenised versions, offers several benefits that may make it a compelling choice for certain investors. While some may find greater peace of mind in physically possessing their gold, others prefer to delegate the responsibility of storage and management.
"Digital gold, including tokenised gold, offers investors an easy and secure way to hold gold without having to manage physical storage themselves," states Oswin. "It provides the reassurance of third-party custody and the convenience of buying and selling online through a dealer's website or app."
Ali adds, "It's easier to buy and sell in small amounts, and it moves instantly. For the people who want exposure to gold prices without handling bars or coins, it's convenient, but it's still gold in a digital wrapper."
Furthermore, digital gold facilitates quicker and more straightforward selling processes through online platforms. Oswin notes, "For those interested in the digital asset ecosystem, tokenised gold goes a step further. It enables investors to trade gold alongside cryptocurrencies and stablecoins, leveraging the flexibility and innovation of decentralised exchanges."
How to Buy and Potential Drawbacks
Accessing tokenised gold typically involves purchasing directly from the issuer, such as through the websites of firms like Tether Gold, Paxos, or Comtech Gold. Tokens can also be acquired on the secondary market via various decentralised exchanges. Additionally, these tokens can often be transferred directly between Ethereum-compatible wallets.
However, the reliance on digital infrastructure can raise concerns for some investors regarding their ability to access their gold physically. Ali cautions, "When things get shaky can you trust the people who have tokenised the gold?... Physical gold removes all that risk – that's the difference between owning gold and owning a promise."
Ultimately, tokenised gold is underpinned by real gold held securely by the issuing company. It is imperative for investors to conduct thorough due diligence, selecting reputable companies that undergo independent audits to verify that their gold tokens are indeed backed by physical gold.
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