Over the past year, the global economy has faced numerous challenges, including the reopening of commerce and rising geopolitical tensions. These factors have significantly impacted inflation, causing pain to consumers, businesses, and countries worldwide. As a result, there a growing interest in the possibility of a return to a monetary system backed by gold, as evidenced by the historic high gold purchases by banks in developing nations and a proposed bill in the United States for the return of the Gold Standard. This trend highlights the growing recognition of gold’s role as a safe haven asset during turbulent macroeconomic and geopolitical times. Additionally, gold provides countries with an alternative to the US dollar, enabling them to diversify their reserves and reduce exposure to currency risk. However, how does gold tokenization factor in this complex geopolitical context.
Despite the gold’s value as a safe haven investment tool, the physical nature of the asset makes it difficult for retail investors to gain access. Bullions are heavy and can be a target for theft. This makes the cost of owning the physical asset higher than simply buying the commodity. Additionally, the authentication process for assessing the purity and integrity of gold bullions in any transaction is lengthy and requires technical expertise. This further creates barriers to ownership.
Despite these challenges, there are alternative ways for investors to gain exposure to gold beyond physical ownership. Gold focused exchange-traded funds (ETFs) and mining stocks are two such options. While neither may provide the same returns as investing in the physical asset, they offer a sound investment opportunity for those who are unable to own the physical asset. Investors can still gain exposure to the precious metal by investing in gold-focused ETFs or mining stocks. They may potentially benefit from its value as a safe haven asset.
However, with the trend of asset tokenization, retail investors can now directly own physical gold via STOs.
Benefits of Gold Tokenization
The tokenization of gold investment comes in different types. It depends mainly on the need and the objective of the retail investor. However, despite the existence of different types of STO gold investments, all of them benefit from the blockchain infrastructure.
Firstly, all the transactions are carried out on the blockchain. The technology ensures that the security of transactions and minimizes the risk of fraud by enhancing the transparency and traceability of the involved parties. Moreover, the immutable ledger contains all the information about the gold bullion, including the proof of origin, which is essential for gold investments. In other words, it also allows for the full tracking of the supply chain.
Secondly, the tokenization of gold investment enables easy trade and increased liquidity. The use of smart contracts in the gold tokenization process facilitates the trade process. It also improves the liquidity of the investment as a whole. In other words, it makes it easier for investor to buy and sell gold-backed STOs.
Finally, tokenization allows for the fractional ownership of the asset. Traditionally, gold is not a divisible asset. The smallest denomination of gold for investment is generally coins. When an investor needs to trade in the investment, the price may only be for the collectability of the coin and not the gold. In contrast, gold-backed STOs enable the fractional ownership of gold investment, allowing investors to accumulate fractions to a whole. This increased divisibility provides flexibility and accessibility to retail investors who may not have the means to buy a full gold bar.
Existing STO Projects
Though relatively new, the last few years have seen a dramatic rise on gold STOs. Since it is an investment with an underlying physical asset, the STO does not suffer volatility like a cryptocurrency. This attractive feature has made private companies, mining companies and national mints interested in utilizing the technology to expand their operations into the digital space. Here are a few examples:
- Asia Broadband is a gold mining company with mines located in Mexico. It is one of the main companies that supplies the Asian market. In 2021, the company launched a STO, whose token is directly tied to 0.1 gram of gold. All of the available tokens are available on the basis of the gold that is mined by the company.
- The Perth Mint, located in Australia, is one of the foremost national mints in the world. While it sells bullions, the mint also offers gold certificates that are redeemable for gold bullions. Recently, the Perth Mint unveiled its first STO backed by the gold in its vault. The Perth Mint Gold Token acts as a digital Gold Pass stored in a distributed ledger, which allows faster transaction times and security over the investment.
- Paxios is a digital company that was founded around the concept of fractionalization. It created the Pax Gold token. The token is tied to only a fraction of a gold bullion that is stored in their vaults. A customer can start investing in gold by buying a single 0.01 troy ounce of a gold bullion and later accumulate more fractions to form a whole gold bullion total. These tokens are redeemable for a physical gold bullion.
The challenges facing the global economy over the past year have highlighted the role of gold as a safe haven asset during turbulent times. The physical nature of the gold bullions can make them difficult for retail investors to own. However, alternative options such as gold-focused ETFs, mining stocks, and now STOs provide opportunities to gain exposure to this precious metal. The benefits of gold tokenization are clear, including increased transparency, traceability, liquidity, and fractional ownership. STOs backed by physical gold offer an innovative and secure way for investors to participate in the gold market. With this trend, we will see more opportunities for investors to invest in gold in a flexible way.
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