It’s widely suggested that gold can act as a safe haven from the world war of currencies, and investors have been hedging against the potential decline of fiat by buying gold in spades. Since the whole point of buying gold is a hedge against, well, large-scale economic crisis, then gold futures or exchange-traded funds (ETFs) are probably not the way to go.
As a result, some financial experts recommend instead to purchase literalgold (gold bullion) instead of “paper” gold. A bar or nugget of gold is not as tied to the financial system as something like an ETF, but it’s a much harder process to buy and own. Buying a bar of gold is nothing like buying an ETF, as gold is indivisible, heavy, burdensome, and therefore difficult to transport. Besides, who wants to keep valuable gold sitting in their house, where it’s liable to a myriad of risks?
Many people don’t, so they have to find a custodian they can trust, which creates challenges (and costs) of its own. How do you know you can trust that the gold in a vault is real? Well, you can’t, because fake gold is circulating throughout the economy.
By now, you probably know where I’m going with this. Blockchain is a tool used to exchange value in a peer-to-peer way without being forced to trust unreliable intermediaries. Doesn’t it sound like the perfect use-case for gold? A gold smart contract could be programmed to contain the assurances of a gold certificate, representing gold as a legally-bound title, and removing all the aforementioned physical limitations associated with physical gold ownership.
So Why Hasn’t “Tokenized Gold” Taken Off?
We all know that “tokenized gold” is no where near replacing gold, let alone even making a dent, and most people in the crypto space or the gold space haven’t even come across it. How come? One attempt was recently made by a project called Quintric, though by most standards it wasn’t a great success. They used Gold Eagles on the blockchain, and even went so far as to live stream the gold in physical reserves to prove that the tokens were backed.
The problem was that people in the gold space don’t really trust crypto. Crypto is all about speculation and hype, while gold is a hedge against greater economic risk. Not just is the ethos of the crypto space somewhat incompatible with gold, but remember that blockchain simply “promises” trust and security, without necessarily being able to back it up.
Blockchain does not protect the physical reserve from being confiscated or stolen, for example. And for trusting your gold investment, the physical security of the gold may be the most important aspect.
Finally, while I did mention that blockchain is a tool for dis-intermediation, it isn’t so for every use-case. A “gold-backed” crypto still relies on a trusted third party to maintain correct gold balances, defeating the purpose of the blockchain.
Ultimately, it’s entirely possible for blockchain and gold to find a successful niche in the industry, but it’s not the “match made in heaven” that some make it out to be.
Guest article by @Frederik Bussler