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Not Anymore, Mr. Buffett: Tokenization Marks a New Era for Gold

Oct 22, 2020·4 min read
Editorial
Not Anymore, Mr. Buffett: Tokenization Marks a New Era for Gold

How the US elections and events of 2020 prove there’s more to gold than meets the eye.

  • In the run-up to the US election, speculation about stock market volatility abounds, with investors turning to traditional safe havens such as gold.
  • The rising adoption of tokenization in the age-old gold market signals a rapprochement between digital asset enthusiasts and volatility-averse crypto skeptics.
  • The $7 trillion gold industry is receiving a new life as a result of tokenization and new customer bases.

2020, the year gold reared its head again

The pandemic and the ensuing economic crisis proved that gold is as relevant as ever, with the precious metal reaching an all-time high of $2,075 per ounce in August 2020.

Over the past critical months, investors rushed to gold, seeking a hedge against the potentially widespread inflation triggered by central banks’ overloaded money-printing presses. Simultaneously, households resorted to selling family possessions such as golden jewelry to weather the shortage of regular income. Business in cash-for-gold stores in Spain, for instance, started booming once the COVID-19 lockdown was over and expected market volatility around the US elections on November 3 will likely boost gold’s desirability even further, as uncertainty often tends to.

Much like money, gold derives its value by virtue of its functions. Its practical applications – as bona fide gold opponent Warren Buffett would argue – are not that many. Gold’s actual value is a social construct as this precious metal has way fewer practical applications than its less valuable cousin, silver.

But historically, gold has always gone beyond that with its ability to store value, its malleability, its cross-cultural significance as a symbol of wealth and status, and the allure of being plentiful and rare at the same time.

Welcoming “Tokenized Gold” to the debate

While individual sovereignty over our financial assets has improved dramatically over the years thanks to the adoption of cryptocurrencies and the underlying technology, it is archaic that we still depend on gold certificates issued by third parties to prove our gold ownership. In contrast to gold, the only proof of ownership for crypto is the private keys each holder possesses and at present gold certificates can be easily manipulated, making the case for tokenization even stronger.

In 2019, Paxos launched PAX Gold (PAXG) –– the first cryptocurrency directly tied to the value of gold. PAXG “is not a representation of gold, it is the legal title for each asset” and stands for assets that “would not have to be tied to a physical process,” CEO Chad Cascarilla explained at the time. The elimination of such physical dependencies and limitations is precisely what blockchain technology’s entire proposition is about – making assets easily divisible and distributable. You’ve got the keys, therefore you’ve got the gold.

The rising adoption of tokenization, specifically in the age-old gold market, indicates ownership guaranteed by private keys is on par with – or even surpasses – traditional ownership certifications. This signals that reconciliation between different types and generations of investors – between digital asset enthusiasts and volatility-averse crypto skeptics, is not only possible but well on its way.

Whether this rapprochement crept in unnoticed or was orchestrated, the social significance of gold – as a traditional asset that risk-wary investors feel comfortable with – arguably plays a key role in driving the shift. It paves the way for a smooth change in the narrative. Tokenized gold, in this respect, very much embodies the evolution to a collective proof of gold ownership that has been hitherto so elusive.

The demand for digital gold is growing in the run-up to the US election

Throughout 2020, interest in tokenized gold has kept growing, with demand for PAXG in particular rising roughly 25% over Q2 and Q3. Digital assets institution Nexo witnessed this trend first-hand by seeing a 61.2% quarter-on-quarter increase in the number of loans collateralized by PAXG in Q3 of 2020.

What’s more, 78% of Nexo’s nearly 1 million users responded in a recent poll conducted by the digital lender that they were interested in buying digital forms of gold, which led Nexo to introduce PAXG to Nexo’s Earn on Crypto product as of October 2020.

This expansion of Nexo’s gold offering comes shortly before the US elections on November 3 -- an event that will, more than likely, spurs market volatility, causing, in turn, a flight to safe-haven assets.

Commenting on the election outcomes for markets, Nexo’s Co-founder and Managing Partner Antoni Trenchev was unequivocal, stating that, if the first Trump-Biden face-off alone disrupted markets, then “there’s plenty more where that came from” as election day draws near. “So better lock in or hodl those assets and no weak hands,” he warned.

Giving investors the opportunity to capitalize on one of the safest assets therefore comes at an especially good time. “Gold remains an investment stronghold in times of trouble, as its increased desirability during the COVID crisis and political uncertainty at present so poignantly reiterates. Tokenized gold is arguably the smartest way to own this precious metal which can mean profitable and accessible investment opportunities for all.”

Gold now and in the future

Gold’s poor reputation in the eyes of traditional investors like Warren Buffett is largely based on its lack of utility, but thanks to tokenization, gold has evolved. It can be utilized fully, becoming even more valuable. It’s value no longer solely derives from its social significance, but from all the things you can do with it in that form – earn on, borrow against, sell, exchange, you name it.

The recently polled Nexo users ranked the utility of gold-backed tokens far above their redeemability for physical gold. It is precisely this utility offered by tokenization that flips Buffett’s criticism of gold on its head, lending unlimited opportunities for this asset to do something.

Tokenized gold marks a new, more inclusive era for this age-old market, with gold-backed tokens’ capacity for integration into any financial or blockchain-based service at the forefront of the asset’s future potential. And with the rollercoaster that 2020 has been, it remains to be seen with just how big of a bang this era of ‘gold as a solution’ will be ushered in.

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