Where Gold Meets Blockchain

Two weeks ago, the London Bullion Market Association published a new edition of its quarterly journal called “Alchemist”. What can we learn from this publication?

History: Spain, Inflation, Wars And Gold

In the recent edition of the Alchemist, there are many interesting articles about the history of gold. Jens Weidenbach writes about the history of precious metals in Spain, noting that the first documented gold trading was about 700 BC. It’s interesting, but modern times are much more important from the investors’ perspective: it turns out that since the 2010, when the Spanish economic crisis became inescapable, investors have increased their exposure to the yellow metal. It confirms gold’s role as a safe-haven asset and a portfolio diversifier. .

The most famous period of Spain’s association with precious metals – the flows of gold from the Americas during the 1500s to the 1700s – is covered in more detail in a separate feature article by Pedro Schwartz entitled “The Treasure Trove of the Indies”. The influx of precious metals caused significant inflation, which eventually led to Spain’s relative economic decline. Interestingly, the annual rate of inflation was about 5 percent – it was enormous for the ordinary consumer in a half-monetized country, though to us, people used to creeping inflation inherent to fiat currencies, it may not appear so great. Now, gold does not generate inflation – it is rather a hedge against inflation, though not perfect.

And James Steel writes about gold during periods of conflicts, noting that “gold and silver are not just spoils of war, they have been the means by which wars and conflicts can be financed and prosecuted.” The key question in this context is, thus, as follows: how much gold does Kim Jong-Un own?

Present: Blockchain And Gold

However, the most important text is probably Tom Coghill’s article entitled “Where Bullion Meets Blockchain” which explores how the blockchain is paving the way for an evolution of the gold market. On October 13, we wrote in the Gold News Monitor that the Blockchain technology enabled tokenization of gold. Similarly, Coghill claims that the gold market can benefit from an innovation in the digital asset financial technology. How?

“Blockchain-based gold ownership has the potential to address the challenges of Net Stable Funding Ratio, market opacity, accounting treatment, balance sheet impact and high cost-income ratios for liquidity providers, by providing an efficient mechanism for the immediate transfer of title to physical assets between parties.”

On the surface, it seems that there is an inherent conflict between the tangible bullion and the digital world of cryptocurrencies. However, the opposite is true: there are important synergies. This is because the use of blockchain

“raises the profile of the investment opportunity for gold, reinforcing the argument

for the safe, secure, physical ownership of gold in an efficient digital market providing

transparency and provenance.”

We agree with that. However, the increased transparency does not have to translate into higher gold prices. Gold investors should keep this in mind.

Future: Remonetization Of Gold

Last but not least, John Butler claims that the remonetization of gold is not only inevitable, but also imminent. He believes that:

“Gold, the only internationally recognized non-national money provides the game-theoretic international monetary solution to an economically multipolar, globalised, competitive world.”

Well, we would support the return of the gold standard, but we are not so sure that it is so imminent. Investors should not count on it when investing in gold.

Conclusions

The take-home message is that the new edition of “Alchemist” was released last month. It includes several interesting articles which cover gold’s past, present and future. Although it may be the case that gold will be used as money again, the remonetization process may take a long time. The tokenization of gold seems to be more probable in the foreseeable future. However, its impact on gold prices needs further examination – the increased transparency improves the market, but it does not have to cause a rally in prices. The price outlook for gold depends rather on the greenback and US real interest rates. Stay tuned!

Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.

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