In March 2017 the value of bitcoins surpassed the price of gold by breaking the US$1,200 benchmark. For the first time, debate emerged over its potential to replace the precious metal as a safe haven for investors. “It seems that more and more people justify investing in cryptocurrencies — even at current record prices — by claiming that they’re an effective hedge against the instability of fiat currencies,” wrote Olivier Garret, CEO of Mauldin Economics in a Forbes post.
The lack of regulation in cryptocurrencies has served as a doubled edged sword. While it reduces market barriers, it also provides uncertainty to investors. “Cryptocurrencies are attractive because some people worry about currency risks inherent to sovereign currencies,” says Trevor Turnbull, Director of Gold and Precious Metals Global Equity Research at Scotia Capital. “Cryptocurrencies do not have many barriers to entry at the moment, which has promoted a rising number of these currencies. It makes it hard to invest in this market as there are hundreds if not thousands to choose from.”
Countries are responding by either rejecting the use of the currency or incorporating it into their legal framework. According to JM Bullion, Norway was the first country to announce that it would not accept bitcoin as a legal currency, followed by Korea and Thailand. But countries including Switzerland are researching its use and Mexico has added its grain of salt to the conversation by approving a Fintech law in 2017 that legalizes the use of bitcoins.
Amid the waves of speculation, the mining industry has risen above the doubt clouding the new kid on the block to find unique ways to collaborate through gold-backed cryptocurrencies. “The growth of the cryptos is a vivid illustration of how much speculative money exists around the world,” says Rob McEwen, Chief Owner of gold operator McEwen Mining. “This is a product of massive monetary expansion, low interest rates globally and the disruptive nature of the digital world.”
Turning the Page in the Debate
As an effort to take advantage of the appeal of cryptocurrencies, Tradewind Markets, a technology provider supported by Sprott, Goldcorp and IEX launched in March 2018 a digital gold trading platform. According to the website, its vision is “to build a global technology platform to digitize and trade precious metals and unlock their full potential.” It relies on Vaultchain blockchain technology that offers an unbreakable record of transactions and account balances. Is additionally backed by the Royal Canadian Mint, which is providing storage for physical gold.
“The gold market today is a very manual market. A lot of the dealing is done over the telephone, via email, maybe even faxes or chat rooms,” explained Matt Trudeau, President of Tradewind in an interview with Bloomberg. “We feel like this will reduce the frictional and transactional costs in the market and lead to greater liquidity and price discovery.” A month after their launch, the company announced the closing of US$10.6 million in a strategic placement led by Agnico Eagle, IAMGOLD and Wheaton Precious Metals.
While TradeWind has attracted the most attention in the media, many other players are appearing in the market. Goldscape, a website dedicated to the weekly roundup of gold news, reported a directory with over 40 gold-backed cryptocurrencies located around the world from Switzerland and London to Belize and UAE. In its report, Goldscape explains that the basic concept is to create tokens or coins that represent a value of gold, which is stored by a “trusted custodian” to be traded with other coin holders.
To Be Continued…
As compelling as it sounds to say that the future of gold trading has arrived, many challenges lie ahead as countries and financial markets continue to ponder the role of cryptocurrencies. “Cryptocurrencies are here to stay but it will take a while to know which ones to bet on,” says Turnbull. “It will take some time before the market identifies which ones are the most important, similar to Google and Amazon, companies that emerged from the technological boom in the early 2000s. In the meantime, we do not have to worry about a new element substituting gold or silver.”
And for others, the entrance of digital currencies in the mining industry is the beginning of a long-term relationship. “The combination of blockchain and gold is really the first way for investors to directly own gold in a financial instrument with no ongoing administration and storage costs…that eat away at the value of the gold that you own,” said David Stephens, Goldcorp Vice President in an interview with Reuters.