Digital gold could soon shake up London’s precious metal markets
London’s $930-billion gold market could be set for a “transformative” shake-up, as the World Gold Council (WGC) looks to digitalize the metal. On Wednesday, the WGC — a trade body that represents the gold industry — launched a proposal for the roll-out of Pooled Gold Interest (PGI) tokens backed by physical gold bars held in London, which could be used to trade bullion and use it as collateral. The tradeable PGIs would give market participants legally enforceable ownership of vaulted gold and allow traders to buy fractions of 400-ounce bars for the first time, according to Mike Oswin, global head of market structure and innovation at the WGC. “This is a way to be able to get into the get into the market, hold a digital representation of gold with full legal [entitlement], with full confidence that that the gold is there,” he said. “It can be used simply for investments. It can be used for collateral. We believe this will increase participation in the market because of the new use cases that it’s going to open up,” he told CNBC in a call on Wednesday. The gold market has already seen a surge in demand this year, with market volatility, rising geopolitical tensions and macroeconomic jitters sending prices to record highs . ‘A third pillar’ Amid that rising demand, Oswin told CNBC that the WGC wanted to create “a third pillar” in addition to the existing two ways of trading gold. Gold trades are currently settled with either allocated or unallocated gold. The former settlement involves direct ownership of specific gold bars or coins. Unallocated gold — the most widely traded form of gold in the world — gives investors a claim to a certain quantity of gold, rather than ownership of specific bars. In this case, the investor is exposed to any credit risks linked to the institution holding the gold. If the institution goes bankrupt, there is no guarantee the investor’s claim on the gold will be fulfilled. “The key objective of this initiative in phase one is to give gold the mobility it needs to be pledged as a financial collateral,” Oswin said. Allocated gold is accepted as a form of financial collateral in many markets, but Oswin explained that, because of the logistical difficulties involved with transferring physical bars between vaults, “it is never used,” and bonds or cash are usually favored instead. “We want to place gold as a financial asset alongside those types of collateral,” Oswin told CNBC. “So pledging gold will become just as simple as pledging a kind of digitally native bond or cash.” While the initial focus will be on digitalizing gold for use as collateral, the PGIs also have scope to make the gold market more accessible in other ways, Oswin added. Asked whether the PGIs could one day be used to settle futures contracts, he expressed optimism. “In a future state, one could look and say, if the PGI is flowing freely around the market as collateral being exchanged between parties … would it be a huge step to say that there could be futures contracts that use this as the actual settlement mechanism?” he said. “[It’s] not flagged as the core objective of ours, but potentially in the future, you could see that as one of the opportunities for sure.” The Loco London gold market — a reference to gold bullion physically held in vaults in the U.K. capital — amounted to 8,776 tonnes of gold valued at $927.5 billion as of June 30, WGC data shows. The London market clears an average 20 million ounces in daily trade, according to the WGC — but the trade body’s outlook for digital gold goes even further. “At the moment, this is U.K. focused,” Oswin said during Wednesday’s call. “[But] of course, it will travel — that is the ambition. And so we are looking at other jurisdictions and how this will work in the U.S. and [elsewhere].” In a white paper released this week, the WGC laid out its Vision Statement for digital gold, describing its proposal as “a unique opportunity to reshape the current landscape.” Physical asset allure However, Russ Mould, investment director at AJ Bell, argued the response to a digital form of gold may receive a lukewarm or even negative response from market participants. “The WGC may feel this is an important development, as it seeks to maintain relevance for itself and the precious metal in a world where cryptocurrencies and stablecoins are currently in favour,” he explained in an email. “[But] real gold bugs may not care, may not see the point or may even be alarmed.” Mould noted that the appeal of the metal to gold bulls was that it remained a physical asset, and that its supply increased slowly in a world where “money supply can rocket at the push of a button.” “They wish to shun financial complexity, opacity and leverage – the terrible trio, the confluence of which tends to be found at the root of any event which prompts both volatility and a loss of confidence,” he told CNBC. “They are just the sort of events from which gold bugs are seeking protection.”
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