Digital Gold On Blockchain – For Now Caveat Emptor

Digital Gold On Blockchain – For Now Caveat Emptor by Jan Skoyles

Bitcoin surpasses gold price – a psychological and arbitrary headline

– Royal Mint blockchain gold asks you to trust in the UK government

– Royal Canadian Mint and GoldMoney blockchain product asks you to trust in government and the technology, servers, websites etc of the providers

– Invest in a gold mine using cryptocurrency – but wait until 2022 for your gold and trust the miners that it is there

– Blockchain and gold will likely make a “good team”, but they’re not ready yet

Are we nearly there yet? Gold on the blockchain.

In the last few weeks there have been significant developments in the world of gold, digital gold, blockchain and bitcoin. Those who have expressed an interest in gold investment, may have received articles from friends and family about how bitcoin prices reached parity with the yellow metal.

We have long argued that bitcoin and gold should be seen as complementary assets. But not everyone agrees and it doesn’t make a good story. Given bitcoin was first touted, and still is by some, as ‘digital gold’ or ‘as good as gold, but better’ then it has been inevitable that each time there is a significant movement in the bitcoin price then the media starts once again to pitch them against one another in a simplistic ‘cash of the currency titans’ narrative.

Below, we ask if there should be all this hype when a digital currency reaches parity with gold, and what this means for blockchain products such as the Royal Mint’s RMG or OzcoinGold which is purporting to be the first gold-backed cryptocurrency – fyi – there have been many attempts.

Ultimately it comes down to investing in and legally own a piece of gold that will serve your portfolio in the same way it has served millions of people in years gone by – as an asset that is a form of financial insurance, that cannot be devalued by central banks and will not be confiscated whether through bail-ins or more forceful means.

If using gold, blockchain and bitcoin together means that investors’ portfolios can meet the above criteria then we are on the dawn of something very exciting, but as you will see from the below, we don’t believe that we are quite there yet.

One bitcoin or an ounce of gold?

Let’s first address why bitcoin exceeding the gold price is or isn’t a big deal.

Lots of things cost more than an ounce of gold, the handbag I am pining for, a night at the seven-star Burj Al Arab or a gold MacBook Pro. So what? You might ask. Exactly, if lots of things cost more than a lump of gold, then why all the fuss about a bitcoin?

Especially when most of the people making a fuss couldn’t really tell you what a bitcoin is, and no one really knows how to trade using this information.

Whilst we can argue that the bitcoin price superseding the gold price is arbitrary, we can’t deny that this it is significant psychologically.

As noted above, bitcoin is often hailed as a form of digital gold, one that is perhaps more convenient and up-to-date with this technological world. Whether you agree or not, many people do hold this opinion and it is one that is widely reported on, hence the psychological importance of this price move.

There are many naysayers in the world of bitcoin and gold. Some would class them as two separate asset class, to them gold is a commodity and bitcoin is a technology. It still takes a lot of persuasion to the mainstream that both are currencies and that both manage to be so without the control of central banks, monetary policy and borders to restrict them.

This is why it is exciting when they reach parity or bitcoin exceeds gold. It means that more of the world is waking up to the issues with fiat money. It does not mean that bitcoin is better than gold nor does it mean that the world has flipped on its head and more people would rather own a bitcoin than hold a piece of gold.

The gold market is still worth more than 300 times that of the 16.2 million bitcoins in circulation. And if you consider the size of the $20 billion bitcoin market next to the Facebook, Amazon, Netflix and Google (FANGs) of the world then you’re not looking at something that is about to turn the world upside down.

Bitcoin is also incredibly volatile, despite calming down in recent years, and can still react like a hormonal teenager to an government announcement or ruling.

Just this weekend, bitcoin collapsed 18% after the U.S. regulator, the Securities and Exchange Commission (SEC), rejected a proposal by the Winklevoss twins for a publicly traded fund based on the digital currency. As Bloomberg put it, this dashed “hopes that a government-approved investment vehicle would lead to wider interest in virtual money.”

This volatility is likely to be the biggest barrier to it gaining the widespread adoption that gold already has – especially in the Asian world.

However, as I often tell people, bitcoin is incredibly young. Bitcoin fans (myself included) are getting excited about this as, given the short history of the cryptocurrency compared to the likes of gold and the masters of the online universe, its future price movements seem heavily weighted to the upside. Just like gold, it cannot be printed at will, devalued, confiscated (whether legitimately or by bail-in).

We cannot know the future of bitcoin when consortiums such as R3 are backing away from blockchain, or companies such as Microsoft, Intel and JPMorgan are embracing Ethereum.

The high bitcoin price tells us more about what we don’t know that what we do – we know it is likely to go higher but we have no idea how high, we know that it is being taken seriously but we do not know what this means for its role as an investment or monetary option.

The main lesson to learn from this price hike is that bitcoin is here to stay and that more people are looking for alternatives outside of the fiat monetary system. This is good for the gold market and those who already own a diversified portfolio including gold.

The downside to the hike in the bitcoin price is that whilst a price climb suggests more trust in the currency, the mainstream still like to play on the falsehood that it is anonymous and ‘unbacked’ by a central bank or authority, and so digital gold providers can take advantage of this. And this is where the likes of the government-owned mints or cryptocurrency builders are stepping in.

Royal Mint expects a gold rush

The government would like you to give them some money. It’s a great deal, honestly. You give them some money and they won’t charge you for keeping it. CME group are helping them to take your money and blockchain is also involved somehow. What do you think? Fancy handing over some of your life savings? No?

Funny that. The above is exactly what is going on. Except there are a couple of steps I didn’t mention. The government would like your money but would prefer that you bought gold from them first and they kept a hold of it. It seems to make the process of handing over funds a lot more gentlemanly, or British if you like.

Under the guise of investing in gold, the Royal Mint claims that they are ‘bringing to market a new way to invest in and digitally trade physical gold bullion.’

When the government-owned Royal Mint announced a new digital gold investment service entitled RMG, in December, they did so with much fanfare and excitement.

Despite a lack of mention of it in their recent literature, RMG uses blockchain technology. As we explained in December

“As one would expect from a trading solution using blockchain, it will ‘log each transaction’. The two parties [Royal Mint and CME Group] will collaborate on a digital gold asset called Royal Mint Gold (RMG) and will ‘transform the way traders and investors trade, execute and settle gold.”

We also quoted the economist Ashe Whitener, back in December, who echoed our thoughts:

“In my opinion, this is only news because the Royal Mint is basically a government-owned entity experimenting with blockchain. Just because something tangible like gold has a serial number on a blockchain, doesn’t mean that it is any more secure, safe or less risky.

Since the underlying asset is still physical, we still must place our trust with the Mint in terms of vaulting the gold. So nothing here really changes.”

More information has been released in recent weeks, but it hasn’t added much meat to the bone of this latest digital gold product.

The fact remains that the Royal Mint have released a digital gold platform, following in the footsteps of and that allows you to buy and sell one gram at a time. Once again, we have to draw and attention to (and ask why) the fact that the government-run Royal Mint is getting the press and naive gold investors excited about RMG, when really very little has changed.

We recently wrote about unallocated gold. We mentioned that whilst new gold investors might think that owning gold without having to pay storage fees seems highly attractive, it also comes with risks and, arguably hidden costs. Unallocated gold is free to store because the bank or institution that you have chosen to buy it through, is using it for it’s own purposes.

The Royal Mint’s RMG is not unallocated, however it does come without storage fees. We have long pointed out the risks in owning unallocated gold and one has to be extremely confident of the solvency of the provider.

We’re all familiar with the expression ‘if it sounds too good to be true then that’s because it usually is. The Royal Mint is owned by HM Treasury, it pays an annual dividend their way every year. It goes without saying that the United Kingdom is pretty broke at the moment

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Mark O'Byrne

I founded GoldCore more than 10 years ago and it has been my passion and a huge part of my life ever since. I strongly believe that due to the significant macroeconomic and geopolitical risks of today, saving and investing a portion of one’s wealth in gold bullion is prudent. I have been an Executive Director in GoldCore since its foundation and today I am Marketing and Research Director. As our customer base grew both domestically and internationally we were receiving a steady stream of requests from our clients and wider public for detailed analysis of the precious metals market. To meet this demand, I stepped into the Research Director’s role and am responsible for helping to inform and educate our clients and followers on how to protect and grow their wealth through owning gold and silver bullion.