As spot gold breaks through historical highs and successfully outpaces 45 years of inflation, becoming the undisputed "anti-inflation asset," a more disruptive transformation is brewing in the gold market. The World Gold Council (WGC) has announced that it will launch a brand new trading model—"Digital Gold"—in the first quarter of next year. This is not just a simple gold-backed stablecoin, but aims to break the "no yield" status of gold, allowing it to be used as collateral and meet margin requirements, thereby fundamentally changing the operation of the $900 billion London physical gold market. So, what exactly is this seemingly familiar yet unfamiliar "Digital Gold"? How does it differ from the once-popular gold-backed stablecoins? Can this "new trading model" really provide significant upside potential for gold prices, allowing spot gold to bid farewell to the "easy win" era and embrace a more active financial role?
- The "Old Three" of Gold Investment and the "New Play": Starting with the Story of the Watermelon Vendor
To better understand this new entity called "Digital Gold," let's start with a "watermelon vendor's story." By replacing watermelon with gold, we can clearly see the three traditional models in the gold market:
Allocated Gold: Just like "allocated watermelons," investors fully own the gold, with each bar being exclusive. Even if the custodian goes bankrupt, investors will not be caught in liquidation. The advantage is high security, while the disadvantages are low liquidity, high holding costs, and a high investment threshold (about $1.47 million for an international standard gold bar).
Unallocated Gold: Similar to "unallocated watermelons," investors hold a debt claim on gold, which can be bought, sold, or withdrawn at any time, but without specifying particular bars. It has strong liquidity and convenient trading, but there is a risk of institutional over-issuance and losses due to custodian bankruptcy.
Gold-backed Stablecoins: Like "watermelon stablecoins," these are digital tokens pegged to gold. In theory, they can achieve the safety of physical anchoring and the efficiency of digital circulation. However, to date, most attempts at gold-backed stablecoins have failed, with the most successful, Tether Gold and Pax Gold, managing scales far smaller than gold ETFs. The reasons include that stablecoins mainly target the crypto world, have low acceptance among traditional institutions, and still face trust issues with issuers.
Each traditional gold trading model has its pros and cons: allocated gold is highly secure but has low liquidity, unallocated gold is convenient for trading but carries risks, and the London gold market, as an over-the-counter (OTC) market, lacks transparency and openness. Therefore, institutions and investors are eager to find a new trading method that retains the security of allocated gold while being as flexible and convenient as unallocated gold.
- The World Gold Council's "Fourth Watermelon Vendor": The Innovative Mechanism of Digital Gold
The World Gold Council has learned from the experiences of the previous three models and is determined to introduce a brand new trading model—"Digital Gold," with the core being a new digital unit called "PGI (Pooled Gold Interests)."
Fractional Ownership, Lowering the Threshold: PGI allows investors to hold fractional ownership of gold bars, with the smallest measurement unit being one-thousandth of an ounce, significantly lowering the investment threshold and enabling more ordinary investors to participate.
Direct Ownership and Asset Security: PGI corresponds to direct ownership of gold, with the bars stored in dedicated vaults, and each bar's information recorded on the blockchain. This fundamentally enhances asset security, avoiding losses from institutional over-issuance of PGI or custodian bankruptcy.
Digital ID for Gold Bars: As early as January this year, the World Gold Council, in collaboration with the London Bullion Market Association, launched an international gold bar integrity system, known as the "Gold Bar Integrity (GBI) Program," establishing a "digital ID" for each gold bar. Through blockchain and database technology, it records the source, purity, weight, and circulation of the bars, ensuring the authenticity and traceability of gold.
Seamless Electronic Transfer, Enhancing Liquidity: PGI can achieve seamless electronic transfer within its ecosystem and is compatible with traditional payment channels and emerging digital payment methods. This means that investors can easily transfer their gold interests and conveniently buy or sell PGI through various payment methods, further enhancing liquidity and usability.
The operation of PGI involves a small number of "core participants" (such as large banks and trading companies) jointly owning the gold bars stored by the vault operator, with these "core participants" issuing PGI. This structure balances security and liquidity.
- The Ambition of Digital Gold: Making Gold an "Active Player" in the Modern Financial System
The World Gold Council's ambition goes beyond this. CEO David Tait stated that they are working to promote the standardization of gold on a digital level so that various financial products used in other markets can also be utilized in the gold market in the future.
Meeting Additional Margin Requirements: When investors are trading and their account margin is insufficient, they can quickly use PGI to fill the gap, avoiding forced liquidation or high-interest payments.
Used as Collateral: The structure of PGI complies with the European Market Infrastructure Regulation and the U.S. Dodd-Frank Act's requirements for collateral, allowing it to be used as collateral in various financial transactions.
With these functions, gold can be used more frequently for trading and financing, generating returns rather than just sitting in vaults or on balance sheets as ballast. This will play a key role in transforming gold from a passive store of value into an active component of the modern financial system.
- Market Outlook and Challenges: Disruption or Resistance?
The market has mixed views on the World Gold Council's attempt.
Optimists: They believe that the emergence of PGI may make gold more popular and further drive up gold prices. From the supply side, PGI strictly corresponds to physical gold and cannot be over-issued like unallocated gold. If gold investors shift en masse to PGI, the supply of gold in the market may decrease; from the demand side, if the security and convenience of PGI are validated, many funds flowing into cryptocurrencies may return to the gold market, increasing demand for gold.
Cautious Observers: They argue that the gold market has long been dominated by entrenched, risk-averse participants, and such innovations may encounter resistance. Adrian Ash, research director at BullionVault, questioned whether the London gold market would adopt this scheme, stating, "Gold is already the best-performing asset class; this feels like asking for trouble."
Conclusion:
The World Gold Council's push for "Digital Gold" is yet another exploration of humanity's attempt to bring the "oldest investment" into the "newest financial system." It aims to leverage blockchain technology to endow gold with new financial attributes, breaking its traditional image of "no yield" and better integrating it into the modern financial system. Despite facing resistance from traditional markets and challenges in technological implementation, if successfully promoted, this new type of "gold-backed stablecoin" could bring revolutionary changes to the global gold market and provide investors with more diversified options. No one can predict what new life ancient gold will breathe in the wave of digitalization.
Related Reading: The Arrival of Gold-backed Stablecoins: Will the "No Yield" Era of Spot Gold Come to an End?
Original Article: “A New Era for Gold After Beating 45 Years of Inflation: Spot Gold Leaves the Easy Win Behind”
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