As technology continues to revolutionize how society operates, currencies are transforming to meet the digital age. Decades ago, physical cash was the norm, but before that, it was the gold standard with physical bullion. As more experiences become digital, gold remains a premier investment option, so how does the physical precious metal work in a cashless society?
There are quite a few reasons why investors opt for gold over the convenience of swiping a debit card or tapping a smartphone to use modern features like Apple Pay. Gold stores value during periods of inflation while typical fiat currencies, like the U.S. dollar, plummet. Traders can use gold as an inflation hedge or crisis protection tool when other asset classes fail.
In Zimbabwe, for example, the nation’s inflation rate hit 100% in 2022 before hitting 175% in June of 2023. At this level of inflation, citizens would need to carry buckets of physical cash just to buy basic grocery store items. Even following a cashless model, hyperinflation causes severe economic turmoil where citizens cannot afford basic living costs.
That’s where gold comes in. The Reserve Bank of Zimbabwe introduced Zimbabwe Gold (ZiG), a gold-backed digital token that citizens can use nationwide on retail payments. With ZiG, Zimbabwe’s population can use a convenient payment method that stores its value, allowing individuals to maintain their wealth and continue affording basic living costs.
Gold-backed digital currencies are not new concepts. The idea of using a gold-backed digital coin has continued to develop over time as inflation soars on a global scale and numerous economies seek a more stable option.
Gold-backed digital coins maintain their value because they are linked to a set amount of stored physical gold. When the price of that gold fluctuates, the value of the currency may change, but the amount of the gold will stay the same, so inflation cannot occur. With an underlying tangible asset, gold-backed digital coins have ideal security and stability.
Digital currencies also have third-party auditors in charge of matching the supply levels to the currency circulation. These reputable providers keep the entire system in check, ensuring there’s enough gold to back the currency levels.
Economies that accept gold-backed digital coins allow individuals to use them for various transactions beyond investment purposes. Consumers can use the currency in retail applications, peer-to-peer transactions, online orders, and more. Essentially, you can buy just about anything using gold, which offers an increased purchasing value when compared to the U.S. dollar during inflationary periods.
However, gold provides numerous other practical applications in a cashless society beyond digital coins. One of the most common reasons traders invest in gold is to diversify their portfolios. Because of gold’s security, it provides ideal risk mitigation and wealth protection when allocated properly.
For example, investors may choose to allocate 40% of their portfolio to gold investments, with the other 60% in riskier ventures. Following this model, if one of the riskier ventures fails, the investor can still rely on the gold assets.
When considering portfolio diversification, investors have a range of digital gold options to choose from.
To start, gold exchange-traded funds (ETFs) track gold prices, allowing traders to invest in gold stock exchanges. Gold ETFs may come with more counterparty risks but offer ideal liquidity. Traders can gain exposure to the gold market without needing to own physical gold.
Another popular option is gold mining stocks, which are shares in any gold-related companies. Again, gold mining stocks may come with additional risks, but traders can enjoy the added convenience that comes along with highly liquid digital assets.
Gold futures and options allow traders to invest in an agreed-upon future contract with an underlying physical asset.
Similar to gold currencies, gold certificates provide a representation of physical gold ownership backed by reputable financial organizations. The options for gold investments continue extending from here, with retirement accounts, like gold IRAs, providing tax advantages and more.
While gold is very much a physical asset that is still vital in numerous industries and cultures, the precious metal is adapting to meet the demands of a now cashless society. Gold has remained relevant as society has shifted through centuries of transformations, so it will likely continue to follow the same course. The recent digital advancements in the gold industry only reflect a small portion of the market’s demand rates, though, as gold jewelry still accounts for the largest amount of gold demand per sector.
As always, investors should consult their financial advisors before making any portfolio decisions.
