In 2011, in a climate riddled with regulatory pressures and extreme market volatility, clearinghouses enacted a move to accept gold as collateral. Fast forward to 2023, with heightened margin calls, increased pressures, and the de-dollarization trend becoming a reality, gold’s use case as collateral is more relevant now than ever before. Nations around the globe want to reduce their reliance on the U.S. dollar, and gold seems to be the natural right choice.
With the U.S. dollar losing strength and the marketplace becoming uncertain, investors are flocking toward the safe and secure option: gold. Gold nearly always positions itself as the safe-haven asset during periods of economic uncertainty, and 2023 supports this case.
Just a few weeks ago, as the United States awaited the debt ceiling decision with concerns over a default, gold became the top asset of choice for investors preparing for the potentially catastrophic event that could have occurred. According to data from Bloomberg, 51.7% of professional investors and 45.7% of retail investors revealed that they would choose gold to hedge against inflation over other assets. The next-most popular asset among survey respondents was treasuries, which only received around 14% and 15.1% of votes, respectively.
While yields may be increasing on short-dated securities, gold appears to be relatively unaffected at this point in time. Typically high treasury yields and gold demand show an inverse relationship, though the current rates have yet to water down gold’s strong rise, likely because of central bank demand.
With central bank demand reaching all-time highs for the last year and a half, gold has gained a new level of support from an unsuspecting sector. With this added support, the precious metal can teeter around the $2,000-per-ounce territory, proving its value to other demand sectors, like investors.
“It looks as though we’re approach[ing] a new gilded period,” Anoushka Rayner, the head of Growth Commodities at Paxos, explained.
As gold gains more demand, popularity, and success, many are beginning to question its trading methods. The precious metal may offer security in some senses, but the actual reality of trading or maintaining it in its physical form is less than ideal. Transacting with gold involves numerous logistical complications, costs, risks, and environmental concerns, as the transportation methods are nowhere-near environmentally friendly.
Because of its rise in popularity, interested parties are attempting to transform how we trade and use gold, with the first obvious solution being tokenization. Tokenization with integrated blockchain technologies would not only make the asset more liquid but allow more mobility within the gold-trading market. Rather than facing a $700,000 minimum for a 400-ounce London Good Delivery bar that requires ample security, insurance, delivery protection, and so forth, traders would quickly be able to buy and sell mobile tokens as they please.
With tokenization, clearing houses would have no reason not to use gold as collateral. As of right now, gold only constitutes an average of $300 to $500 million out of the tens of billions of collateral used by clearinghouses. As margin demands increase, inflation surges, and de-dollarization continues, clearinghouses may turn to gold as a stronger solution, especially if that solution becomes more convenient with mobilized tokens.
The full mobilization of gold through tokenization may not happen immediately, though it could occur over the long term as macroeconomic pressures force institutions to reshape their collateral approaches.
“The mobilisation of gold via tokenisation is not going to take off tomorrow. It will only be over the medium to longer term that the macroeconomic environment will catalyse financial institutions to alter their approach. But, as firms begin evolving their strategies, those holding digital assets and embracing the use of tokenised gold as a form of collateral will be best placed to reap the rewards of fractional, near real-time, and low-cost digital assets,” Rayner explained.
How gold will work in the future remains up for debate. Today, traders continue transacting with the same physical asset that people relied on during ancient civilizations, yet many also invest in more convenient options like mining stocks, futures, ETFs, etc.
Whether or not the convenient options will supersede the traditional form is unclear, though we can predict gold’s relevancy in the future based on its past performance. When tracing back trends that mirror 2023’s landscape, gold rises as the secure asset of choice. Assuming similar patterns play out and analyst predictions come to fruition, gold has a bright future ahead.
As always, investors should consult their financial advisors before making any portfolio decisions.