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What is tokenised gold? Why investors are buying it and how it differs from physical gold - THIS IS MONEY
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For centuries, gold has been used by humans as currency and as a store of value.
Investors continue to turn to the precious metal in times of uncertainty, looking on it as a safe haven when other assets are facing turmoil.
And this year has been a prime example, with investors crowding into the precious yellow metal amid geopolitical uncertainty and, more recently, fears of an 'AI bubble' set to burst.
Gold prices surged past the $4,000 per ounce barrier last month, before dropping again, but the yellow metal could still be on track for its strongest yearly performance since 1979.
On Thursday, gold was trading at $4,198, or around £3,181 per ounce, below its October high.
And in today's digital world there are ways that investors can gain exposure to gold that don't involve stuffing bullion under the mattress or keeping Krugerrands and sovereigns in a safe at home.
Digital gold has recently become a popular choice for investors who want to gain exposure to the yellow metal without going through the rigmarole of buying and holding it physically.
The latest evolution in this digital offering has come in the form of the tokenisation of gold, and increasing numbers of investors are piling into these tokens.
But how do gold tokens work, and do they offer the same safety as the real thing?
What is tokenised gold, and how does it differ to digital gold?
Digital gold allows investors to gain exposure to the precious metal without having to buy physical gold themselves. Investors purchase a quantity of real gold, which is stored securely elsewhere with ownership recorded digitally.
The Royal Mint's 'DigiGold' offering, for example, allows buyers to purchase a fractional amount held securely in its vault. Investors can buy by value, rather than weight.
Mike Oswin, global head of market structure and innovation at the World Gold Council, told This is Money: 'Digital gold allows customers to invest in gold through digital channels, with the physical gold securely held in a vault on their behalf.
'Crucially, all forms of digital gold are backed by physical gold, whether it's allocated to an individual customer in the form of a specific bar or coin, or pool-allocated across multiple investors.
'In both cases, full legal ownership of the gold must transfer to the customer rather than remain with the dealer.'
Tokenised differs to digital gold in that it gives a digital representation of each unit of gold recorded on a blockchain, giving investors the benefit of added transparency and security.
Many investors will already be familiar with gold ETFs, which offer exposure to the metal. The investor owns a share of a fund that owns gold, rather than owning the gold itself.
Larry Fink, chief executive of Blackrock, said last month: 'The tokenization of financial assets will mark the beginning of a new era for financial markets'.
And some 26 per cent of investors say they would be very likely to invest in gold token products, the World Gold Council said.
Tokenisation gives transparency, according to Faisel Ali, founder and managing director of Gold Bank London.
He said: 'You can see transactions on the blockchain, but you're still trusting someone else to hold the gold.'
Some providers offer physical redemption, which means that customers can convert their digital holdings into physical gold in the form of bars or coins if they choose to do so.
Tether Gold, for example, lets customers redeem actual gold in exchange for their tokens or to have it sold on the Swiss gold market and receive cash proceeds.
To have gold delivered, it says it will charge 25 basis points, 0.25 per cent, on the gold price at the time of redemption, as well as delivery costs.
Why are people buying tokenised gold now?
Tokenised gold surpassed the $4,000 dollar mark per token last month.
However, it trades at a slight discount to physical gold spot prices, owing to custody and redemption costs, and liquidity and market structure.
Tether Gold, one of the principal tokenised gold assets, is currently trading at $3,999.55. One Tether Gold token represents, and is backed by, one troy ounce of the yellow metal.
There is some $3.6billion worth of tokenised gold currently in circulation, according to figures from Coingecko, with a daily trading volume of more than $1billion.
Partially, the growth of gold tokens comes as more investors look to gain exposure to the metal, but it also comes on the back of its benefits over other digital gold options.
As many as 34 per cent of US investors say tokens being fully redeemable for physical gold will be 'crucial to building trust'.
'People want safety and a hedge against instability, but they also want convenience. So tokenised gold sits in the middle. It's bringing new investors into the space, which is great for awareness,' Ali said.
What makes it a good choice for investors over real gold?
Digital gold in general has some benefits over physical gold that may make it the right investment choice for some. For others, the real thing will still be preferable.
While some gold investors might feel more safe in the knowledge that their gold is securely stowed at home or in a storage facility, others will prefer not to have to deal with their holdings themselves.
'Digital gold, including tokenised gold, offers investors an easy and secure way to hold gold without having to manage physical storage themselves,' Oswin said, 'It provides the reassurance of third-party custody and the convenience of buying and selling online through a dealer's website or app.'
Ali added: 'It's easier to buy and sell in small amounts, and it moves instantly. For the people who want exposure to gold prices without handling bars or coins, it's convenient, but it's still gold in a digital wrapper.'
The other benefit for gold investors is that they are able to sell their holdings more quickly and easily, using online platforms.
Oswin said: 'For those interested in the digital asset ecosystem, tokenised gold goes a step further. It enables investors to trade gold alongside cryptocurrencies and stablecoins, leveraging the flexibility and innovation of decentralised exchanges.'
How can you buy it, and are there any drawbacks?
There are a few ways to access tokenised gold, the most common being by purchasing it directly from the issuer.
For example, Tether Gold allows prospective buyers to set up accounts and invest directly through its website.
Other firms like Paxos and Comtech Gold offer similar services, Oswin said.
He added that the tokens can also be purchased on the secondary market on several decentralised exchanges.
Oswin added: 'Tokens can also offer the ability to transfer directly between Ethereum compatible wallets.'
All of this digital infrastructure, however, may lead to concerns from some investors that they don't actually have access to their gold in person.
Ali warns that tokenised gold, and digital gold options more generally, don't offer the same assurance as the real thing.
He said: 'When things get shaky can you trust the people who have tokenised the gold?... Physical gold removes all that risk that's the difference between owning gold and owning a promise.'
Tokenised gold is based on the real thing, and backed by gold that is securely stored by the company offering the investment.
Of course, investors should make sure that they use well-established companies that make use of independent audits to ensure that your gold tokens are truly backed by the real thing.
