Ancient Highways: removing friction from gold as a commodity and currency… A Relevant Simile

By way of introduction, consider this comparison between the timeless nature of gold and the traces of antiquity: Dashed lines on tattered maps conjure up images of unexpected but long neglected remnants of the world’s rural past. One may wonder if these byways might lead to an untrammeled vista, a hidden historic site, or some charming hostelry far off the beaten path. The Appian Way built in the heyday of the Roman Empire comes to mind.  For a moment of hesitation in today’s hectic lives the traveller catches a fleeting glimpse of stone markers or worn cart tracks,  never popping up on our GPS display, so instead he clings to the familiarity of the well-traveled superhighways with their sanitized rest areas featuring generic fast food. The path to gold is much like those long forgotten byways. Such faded legacies of past commerce are an apt comparison to the way physical gold has been shunted aside by so many institutional investors, particularly in the West, as mass-produced, securitized substitutes take the lion’s share of the customers. Today’s financial markets need a superior way to access the durable treasures along those old routes, for gold is the one asset that has always enriched the landscape. But precious assets could become more accessible to the investment expressways now choked with traffic. Note: For clarity and brevity, in this argument the term “gold” is used to represent the entire precious metals asset class. Therefore, the analysis applies in large measure to silver, platinum palladium…and eventually to other hard assets.

Physical Precious Metals as Commodity and Currency

For too long, institutional investors have been dissuaded by or even blocked from easy access to a secure, liquid, and flexible marketplace for owning and redeeming physical bullion. But today the gold industry seeks to turn a lifeless stock of precious metal into a versatile asset to hedge against an array of risks. Physical gold can now function globally as a dynamic asset-backed currency, assuming the technology is connected through a partner in a clearinghouse format that would protect it from regulatory obstacles and other requirements that could curtail its flexibility. The ideal platform provides access to palpable gold that can serve investors as both a store of value and a medium of exchange.  Here is how this works, taking a historical perspective:

Why Gold is Money

The global power of gold surpasses its value as a dormant, static, immobile reservoir of wealth. It has all the necessary attributes to function as a currency, defined to be a stable, reliable, and recognizable medium of exchange that enables modern economic systems to function efficiently and grow. A currency is usually defined to be “any generally accepted form of money issued by a government for widespread circulation within an economy as the fundamental basis for trade.” Economists claim an ideal currency should meet six criteria: Durability, portability, divisibility, uniform quality, low opportunity cost, and stable value. How does gold in the form of physical bullion measure up on those key dimensions?

1. Durability:

Does it last? Gold is immune to the ravages of time. It is a stable element that is highly resistant to oxidation, so it is very difficult to burn and does not rust or corrode.

2. Portability:

Can it be moved around easily? Technology-enabled transportation allows today’s investors more efficient transfer and shipping of allocated physical gold. Two 400-ounce bars of gold worth nearly a million USD could fit into a single attaché case.

3. Divisibility:

Can it be divided for practical use? Efficiency in the production of units of pure physical gold has improved greatly with the introduction of smaller bars and coins of outstanding (99.99%) purity. And coded identifiers, analogous to CUSIPs for stocks, can be put in place on each bar to ensure quality, prevent counterfeiting, and expedite transfer of ownership in ways that enhance liquidity.

4. Uniform Quality:

Are all units identical? The pursuit of uniform standardized building blocks of currency has been a challenge in the past, with gold coins plagued by nipping, or gold 400-ounce bars differing +/- 10% in weight, hollowing out the core to replace with tungsten, and the hassles of honest assaying for purity. Refiners now produce bars and coins of exact weight in a wide array of sizes prized by investors. With a self-contained ecosystem for “Good Delivery” gold (as defined by the LBMA), the imposition of efficient technology eliminates problems that could potentially compromise the value or comparability of the precious metal.

5. Low Opportunity Cost:

What resources are used up to produce the currency? The fifth criterion for currency does not apply to gold as a drawback, for it should be considered a positive characteristic instead. It is costly to mine and refine new gold, $1200 per troy ounce as of 2017, but that immutable fact (called “inelastic supply” by economists) helps to support the price of the gold extant in the global marketplace. Unlike paper receipts, conventional  currency or fractionally-backed token coins with virtually no intrinsic value, an ounce of gold rarely sells for less than its cost of production. Nor can a billion or trillion-dollar minting of gold coins be stamped out in the manner of fiat currencies under the control of shortsighted or desperate governments. The gold asset is on the owner’s balance sheet and it is there at all times in the vault, never to be loaned out or compromised or vulnerable in any way.

Note: Small amounts of the existing supply of gold mined over a span of at least 55 centuries of human mining and refining effort are relatively inexpensive to recast into bars and coins of rigidly controlled and standardized weight and purity. But that overall supply is slow to change. All the gold ever brought to market, weighing 180,000 metric tonnes, comprises the equivalent of one cube nearly sixty-nine feet on a side, with just a 1.5% additional layer each year from the world’s mines and refiners.

6. Stability in Value:

Has it been reliable? This final important quality of a currency has been a consistent attribute of gold over the years, although short-term shocks and secular trends in demand have been the primary factors whenever the price exhibits volatility. The price of gold is dependent far more on demand than on supply. The price per ounce has been affected by market shifts and speculation during and after global events (wars, panics, depressions, inflationary fears, price controls, political movements, etc.) Note: An ounce of gold during the Great Depression was worth $35 on the government-controlled market in the US, an amount that could buy two hand-finished worsted wool business suits from Marshall Fields in Chicago. An ounce of gold in April of 2017 is worth close to $1200, an amount that can purchase two equivalently tailored worsted wool business suits from Hart Schaffner and Marx. Meanwhile, the $35 cash from 1934, though similar in looks to $35 in cash today, would be sufficient to purchase only a pair of fine silk pocket squares for those suits. The ounce of gold has kept its value quite nicely over that full lifetime, while the fiat money has shrunk to a tiny fraction (3% as much, at least for suits) of its previous purchasing power.

Misplaced Nostalgia for the Gold Standard

Appreciation of the actual and potential power of gold within the world monetary system does not imply advocacy of a return to the rigidity of the gold standard. The manifold merits of gold as a currency maintain their rational appeal despite the fact that very few influential people across the world endorse the imposition of a strict gold standard, or argue for its more recent variant known as the “gold-exchange” standard. Those systems have proven to be illusory panaceas indeed, for they trigger the enforcement of inflexible international exchange mechanisms that inevitably restrain the potential for economic growth, even as they ostensibly seek to impose spending discipline on the public sector.

But there are compelling reasons why physical gold in a secure and accessible ecosystem can function globally as a medium of exchange, especially for large transactions among institutional stakeholders. And it can do so in harmony with existing monetary structures and global institutions. This is particularly the case if and when thousands of large institutional investors, sovereign wealth funds, foundations, endowments, and family offices maintain living, active, useful accounts of physical gold on deposit in vaults across the world. And because these asset owners can easily add to, transfer, redeem, or use their allocations to settle purchases within the ecosystem, implemented with assurance according to the advanced messaging standards and automation and coded identifiers, those individual institutions and the wider economy will benefit from a remarkable re-invention of physical gold as a living currency. Gold can return to serving as a dynamic monetary medium at institutional levels, rejuvenated with greater mobility for the modern economy.

In a real sense, a superior platform would enable ownership of a liquid, timeless, dependable asset at a reasonable distance from the existing banking system. Its aim would be to provide the owners of gold with tools for investment, currency overlay, and trade finance that will tap unlimited possibilities. The time is right to move beyond the stockpiling of precious metals in cold, dead vaults. Gold need not be concealed or buried near those forgotten pathways in the hinterlands. The time is overdue for gold to work for investors.

The Solution

The technology required to modernize the physical gold industry works by removing the friction from gold as a currency. By doing so it transforms a previously static store of wealth into a dynamic, flexible, liquid asset that can be put to effective use by the owner/investor. This technology has been designed to function at every step to maximize security, consistency, and transparency, while assuring trust in the process by every client. It integrates and coordinates a constellation of useful features and functionalities that had been heretofore scattered and difficult to access and link together across the gold marketplace. Investors seek a technology platform for ownership of gold that delivers secure and streamlined communications between and among the parties in every purchase and sale of precious metals. They would appreciate standardized logistics for an industry known for its transfers and faxes and other technological lags. The time is here to supersede the older ways by implementing a securely encrypted communications network that authenticates messages among all market participants. Modern institutional investors seek to harness the powerful technology of risk mitigation, wanting the gold industry to do what SWIFT has accomplished for global cash management.

Owners would gain from using their allocations of physical metal to settle debts, make purchases, and quickly redeem, relocate, or readjust their portfolios of wealth. The ability of large investors and financial institutions to move real resources and transfer title quickly with physical bullion is beyond the limits of gold-backed ETFs such as GLD, as well as gold funds, futures, OTC transactions, warehouse receipts, or any other securitized or “paper” gold ownership solutions.

The contemporary economy already provides many standardized processes that minimize transaction time, cost, and risk to those who seek to access the margins but not the full potential of physical gold to function as a currency and a true medium of exchange. Unfortunately, the market for physical commodities has been slow to embrace the path-breaking technology. Therefore physical gold has remained inaccessible to a wide range of investors who understand and appreciate the importance of physicality, mobility, and the currency dimensions of their investment allocations. Those individuals often settle for the quick convenience of securitized gold, or do without precious metals entirely in the institutional portfolios they own or advise. But now advanced messaging standards make it possible for the constricted old world of immovable bars of bullion in vaults to come to life with a range of practical solutions that widen the trading and financial possibilities available to institutions and investors alike.

Gold’s utility as a currency requires a robust approach to technology…one that enables the mobilization of the physical asset as collateral via a secure process where title is seamlessly transferred within a transparent ecosystem featuring exceptional safeguards. This requires that the allocations to gold be integrated into a global clearinghouse (for physical, not paper) that allows these four features:

1. Clarity of Gold Ownership: Creating fully allocated and segregated ownership of the asset to perform an active currency overlay: The great flexibility and other advantages of physical gold will pertain, of course, to all but the smallest bars available on the platform. If too small, a bar would be either untitled or unallocated. Central to this process is the remarkable mobility that the technology of automation provides to the holdings of gold, opening up practical monetary applications.

2. Gold as Credit: Pledging physical for trade finance as the superior format for credit: Physical gold provides an unparalleled way to create a comfortable separation of the owner from credit risk. Recent experience in financial markets show that even the most liquid assets such as US Treasury securities can be vulnerable to surprising levels of risk, but that is not the case for gold that is clearly an asset on the owner’s balance sheet rather than being a liability on someone else’s. And that distinction is vital to investors and institutions.

3. Gold as Currency: Using gold as an alternative payment mechanism for large scale transactions: For example, a multinational corporation such as a gold mining company with a global payroll requiring multiple world currencies could utilize physical gold as a currency to simplify and advance the efficiency of their operations. A key issue for global investors is less about the dollar value of the physical asset and in what currency it is held. Holding clear title to the gold or other precious metals: The clarity of the ownership title is a crucial aspect of a secure position in gold. The gold is owned at a comfortable distance from the existing banking structure, a system that has revealed its vulnerability to systemic problems in recent years.

4. Global Reach: A system featuring globally integrated technology within a liquid marketplace removes the friction from gold’s duality as a commodity and a currency while balancing the voracious demand for physical gold from the Golden East with the Western World’s relatively weak preference for securitized solutions.

Conclusion Returning briefly to the introductory analogy between ancient pathways and gold, the securitized proxies for bullion are akin to the regrettable calories derived from fast food at roadway rest stops. They are not real food, just as GLD is only paper gold…not real, physical metal…and very difficult to transform into their physical counterpart when redemption is desired. Indeed, one of the fathers of GDL, George Milling-Stanley said it this way: “When you buy GLD shares, you’re buying an ownership interest in a trust, and the sole asset of that trust is physical allocated gold bullion bars. The individual investor does not own the gold that backs the trust, any more than an investor in GM owns a car or an investor in Apple owns an iPhone.”

And far too many of the other gold ownership solutions require unpaved detours far off the familiar road. A modern process for gold ownership would bring the unique qualities of the desirable asset on the ramp merging with the investment superhighway. Adding the ideal allocation of gold on route to an optimal investment outcome then becomes seamless, low in cost, but high in accompanying benefits.

The importance of this drive to efficiency is underscored by the global trends in the gold marketplace. Although London has been the dominant locus of the gold trade since 1919, and has been the focal point of the enormous gold futures marketplace since 1982, it is seeing a gradual erosion of its dominance to the expanding gold exchanges in the East. Hence, the London Bullion Market Association’s role as price-maker is being reevaluated and reformed. China, (19% of the world total population, ahead of India’s 17.4%) is soon to assume its inevitable role as the world’s largest economy, surpassing the US in total GDP. The peerless Middle Kingdom is characterized by an extraordinary familiarity over the millennia with gold as both a trusted store of value and a versatile medium of exchange. The reality that China is the world’s leading gold producer as well as the largest holder of physical gold together reinforce the momentum and inexorable nature of this “golden tide.” In light of these forces of change, there is heightened attention being paid to the efficacy of existing gold solutions and the precision of messaging standards, obsolete physical markets, and payment systems around the world. The gold investor welcomes this evolution of a superior way of owning and trading physical gold to serve as a commodity as well as a currency. Metaphorically, the ancient highways across China and other lands are being paved with gold. Precious metals are poised to catalyze and assist this great transition.

Roy Van Til, Ph.D.

Vienna, ME USA

royvantil@mac.com

207-500-9604