Diversifying into digital gold
We speak to Frederic Panizzutti, Managing Director at MKS Dubai and LBMA winner of LBMA's 2019 Precious Metals Forecast Survey on why investors should consider digital gold.
Can you share the current outlook on physical vs digital gold?
Digital gold is somewhat regarded as new whereas physical gold has existed for centuries. Based on flakes of gold found in Paleolithic caves, it is estimated that the use of physical gold dates back to 40,000 B.C. Yet, what is the key differentiator between physical gold and digital gold? A digital gold product, fully backed by segregated gold with direct legal ownership title of the physical gold, is no different to physical gold, what changes is the way you gain access to it.
In a globalized and fast-paced world, I think the outlook for digital gold, provided it is a well-structured product with physical gold as the underlying, is the same as that of physical gold, with the added benefit of a digital format with even greater potential. In other words, with digital gold you buy physical, you own it but you do not have the inconvenience of shipment, storage and insurance. The same goes when selling it; no need to find a buyer, no need to ship it and less risk of facing discount from the buyer. All upsides and no downside.
We’ve seen a shortage of physical gold in the last few weeks, can you tell us why?
There is something we need to differentiate here. Yes, there is a shortage of physical gold though there is no shortage of physical gold availability. There is enough gold in the major vaults, but the gold is not necessarily where it is in demand.
It is not a liquidity but a logistics problem. With the reduced amount of flights currently available, it is not always easy to transport gold from vaulting facilities or refiners to the final destination. This situation is creating a gold premium disparity from one country to another, depending on the ease of supply between one geographical area with another.
Of course, this is temporary and due to the exceptional and unprecedented lock down situation across the world. When everything returns back to normal, logistics will no longer be a challenge and gold will normally flow to the various demand centers and premiums will normalize.
Is digital gold safe?
When talking about the safety of digital gold, I think we need to differentiate two safety categories:
1) The safety & robustness of technology:
How the digital gold product is built and mapped to the underlying gold is key. There are a number of gold tokens in the market today with varying levels of security. Choosing a well-thought product backed by an experienced and reputable organization in the gold market is advisable. In partnership with leading organizations, MKS has developed a gold token called DGLD based on the use of a dedicated permissioned sidechain, periodically attesting back to the bitcoin Network. This ensures the trustless immutability of the DGLD blockchain and of the record of gold ownership. DGLD holders can independently verify and prove their unique ownership of insured LBMA grade allocated gold, vaulted in Switzerland, without relying on any third party. This means that ownership of allocated gold cannot be re-assigned or double-spent by anyone, including by the emitting company.
2) Investment safety:
In the case of a digital gold product that is fully backed by physical gold, with full ownership title to that gold, stored in a safe vault, in a safe country and fully insured like the DGLD product described above; I would say that it is as safe as owning directly physical gold. I would even go one-step further. With a digital format, there is no need to transport the gold when buying or selling it, thus avoiding further risk. We could argue that it makes digital gold even safer.
Why do investors consider digital gold as part of their portfolio?
Digital gold done correctly and backed by physical gold is as good as straight physical gold. Investors willing to buy gold either to protect their portfolio by mitigating against volatility in other markets, or as a safe haven or just as a directional price move investment have the easy choice to go for digital gold instead of physical gold, with the ease of access and without some of the constraints they could encounter with physical gold.