And Why You Should…
All that glitters is not gold. Sometimes it’s digital 1s and 0s.
I write to you a lot about gold. And I write to you a lot about cryptocurrencies. What I don’t do is write to you ever about gold cryptocurrencies.
Today, we change that…
From reader Paul, who sent me this “Ask El Jefe” query:
Today I happened upon an online article pertaining to a particular gold-based stablecoin. This is the first time I recall encountering that description of a crypto.
I know you emphasize accumulation of gold, Swiss francs, and bitcoin (plus a play in other cryptos), but I don’t recall you addressing gold-based stable coins. I’d love to hear your thoughts on such.
Thus, my thoughts on such…
But first, we answer the more basic question: What is a gold cryptocurrency?
It’s gold on the blockchain.
No different than US dollars on the blockchain in the form of US Dollar Coin (USDC) or US Dollar Token (USDT, more commonly called Tether). So, basically, we’re talking about a digital asset—a cryptocurrency—that is backed by a physical asset—gold.
Simple as that.
Instead of owning physical gold at home or in a vault, or instead of owning a gold ETF in a brokerage account, you can own the representation of physical gold in your crypto wallet.
I’ll use Paxos Gold (symbol: PAXG) as our lab rat for this dispatch. (Note: This isn’t a recommendation, but I’m also not not recommending PAXG. I’m just using it as our example here.)
PAXG is a stablecoin that functions on the Ethereum blockchain, and is tradeable at crypto exchanges including Gemini, Kraken, Binance.US, and Cypto.com. It is not available on Coinbase, but it is on Coinbase Wallet (confusing, I know. Coinbase Wallet is a wallet you control yourself instead of just holding your crypto in a pooled account at Coinbase.com.)
Every PAXG token represents one physical, troy ounce of gold that New York-based Paxos Trust Co. holds in reserve. That gold is held in London Bullion Market Association vaults, or LBMA vaults, in London. I already risk diving too far down the rabbit hole here, so I’ll just say that LBMA vaults are the standard-bearer vaults in the gold industry.
The point here is just that if you own PAXG you effectively own a real ounce of gold held securely for you in highly regulated—and guarded—vault in London.
PAXG is also the only crypto that’s redeemable for the underlying gold.
Now, to be clear, if you own just a handful of PAXG, you can’t ring up Paxos Trust and request that they send you your physical gold. You’d need to own 430 PAXG. I don’t want to get into why that amount because it takes us into the boring inner workings of a so-called “London Good Delivery” gold bar, which weighs between 370 and 430 ounces.
But basically, if you own enough PAXG you can redeem it at any time for physical gold.
Moreover, if you own any amount of PAXG, you’re pretty much tracking the underlying value of physical gold on a 1:1 basis. You can see that in this chart:
The pinkish line is physical gold. The multicolored line is PAXG.
I’ve monkeyed around with each line’s location on the chart just so you can see how tightly PAXG shadows gold. If I’d left them un-monkeyed, you’d struggle to see two distinct lines because they so closely overlap.
So with this particular gold stablecoin, you’re gaining direct exposure to the physical metal and you’re tracking the price of the physical metal as tightly as possible without actually owning the physical metal.
But that raises the obvious next question: Why not just own the physical metal?
You certainly could. And I’d argue you certainly should. I do—on two different continents.
Then again, I do see three very big benefits in owning a gold stablecoin:
- Portability.
I own physical gold in the US. Of late, I’ve had ongoing thoughts about flying home to reclaim my gold and bring it back to Europe (for reasons worthy of a different dispatch). But do I want to travel with all those gold coins in my backpack?
Honestly, I’m quite leery about doing that.
With PAXG, that’s a moot point.
I can load a bajillion dollars’ worth of gold onto my Ledger Flex hardware wallet and pop it into my jeans pocket and travel anywhere in the world and not have even the most niggling worry. Or I can just keep all my PAXG on a browser wallet that I can then access from anywhere in the world I can find an internet connection.
So portability is a huge benefit.
- Scalability.
Physical gold is available in various sizes, from one gram to one-kilo bars. At today’s gold price—just over $3,140 per ounce—that means one gram will cost you roughly $100. But what if I want to scale into gold methodically over time—putting to work, say, $25 per week so that I am dollar-cost averaging my way into gold consistently?
No way to do that with physical gold.
But I can set up a dollar-cost averaging arrangement at just about any crypto exchange these days so that the exchange automatically invests $X into PAXG over any timeframe… every day, every three days, every week, every month, whatever.
Moreover, if I decide I want to spend in gold, I can do so far more easily with a gold stablecoin. I cannot spend $4.50 worth of gold to buy a Red Bull at Uncle Jeeter’s Gas-n-Go. There is no physical gold that small. I’d have to spend 1 gram… but do I really want to carry around grams of gold in my pocket? And how does the merchant know the gram of gold is legit and not painted lead?
If Uncle Jetter accepts crypto as a payment solution, however, and if his payment-solution provider allows for spending in a gold stablecoin, then I can spend $4.50 worth of gold as simply as spending $4.50 on a debit card.
- Cost.
Every quantity of gold under 1 kilo has an added cost tacked on—a so-called “fabrication cost,” or the cost of taking a kilo bar and melting it down into 32 troy ounce slabs, or 128 quarter-ounce coins, or 1,000 one-gram bars.
Those fab costs can add a pretty penny to the cost of buying gold.
A gram of gold, for instance, sells for about $121 at the moment—a hefty 21% premium over the underlying price of the metal. That’s a big cost to pay and it means gold must rise to $3,750 before you break even.
But with PAXG, you can buy any amount of gold—from $20 on up—and not pay any added costs other than a transaction fee at your crypto exchange.
For instance, I popped onto my Kraken account and put in a test order to buy $100 worth of PAXG, or basically one gram of gold. The transaction cost: $0.99. So I am basically buying gold at its live, market price. I’m 21% ahead of the buyer who grabs a gram of physical gold instead.
So… that’s what gold stablecoins are—a way to own physical gold, cheaply and conveniently, without having to own physical gold.
Do I recommend them?
Yes. I think they’re a great way to own gold.
I want to own physical gold, too, just in case. But blockchain-based gold is an excellent and more convenient way to buy smaller quantities of gold.
Which means you can own bitcoin and gold on the blockchain.
Oh, and you can own a Swiss franc stablecoin too… which means you can own what I am now calling “The El Jefe Safety Trio” (bitcoin, gold, Swiss francs) all in your crypto wallet for what might just be the perfect self-sovereign set up.
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