The last fortnight has been an exciting one in the gold and blockchain space. Earlier this week Euroclear and Paxos announced that a group which included Société Générale, Citi, Scotiabank had completed the first pilot of the blockchain-based gold trading platform as being developed by Euroclear. In Canada, the Royal Canadian Mint became the latest sovereign mint to announce a blockchain product with GoldMoney.
Royal Mint Gold Sovereigns 2017
The Royal Mint in the UK had beaten the Royal Canadian Mint and GoldMoney to it by announcing at the end of November that they were launching a blockchain project, one which will be in direct competition with the Euroclear project.
We will be looking at this week’s development in more detail shortly but today focus on the UK Royal Mint announcement and ask what this means for the 1,000 year old institution, the gold market and blockchain technology.
The Royal Mint and CME Group announced a gold and blockchain ‘solution’ three weeks ago. As one would expect from a trading solution using blockchain, it will ‘log each transaction’. The two parties will collaborate on a digital gold asset called Royal Mint Gold (RMG) and will ‘transform the way traders and investors trade, execute and settle gold.’
In a conference call quoted by the Internatonal Business Times, there was very little said about what made the plans any different to what is already being offered by the likes of Goldcore. Bars will be held in secure storage, represented on an online trading platform and then traded. But, a blockchain will be in place.
Despite the fanfare and considerable PR benefit surrounding the announcement there is very little information on the hows and the whys of the decision by HM Treasury owned Royal Mint and the world’s largest futures exchange operator to launch a joint blockchain offering. Instead this appears to be about encouraging physical gold ownership, facilitated by a government who happen to own a storage facility.
But what does it mean?
Blockchain has to be the most hyped technology in a very long time. Even AI, IoT and VR, all of which are creating a lot of excitement, are not experiencing the same level of fuss.
Solutions for trading physical assets, based on the blockchain are becoming more popular and as a result more sophisticated. Many are autonomous which is obviously attractive to those who choose to invest in gold.
This is where there is an interesting point when it comes to the Royal Mint and their interest in blockchain. It is too easy for someone unfamiliar with blockchain technology and the gold market to assume that this move by the 1,000 year old institution is to offer some kind of autonomy to the gold market.
It seems that we live in a world where we shout ‘got a problem? Blockchain’ll fix it!’
Take health records, for example. There is little doubt that blockchain technology really could transform the systems and processes that are currently in place. However those problems exist because of a multitude of reasons location, legacy systems, interest of invested parties to name a few.
None of which will disappear with the appearance of a blockchain.
The case is the same for gold and the blockchain. I do believe that blockchain could play a big role in the international gold market. But, in this case for the end customer and for the wider gold market I believe this will not have a significant positive impact. As explained earlier, this is a gold trading platform that happens to be using blockchain.
Economist Ashe Whitener agrees
“In my opinion, this is only news because the Royal Mint is basically a government-owned entity experimenting with blockchain. Just because something tangible like gold has a serial number on a blockchain, doesn’t mean that it is any more secure, safe or less risky.
Since the underlying asset is still physical, we still must place our trust with the Mint in terms of vaulting the gold. So nothing here really changes.”
What is it good for?
This is likely better news for the blockchain industry than for the gold market. For the blockchain space an announcement by a 1,000 year-old, government owned institution along with the world’s largest futures exchange operator is another tick in the legitimacy box for this relatively new and much hyped technology.
The announcement has lead to even more discussions about how the distributed ledger technology can be used in the world of gold trading.
As Michael Scott wrote upon hearing the announcement:
“It reflects blockchain’s ability to adroitly track and authenticate data, secured by a global ecosystem of computers which ensure that recorded transactions are tamper resistant and unalterable.”
Does the Royal Mint need a blockchain?
Blockchain’s abilities to remove uncertainties could be particularly beneficial to the gold market, a market that is so overrun with uncertainty and opacity that companies such as GoldCore go to great lengths to put systems and processes in place in order to guarantee transparency and accessibility.
At present, very little information has been released by CME Group and the Royal Mint on the specifics of what kind of blockchain will be used, and in what capacity it will play a role.
As Sandra Ro of CME said in the conference call
“We will go into further details about exactly how a lot of process will work and the finer details around the platform at a later date.”
What we do know (thanks to Ro) is that the blockchain in place will be a permissioned network. This effectively means that Joe Bloggs cannot decide he would also like to participate in the Royal Mint’s blockchain and start approving transactions. Instead, all actors will be known and ‘and there will be a mechanism by which validators will validate the transactions.’
As the two parties have themselves said, this is not about a blockchain product, this is an investment platform that happens to use blockchain. However, be sure that both the Royal Mint and CME Group will have full oversight and likely control over the blockchain.
The attraction of blockchain technology in the gold market, is similar to that in any other marketplace where there is an exchange of information (which may or may not lead to an exchange of an asset). A central database, or registry, is not needed thanks to the decentralised network of records.
This creates some significant cost and time savings, as well as boosting the efficiencies in how information is recorded, updated and shared.
One of the claims by the Royal Mint is that by using a blockchain solution, they will not have to pass storage fees onto clients. How using the blockchain means that storage fees no longer have to be charged is something that is not yet clear. If RMG is fully-backed by gold then who is covering the storage and insurance costs for participants?
Is it not of interest as to why an institution owned by a heavily indebted government would be making a lot of noise about it’s gold trading platform that just so happens to be connected to some storage vaults?
Boost to London?
The decision to use blockchain technology is, according to the UK’s Daily Telegraph “a bid to broaden London’s appeal as a place to buy and sell bullion.”
Currently the London Gold market, along with the COMEX is the biggest price creator in the gold market. Around $5 trillion of gold deals are done in the capital city, per year. The City is not currently struggling in terms of appeal, to the mainstream at least.
However of late a series of moves across the globe may have current gold market influencers thinking about what the future may hold.
The move to blockchain by both groups is not surprising.
The Royal Mint has been looking at the space for the last couple of years, whilst CME Group have investments in two blockchain companies. Both will no doubt be feeling the pressure from the developments that are going on in London. We recently discussed the increasingly fragmented London gold market, which has new players offering blockchain solutions for various aspects of gold trading.
In the US, CME Group will also be carefully watching TradeWindMarkets, a spin off from IEX Group (of Flashboys fame) which will also be launching a blockchain supported gold exchange.
Outside of London announcements by Singapore and China, plus the setting of the Sharia Gold Standard likely has current price setters in the gold market, anxious about how they can maintain their stronghold.
But this is unlikely to just be about increasing awareness of the London Gold market. The big gold trading institutions are already aware of, and are using the OTC market.
Royal Mint gold is not diversification
Gold investors buy gold to diversify their portfolio. There are more detailed reasons, and further reasons for doing so, but this is the one that covers most gold investors. You might also invest in gold because you read that it would perform well in the next five years, your colleague might invest in gold because of concerns over the cashless society and it goes on. But ultimately we all do it to diversify our investments and as a form of financial insurance.
We want some portfolio diversification because we want to protect (and grow) our wealth as much as possible. What are we protecting it from? Changes in the economy. This in turn is affected by a multitude of factors from financial developments, economic policies, governments, geopolitical events and even the weather.
When we invest in an asset that is designed to reduce our exposure to global risk, it’s probably a great idea to choose one which is as far removed from the system as possible.
This is why we choose gold. It is a border less, autonomous asset, a gold bar or coin cannot be printed many times over at the will of government or central bank, it cannot be eaten away by negative interest rates, if held non bank, non government, safer jurisdictions, a government will find it very hard to remove it through or asset confiscation. History has shown how its value remains and it is an invaluable wealth preservation tool.
This is also why a lot of people like bitcoin, and why many are interested in the benefits a blockchain can bring to a system that represents exchange of value.
So when we invest in gold, it flummoxes me why many people choose to do so with the help of the very system that has created the need to hold safe haven assets e.g. gold and silver. Why place your gold in the custody of a heavily indebted national government?
We like the Royal Mint and their bullion coins, including Gold Sovereigns and Gold Britannias, are some of our best selling gold coins. However, for those looking to own gold for diversification, safe haven and financial insurance purposes it is prudent to opt for owning such bullion coins and bars in allocated and segregated storage in large, stable, creditor nations.
It is unlikely that a blockchain solution will give those Royal Mint users greater automony over their gold. The gold will still be stored in Royal Mint vaults, in the UK and, therefore, the custodian will remain the British Government which is under considerable stress and faces many challenges including Brexit and a massive national debt.
To begin to promote gold ownership, via the hype of the blockchain, at a zero-storage fee cost leads to obvious questions as to whether this is a win for the investor or for the Royal Mint.
Gold Prices (LBMA AM)
22 Dec: USD 1,130.55, GBP 916.20 & EUR 1,080.47 per ounce
21 Dec: USD 1,134.40, GBP 919.20 & EUR 1,091.07 per ounce
20 Dec: USD 1,132.75, GBP 915.94 & EUR 1,090.84 per ounce
19 Dec: USD 1,137.60, GBP 913.15 & EUR 1,089.14 per ounce
16 Dec: USD 1,134.85, GBP 911.17 & EUR 1,084.80 per ounce
15 Dec: USD 1,132.45, GBP 904.37 & EUR 1,080.70 per ounce
14 Dec: USD 1,160.95, GBP 917.38 & EUR 1,091.99 per ounce
Silver Prices (LBMA)
22 Dec: USD 15.77, GBP 12.78 & EUR 15.10 per ounce
21 Dec: USD 16.03, GBP 12.96 & EUR 15.40 per ounce
20 Dec: USD 15.80, GBP 12.80 & EUR 15.22 per ounce
19 Dec: USD 16.00, GBP 12.89 & EUR 15.34 per ounce
16 Dec: USD 16.05, GBP 12.91 & EUR 15.36 per ounce
15 Dec: USD 16.14, GBP 12.95 & EUR 15.51 per ounce
14 Dec: USD 17.11, GBP 13.52 & EUR 16.07 per ounce
