As markets around the world reel from the shock of the coronavirus epidemic’s impact on the economy and absorb news about the U.S. Federal Reserve’s sudden rate cut, some investors may be looking to gold as a safe haven. But the most accessible gold coins these days may be the digital kind. Tokenized gold, or crypto-backed gold, is now an option that allows gold ownership without having to pay storage costs or third parties to manage it in securities.
Australian fintech startup InfiniGold is a platform that digitizes gold and other precious metals in partnership with the Perth Mint, one of the largest gold refineries in the world. The platform allows investors to buy, store, transfer and sell physical gold via digital certificates in real time based on the spot price at the mint, unlike exchange traded funds (ETFs) that operate in limited time periods.
In an interview with Forkast.News, InfiniGold CEO Jon Deane predicts that the impact of the Fed rate cut would be limited, while gold prices would be a leading indicator of larger market trends.
Highlights
- “In this environment, when people are selling out of equities and rushing to the hills to try and move towards cash or other stores of value, their first option is not bitcoin, their first option is gold in my opinion.”
- “I believe that the projects that we’re doing around providing digital certificates of physical commodities and then enabling distribution through tokenization will bring more institutional investors into holding title of an asset through tokens. To me, that is net beneficial to things like bitcoin or other cryptocurrencies.”
- “With anything like a Perth Mint Gold Token that can be transferred peer to peer, so your price tracks exactly the same as the price of gold, you always have an exit. There’s always a 24/7 price unlike an exchange which generally trades about eight hours a day. And you can also move those products physically between different participants in the ecosystem. So we see there to be significant benefits versus the ETF market.”
- “You’ve had a decade now of quantitative easing and lower rates. What that means is that the money supply in most of these major economies around the world has increased dramatically. So they’re really devaluing your dollars. That’s obviously been a big argument when people look at things like bitcoin, but gold is the true original decentralized store of value.”
Listen to the Podcast
The U.S. Federal Reserve has attempted to stymie the effect of the Covid-19 on the economy by cutting interest rates to their lowest level since the 2008 financial crisis. “The virus and the measures that are being taken to contain it will surely weigh on economic activity, both here and abroad, for some time,” said Fed chairman Jerome H. Powell, in a news conference announcing interest rates are now at a 1% to 1.25% range. Last week, the S&P 500 had its worst week since 2008 as concerns of the virus’ spread mounts.
The Covid-19 disease has spread to all continents except for Antarctica, with over 93,000 confirmed infections resulting in more than 3,000 deaths. With China’s reduced economic capacity as a result of attempts to mitigate the spread of the disease, markets around the world are starting to feel the impact on supply chains linked to the country. Financial markets were sluggish to respond while the virus remained predominantly an issue in Asia, but as the numbers of infected start to grow each day in Europe and the U.S., markets are starting to take notice.
“The gold market, actually, was a reasonable leading indicator,” said Deane. “We saw gold move substantially higher before we saw a big lowering in equities. Then as we started to see the coronavirus spread, if only [a few] cases outside of China and the Iranian situation, we saw the equity market sell off. I think that’s just the start of what could be leading us towards a more severe downturn, at least in global growth.”
Reducing risk through tokenization?
While the Fed has reacted to curb the effect on global markets, the period after the 2008 financial crisis saw an abundance of governments employing quantitative easing to spur economic activity out of the Great Recession, resulting in a global trend of low interest rates that persists to this day. With only four more quarter-point cuts left at their disposal, the Fed may not have much more room to maneuver in the face of future economic setbacks that the coronavirus could cause.
Nonetheless, U.S. President Donald Trump criticized the Fed’s recent cuts, asking for “more easing and cutting” in a tweet. In 2019, Trump called Powell and members of the Fed “boneheads” for not reducing rates down to zero at the time.
The Federal Reserve is cutting but must further ease and, most importantly, come into line with other countries/competitors. We are not playing on a level field. Not fair to USA. It is finally time for the Federal Reserve to LEAD. More easing and cutting!
— Donald J. Trump (@realDonaldTrump) March 3, 2020
“With the Fed cutting rates even more, we’re at an inflection point where you can put your money in the bank and the bank’s going to charge you to have that money in the bank, and that’s what negative rates means, or you can put your money into gold and pay a potential storage cost,” Deane said. New investment vehicles using blockchain such InfiniGold products could circumvent the drawbacks of conventional gold ownership because it cuts out intermediaries such as ETFs and removes the requirement of payment for physical gold storage.
Gold investors can get exposure to the precious metal through ETFs, which offer derivative products backed by gold, but they do not own the gold itself.
See related article: How Cryptocurrencies are Becoming an Asset Class: Marc P. Bernegger, Crypto Finance
According to Deane, tokenizing assets such as gold eliminates a lot of the systematic risk which brought about the 2008 financial crisis. The proliferation of collateralized debt coupled with a lack of regulation oversight led to a large aggregation of risk sold to investors.
“Tokenization and using smart contracts can enable a large part of that collation of risk and enabling investors to still get the same exposures without creating increased systematic risk within some of these financial institutions. So there is a value proposition where global regulators could look at tokenization as a way to take systematic risk out of the ecosystem,” Deane said.
However, the financial infrastructure necessary to encourage wider adoption is not as established as ETFs or other investment mechanisms, and banks as well as regulators are still ironing out the wrinkles in the emerging cryptocurrency market which poses multiple risks for investors.
“The issue around why we wouldn’t see wider adoption today is really because tokens as a way to hold title over over an asset — whether it’s a commodity, whether it’s a security — the ecosystem of infrastructure that needs to exist to encourage true institutional adoption, it’s coming and being built by all the major banks,” Deane said. “However, it’s not there right now.”
Full Transcript
Angie Lau: Welcome to Word on the Block, the series that takes a deeper dive into the emerging technology that shapes our world. It’s what we cover right here on Forkast.News. I’m Editor-in-Chief Angie Lau. The global markets have been rocked by the coronavirus, with stocks across Asia, Europe and the U.S. sliding in anticipation of a global slowdown. With the economy taking a massive hit as supply chains are disrupted and populations around the world remain at risk of contagion. Now central banks around the world are talking about coordinated efforts to provide stimulus, perhaps softening the blow, so to speak, with G7 finance ministers and central bankers prepared for a coordinated response.
In fact, the Federal Reserve in the United States did just that in an unscheduled cut, a policy rate cut of half a percentage point and warned of evolving risks from the virus. The last time the Fed slashed interest rates by half a percentage point was back in October 2008 during the global financial crisis. Let’s talk about these dynamics through the lens of digital assets, alternative assets. Jon Deane is more than familiar with financial markets as former managing director at J.P. Morgan and recently appointed CEO of InfiniGold, providing software solutions to Perth Mint that allows them to sell digital gold and tokenized gold on the blockchain. Jon, welcome. Thanks for joining us.
Jon Deane: Thanks for having me, Angie.
Lau: All right, you take a look at the markets right now, the market gyrations. People are nervous not only about their health, but also their wealth. How are you assessing the markets right now through the lens of not only traditional markets, but also where you sit in terms of digital markets, alternative assets?
Deane: I think we’re in sort of uncharted waters where we are in financial markets. We went through the last decade with quantitative easing, lower rates for longer, and put ourselves in a bit of a position where it was always going to be difficult to absorb the next shock. With rates around the world close to zero and negative rates predominantly in Europe, a lot of retail banks are now charging savers to actually put money in the bank. Now the heat of coronavirus and the impact on financial markets is significant. I think what we’re seeing predominantly in Asia, now starting to spread into Europe and I think we’ll start to see the same thing down here in Australia and also in the U.S., is that a lot of businesses have gone into business continuity planning, and that effectively means that people aren’t going into the office. People aren’t having meetings. People aren’t travelling the world trying to do new business, people aren’t really trying to grow their own businesses. The impact of that is hard to really gauge and I think we’re going to see a continual slowdown as an impact of that on top of that.
You and I were talking briefly before this podcast around manufacturing, about the actual business of being a small startup, all the way up to a large financial institution, and those businesses are no longer talking. When you go down to the manufacturing, the supply chain side of things, you’re not seeing products coming out of Asia. You’re not seeing products coming out of China, which a large part of the world has put as a key client risk on China being the fact that they’re all extremely reliant on product coming out of there to either manufacture domestically or to put all their manufacturing on China and get products out. A lot of that now is leading to 7 to 8 months delays and it could be longer because obviously we don’t know the extent of the coronavirus and how long it’s going to play out. But I think financial markets are finally starting to respond. When it was a contained issue in China, I felt the U.S. markets predominantly didn’t feel like it was a major issue.
The gold market, actually, I thought was a reasonable leading indicator. We saw gold move substantially higher before we saw a big lowering in equities. Then as we started to see the coronavirus spread, if only [a few] cases outside of China and the Iranian situation, we saw the equity market sell off. I think that’s just the start of what could be leading us towards a more severe downturn, at least in global growth. Whether we see lower equity prices for longer is still a little bit up in the air, purely because of where the rate environment is, however, the ability for central banks to respond to this I think is limited.
You mentioned the 50 basis point cut last night by the Fed. My view of that is it’s obviously a reactionary measure. Trump was out yesterday prior to the Fed cutting sort of urging them to cut, and obviously they’re meant to be independent, but when you’re at close to zero rates, what’s the impact of 50 basis points on the market? It’s quite limited. So the number of bullets the Fed has to stimulate the economy is probably not many. I think you’re probably gonna be looking more towards fiscal stimulus from the government to try and get the economy going again. But that’s not going to be any form of short term remediation, I think it will take some time for those impacts to be truly felt.
Lau: That’s exactly what people are taking a look at right now, being very nervous. If you’re a retail investor or just an average person on the street taking a look at their retirement funds that are tied to the market, if you’re an American, it’s your 401K and really around the world a lot of your retirement money is tied into the equity markets, this is nerve-racking. Then of course graduating all the way up to the top of traditional institutional investors, really worried about what that global outlook looks like.
So the backdrop of this is how do you look for safety? Now, gold, you mentioned is an obvious safety play. It has been universally and traditionally been seen — the actual physical gold, yes 24 carat and softer, the 99.9% I think is the softest — but physical gold as a safe haven. Now there is technology that can turn that into a digital asset. Are you seeing pickup with InfiniGold as people take a look at the gold markets now, and we are seeing prices spike correlated to the dip in equity markets? Are you seeing the same pickup where you are?
Deane: Yes, I’ll talk about gold as the store value first and I’ll talk about what sort of demand we are seeing. So gold over many, many centuries has proven itself as a store of value. One of the big arguments against gold has been the carry cost to gold, meaning that it cost you money to store gold. So historically, a lot of people looked at that and said, well, why would I put my money into gold when I’m going to pay to keep it in gold versus putting it in the bank and someone pays me to put it in the bank. I think that argument is now broken. As I mentioned before, we’re seeing negative rates, and with the Fed cutting rates even more, we’re at a point where it’s really like an inflection point where you can put your money in the bank and the bank’s going to charge you to have that money in the bank, and that’s what negative rates means, or you can put your money into gold and pay a potential storage cost.
Now that’s only some versions of gold. InfiniGold is a product with the Perth Mint, we don’t actually charge storage, so our product is free. It’s as if you’re putting in your money in the bank and earning zero. And so we do think we’re going to start to see a meaningful transition towards gold. On top of that, you’ve had a decade now of quantitative easing and lower rates, as I’ve mentioned before. What that means when you dig into it is that money supply is increasing, the money supply in the U.S., the money supply by the ECB in Europe. The money supply in most of these major economies around the world has increased dramatically. So they’re really devaluing your dollars. That’s obviously been a big argument when people look at things like bitcoin, but gold is the true original decentralized store of value.
That’s why I think you’re starting to see a large number of commentators out there calling for gold prices to move materially higher than where they are today, even though they’ve already had a reasonable run up from 1,350 to 1,650. Last night it was up 3% on the back of the Fed cuts and the equity market selling off again. Now, in relation to demand for InfiniGold, the answer is yes. Our product, as it stands right now — we have two products, one is GoldPass, which is a central ledger, but cryptographically secured solution which we offer directly from the Perth Mint. You can download that application in the app store or via Android, and you can buy digital certificates of gold.
Now, those digital certificates of gold are exactly what you’d imagine them to be. They are a physical title of gold, it is truly gold, you can sell it back to the Perth Mint for all the different G10 currencies, or you can transfer peer to peer to anyone else who’s also onboarded in GoldPass. So it’s like a version of cash to some degree, provided you’re operating in that ecosystem. The next step was we tokenized those digital certificates so that people don’t need to be on board with the Perth Mint to transfer them peer to peer. We’re talking to a number of inter-dealer brokers around broking this product, because we see it as a replacement for the interbank gold market and potentially as a true competitor to exchange traded funds (ETFs). But what I guess the real value of tokenizing is that you can transfer it peer to peer, but there’s always a gateway where you can convert it instantly and for free back into GoldPass certificates and take physical delivery from the Perth Mint. Or you could sell it back into any of the G10 currencies, which is quite unique.
To answer your question of are we seeing increased increased demand? Yes, we’re seeing meaningful increases in customer numbers on a daily basis. We had a record day in gold trading middle of last week — it was a factor of two to be honest with you, on what our previous high day was. So there’s definitely demand coming through. We only listed the Perth Mint Gold Token (PMGT) starting from last week and we’re in a sort of soft-launch phase where we are right now, but we do anticipate to see some meaningful institutional demand coming through for that and dealing on an over-the-counter basis.
Lau: Okay, so you’ve got the token. It’s tokenizing gold, how are you competing with traditional gold markets? Why wouldn’t somebody just go into the equity markets or buy an ETF or participate on Wall Street and just function that way and purchase gold? How do you compete with that?
Deane: The biggest ETF out there is GLD, and I think their daily turnover is about a billion dollars a day, and I think it is around a 100 billion market cap. Now, the interesting thing about GLD is that they charge you 40 basis points a year to hold GLD. There’s an ETF provider behind GLD that obviously securitizes and manages the gold prices for you and it provides effective security, which is listed from the exchange. So you’re creating quite significant operational and system mathematic risk by going through the process of trying to earn gold because there is someone behind the ETF, who is then taking other products and putting all those products together to create a synthetic price of gold, which they’ll list as an ETF.
Now with the Perth Mint Gold Token, all the gold certificates, you can take physical delivery of gold. Unlike an ETF, you have zero storage fees unlike GLD or IAU, which also is one of the larger ETFs on gold. So you have this inability to one, take it physically and also you’re paying an ongoing management fee for someone else who’s really creating further risk within the entire ecosystem. And then lastly, your only venue to trade those ETFs is on the exchanges that they’re listed on. So if I own an ETF on gold and I want to transfer it to PIMCO or Ontario Teachers, one of these major institutions… you have to do that on the venue or via a regulated OTC transaction.
With anything like a PMGT or a token, that can be transferred peer to peer, so your price tracks exactly the same as the price of gold, you always have an exit. There’s always a 24/7 price unlike an exchange which generally trades about eight hours a day. And you can also move those products physically between different participants in the ecosystem. So we see there to be significant benefits versus the ETF market. The issue around why we wouldn’t see wider adoption today is really because tokens as a way to hold title over over an asset — whether it’s a commodity, whether it’s a security — the ecosystem of infrastructure that needs to exist to encourage true institutional adoption, it’s coming and being built by all the major banks. However, it’s not there right now. You don’t have a fantastic lending environment, if you have your bank within a goal right now, you’re allocated through your private bank, they’re probably going to give you 90% to 95% loan-to-value ratio (LTV).
With something like PMGT, we’re working with providers to give that sort of LTV. However, it doesn’t exist right now. When you want to take true institutional adoption, you’ve got to be out to get all those other pieces of the pie together because they’re all important for how they currently take risk. It’s not as simple as saying ‘I want to own gold’ and ask if it is better to buy GLD or PMGT? Because GLD, while it may cost more today, does have that other infrastructure that supports it. But within the token world, it’s not there, but it is coming. If you look at all the major banks and obviously State Street, Fidelity, Standard Chartered, J.P. Morgan, Credit Suisse, they’re all working towards providing that exact infrastructure to support tokenization ownership. So maybe that’s 12 months away, but it’s coming. I think a lot of markets and a lot of venues out there are nervous about what this means to their current business models.
Lau: The evolution of the space is very interesting, tokens such as yours and others including stable coins are starting to tie the value of that token to an actual asset, an actual security — physical gold or a traditional fiat. When you take a look at the price of bitcoin, which many characterize as digital gold having the same characteristics of being counter to equity markets — the way it’s been behaving recently though, it just doesn’t seem like it is spiking in the way that gold, actual gold is spiking from the digital side. How do you explain bitcoin, other cryptocurrency prices against the backdrop of this emerging global economic crisis in the same way that in 2008 we really saw a pickup? We’re seeing less enthusiasm, I would say, but what’s your observation?
Deane: So it comes down to the utility of the underlying token. I think, with bitcoin, it’s long been an argument, the utility as a store of value, and people viewed it as a way to be in cash, but not in cash I guess is the best way to put it. And that’s a fantastic scenario to have if you can think that bitcoin is gold 2.0. However, the rational behavior of bitcoin I don’t believe is similar to gold for a couple of reasons, at least not right now, and that’s mainly driven by market composition. Gold historically has been a store of value, and when we have seen markets in stress or quite volatile markets where investors are nervous, you see them generally transitioning or increasing their allocation to a store of value asset like gold.
Gold has proven time and time again to be the true store of value. Something like bitcoin right now is being pushed as a product by very strong bitcoin enthusiasts, people who completely want to move towards a decentralized system. One, while there are some pockets of institutional players within bitcoin and there are some hedge funds and large asset managers which are starting to allocate, the epicenter of allocation to the space is very, very small. Two, they’re not at a point yet of truly believing that bitcoin is a store of value. So in this environment, when people are selling out of equities and rushing to the hills to try and move towards cash or other stores of value, their first option is not bitcoin, their first option is gold in my opinion.
We can talk about the 5% drop in gold in a second, but I just don’t think [investors] are there yet to say ‘we’re seeing really, really volatile markets, we’re gonna allocate to bitcoin’, versus in a world where you’re seeing these markets moving up and down quite violently, people are quick to move to gold because they know it’s proven through time to do exactly that. With bitcoin, the market composition of those users is predominately day traders. There are these HODLers and people who truly believe bitcoin is higher and going to be meaningfully higher in the future, and they could be completely right. It’s just that it’s going to take more and more time to move all of these people who are managing trillions of dollars of assets to put them into bitcoin.
The people who are currently managing bitcoin risk don’t really have that much risk allocated to these other sectors, which are actually under the stress. So you don’t really have the true co-mingling yet of bitcoin as a store of value asset within the ecosystem with institutional investors. Others clearly touch on the 5% drop in gold because it’s an interesting move when we saw volatility in equity markets as well. There’s been a lot of commentary around gold, about people selling out of gold because of margin requirements. I think that could be factually correct, we had a big sell off in equity markets, it would’ve been a lot of pressure on different types of accounts. A lot of people went long on gold for a different reason.
People weren’t long on gold purely from a store value perspective, they were long on gold because they were concerned around lower rates and the fact that we were going into a negative rate environment and what that meant for effectively money supply, and would there be confidence loss in the government. I think we saw a large number of institutional investors holding significant gold positions on that basis, not holding it in the event of a large equity sell off.
So I thought what we may have seen when we saw a 5% drop in gold is one, that initial unwinding of some of those bigger gold positions. And then two, as we started to move lower all the CTAs, effectively the trend following blackbox is probably on the back of it and pushed it a little bit too overextended. That’s why we saw a big rebound overnight and gold back up 3 percent. I think that’s why we’re seeing a little bit of volatility in that space. But if you look at gold historically over time, it does experience similar moves in these volatile periods. But if you look at the medium term, it obviously proves its worth as being a real store of value.
Lau: Well, to your point, it’s living in the same ecosystem, the same pool of money, it is in the same portfolio for money managers. And so as markets generally rise and dip, I understand your viewpoint of that correlation. It is interesting that you talk about bitcoin and other cryptocurrencies that really is almost segregated, remains as such but less so, but it also speaks to what this next level of tokenization might look like to get more institutional investors or traditional investors to provide bigger liquidity pool into assets because it’s directly tied to securities such as yours, directly tied to the Perth Mint. Do you think that we will see that as the next trend? We were already seeing that in the past year. Do you see that as being more of a pickup as a result of any kind of recessionary pressure or economic pressure or even central bank pressure that we’re experiencing right now?
Deane: To answer your first question, yes, I believe that the projects that we’re doing around, one, providing digital certificates of physical commodities and then enabling distribution through tokenization will bring more institutional investors into holding title of an asset through tokens. To me, that is net beneficial to things like bitcoin or other cryptocurrencies.
Now, when we talk about cryptocurrencies, it’s more about utility. I think that’s quite an important point because obviously different cryptocurrencies have different utilities. Bitcoin from a utility standpoint is the most attractive thing for an institutional investor today. Some of the other cryptocurrencies, I think it would take a bit more time for them to fully understand about the value in investing in them versus traditional equities and other asset classes that don’t have the investment mandate, one, and two, I guess the education around what they’re actually doing and how to allocate appropriately to them. Around what central banks are doing and whether we think they are going to provide an ecosystem to tokenization, I think it’s more important to think about if we have some sort of systematic risk in the system again, similar to 2008 where we saw a large chain of supply impact from one institution collapsing and then the flow on impact across institutions.
In my view, tokenization eliminates a lot of that systematic risk. What those institutions are inherently doing in being to some degree rent seekers in the ecosystem, is they’re collating risk, they’re putting it together, repackaging it and then selling it to investors. Tokenization and using smart contracts can enable a large part of that collation of risk and enabling investors to still get the same exposures without creating increased systematic risk within some of these financial institutions. So there is a value proposition where I guess global regulators could look at tokenization as a way to take systematic risk out of the ecosystem. And there’s a number of projects out there doing things across mortgages, across the commodity space, across trade finance, voyage financing, which I believe are very, very net beneficial to the entire global economy.
It will mean that there will be a transition of value from some of these intermediaries that have performed functions before and I mentioned ETF providers before, but ETF providers in general, all they’re doing is they’re taking a risk. And when I say risk, I mean they’re taking price volatility risk and they’re repackaging and repurposing that risk and then trading a security to give investors access to that risk in a size that is appropriate for them. So tokenization facilitates that flow without that intermediary being there, and moving that value and cost that the intermediary is currently absorbing and attributing it back to the the holder of the risk.
So looking at GLD, going full circle in this conversation, they’re charging 40 basis points to hold gold. Now, they shouldn’t have to charge it, we don’t need that ETF provider to be there, they could buy PMGT if you want to hold gold. And if you did that, you wouldn’t be paying 40 basis points. So that’s really where I mean that rent-seeker infrastructure exists and it’s the same thing which exists in trade finance, if you look in the banking system, how they transfer titles to effectively extend loans, and tokenization can facilitate a large part of that. There’s a number of projects already focused on doing things along those lines.
Lau: Essentially what happens is that you democratize this market even more and give direct access peer to peer, direct access to a security that people might have had to pay enormous rent to some third market intermediary to actually have access to. And 40 basis points is a significant amount of money, especially when you take a look at the volatility of the markets, preserving wealth is something that is on people’s minds.
John, thank you so much for joining us on this episode of Word on the Block. I appreciate you sharing your latest views on the market gyrations and what digital assets and our access to it might look like in the future. So I want to thank you and I want to thank everybody else for joining us on this episode of Word on the Block. I’m Forkast.News, Editor-in-Chief Angie Lau, until the next time.