Physical Gold vs. Digital Gold - which is a better investment?
You can learn a surprising amount from the classic James Bond film, Goldfinger. The primary plot twist is that the titular bad guy has his minions break into Fort Knox, which contained much of the gold supply of the United States. But he wasn’t there to steal it--instead, his nefarious plan was to detonate a radioactive bomb inside, rendering the gold valueless for millenia. This would have the effect of raising the value of Goldfinger’s personal gold supply, since the total amount of gold worldwide would be reduced.
One of the myriad benefits of cryptocurrency is that it does not rely on a physical asset, like gold, that can be irradiated by a maniacal villain. But there are electronic forms of money that are backed by actual physical gold reserves, and they offer advantages over actually trading in the physical equivalent. Read on to determine whether physical gold or digital gold is a better investment, and what the differences are.
Physical Gold vs. Digital Gold by the numbers
Around 244,000 metric tons of gold has been mined or discovered as of 2016, according to the United States Geological Survey. This includes an estimated 187,000 metric tons that are already above ground, and around 57,000 metric tons that have been identified by scientists as located but not yet mined. Almost all of this gold came from the earth in China, Australia and South Africa (the US is fourth). That might sound like a lot or a little, depending on your point of view. To imagine it, every scrap of gold discovered to date would fit inside a cube that is 28 meters across on each side. Gold must be mined (there are numerous reality TV shows that follow adventures in gold mining, if you’re curious about how it’s done). There is surely more than that 57,000 metric tons still underground, but no one knows how much. But gold is seriously valuable: an estimated $9 trillion market value.
Gold is No Longer the National Currency Standard
Gold has been desired, coveted, and held as the epitome of value since time immemorial. According to the ancient myth, King Midas was so obsessed with it that he wished that all he touched would turn into gold--forgetting that he had to touch things like his lunch, so it didn’t turn out well for him. Empires of old counted their wealth in gold and the earliest coins were made of it.
Gold used to be the standard on which national economies were built, too. This meant that there was an amount of physical gold kept in vaults to match all currency (paper money and coins) issued by a government. Citizens could, if they wished, trade in their paper money for a relative quantity of gold. At the moment, no government uses a gold standard--Britain stopped in 1931 and the US began to phase it out in 1933, officially ending it in 1971. The use of “standards” (gold, silver or any natural commodity) has been eliminated from almost all currency, meaning that you cannot trade currency for anything other than currency anymore. The value is theoretical, based now on how much of it is printed and in circulation, and how the open market reacts to it.
This means that it is no real leap of the imagination to shift gears to cryptocurrency, the value of which is also theoretical, based on quantity in circulation, mining (rather than printing) and what the market will bear.
But here’s the twist. Digital gold, as a category of cryptocurrency, is usually backed by actual physical gold reserves: bullion safeguarded in vaults held by private agencies. While governments found a gold standard too unwieldy for national economies, private firms picked up where governments left off and are replicating the old system, only now using electronic money instead of paper money. The principle is the same: there is an amount of physical gold held in a vault to match 100% of the digital gold currency held by investors.
The Digital Gold Twist
While Bitcoin has sometimes been described as “digital gold,” there is a category of cryptocurrency that actually is digital gold.
The first company that went down this route was E-Gold, which operated in the mid-1990s. While E-Gold and some of the other early companies ran into legislative issues, the advent of blockchain technology has seen the proliferation of multiple such options today.
PAX Gold, run by Paxos, offers a digital token that follows the price of gold, with each “PAXG” being backed by one fine troy ounce of a London Good Delivery gold bar (each of which weighs 400 ounces and is worth around $600,000 as of August 2019), and stored securely in the vault of the famous Brink’s security company.
PAXG is an ERC-20 token built on the Ethereum blockchain. It is redeemable--you can trade your tokens for actual gold if you hold at least 430 ounces’ worth of gold, but as we’ll see, one of the advantages is in the security of not having to move the gold from those super-secure vaults.
The supply of PAXG changes only based on the amount of physical gold that the Paxos company holds. This approach differs from most cryptocurrency, which sees the makers of it choose an arbitrary total number of “coins” that can ever exist , as in the case of Bitcoin with only 21 million bitcoins, in order to create rarity.Other companies have the same approach: gold-backed cryptocurrencies also include Perth Mint Gold Token (PMGT), Digix Global (DGX) Meld Gold by Algorand, and Tether Gold (XAUT), available on the FTX exchange.
FTX also offers SPDR Gold Shares (GLD), which is a tokenized stock: each one of which represents a share in a company. SPDR is an exchange-traded fund. In simple terms, it keeps its price in line with the world price of gold. Because of concern over the variability of cryptocurrency pricing, options that are tethered to a tried-and-true asset like gold feel less likely to fluctuate dramatically. This means that digital gold feels like a safer investment, or a useful divestment from a traditional crypto portfolio.
Security of Physical Gold vs Digital Gold
Unless you plan to make jewelry out of the physical gold (or use ingots as paper weights or to tile your bathroom--whatever you’re into), then you’ll probably feel better keeping your gold in a vault and never actually handling it.
When you buy physical gold online, you are assigned a portion of actual gold, as in the precious metal, which is held in a vault somewhere. The physical gold bullion is extremely safe while it remains locked away in maximum security vaults. It's the transport of bullion that exposes it to risk of theft or loss, or holding it in a private home, where security is presumably far more limited than in a bank vault (unless you live in a house that would be the envy of any James Bond villain).
One benefit of digital gold is that the physical gold linked to the currency never needs to leave the vault. If you sell some, the blockchain just registers a change in ownership of the equivalent physical gold back at the vault. There is no transport or removal of the physical gold, thereby drastically reducing the chance that it could be lost or stolen.
In addition to the security benefits, there are significant savings in the cost of shipping gold around the world and the various third party fees inherent in moving a high-value, weighty commodity. Digital gold also opens up the asset to more people around the globe, as there is no minimum purchase amount, and investors can buy (or trade) gold in tiny fractions.
In the end, your opinion on whether digital gold or physical gold is the better investment is going to come down to how attracted you are to the precious metal itself.
So, while digital gold is not going to give you a shiny ring to wear on your finger, it is more convenient, and much safer from would-be Goldfingers.
Paxos (PAX) and Pax Gold (PAXG) can be safely stored on the Exodus Crypto Wallet, which hosts over different cryptocurrencies, and gives you control over your own private keys.
This content is for informational purposes only and is not investment advice. You should consult a qualified licensed advisor before engaging in any transaction.