‘Digitization will be biggest driver and determinant of gold demand’
The major impediment for institutions to currently trade gold is the fact that it’s capital heavy, says David Tait, Global CEO, WGC
The World Gold Council is dedicated towards solving for gold integrity because that’s the bedrock. There is no point digitizing an asset that is untrusted, says David Tait, Global CEO, World Gold Council, in an interview to Mint. “On top of that, my goal is to digitize the entire global gold system”. Edited excerpts:
What is likely to be the biggest demand driver for gold in the next few years?
I think the industry is on the cusp of a digital revolution. There are many areas where we are advocating change. First, is trying to solve for gold bullion integrity, the chain of custody provenance and the integrity of gold bars. There’s no point digitizing or tokenizing an asset that is untrusted. So, we have dedicated ourselves over the last 18 months to getting on the front foot with this. We came to an agreement with the LBMA (The London Bullion Market Association) that we were trying to force this agenda and we focused on two companies, aXedras and Peer Ledger, to provide a global database for gold across the world and that came into being on 28 March this year. Sounds relatively innocuous, just a database. But this database will be a place for all gold, all delivery lists, all shapes and sizes will go into this such that the world knows that their gold exists, what the criteria are behind each bar, what provenance, where it’s from and this gives people assurance.
The second bit is there’s the potential for huge change in security features at the moment, a technology where you can mark gold at the molecular level, which means that you can have absolute assurance that the gold from the dore stage to the ring on your finger can be tracked. And you can check it against the distributed ledger technology (DLT) database. These two things running side by side will create an immutable ecosystem, which will, I hope, give people confidence in the asset class.
On top of that, my goal is to digitize the entire global gold system, all the allocated piles sitting in vaults, banks, and anywhere else, can come together and agree on a digital form of that gold.
The major impediment for institutions to trade gold is the fact that it’s capital heavy, it’s expensive to trade relative to other assets. Digitizing removes those impediments overnight. You get atomic settlement on trades, you don’t have to worry about it where it is, it just stays where it is all the time. It doesn’t have to move, because you’re trading a digitized version of it. So suddenly, all those impediments for institutions at a huge global level to trade gold falls away, in many respects, it suddenly becomes as capital light as a dollar. And that’s why I think, that is the biggest determinant and biggest driver for gold demand going forward.
Don’t you think that electronic forms of gold such as ETFs are playing that role at present? Digitization will affect investment demand for gold. But how will it transform the other two big sources of demand, jewellery and central banks?
Yes, this product could cannibalize ETFs. There is a possibility. Do I think it’s going to provide a different form of interaction between banks almost like a dollar would? Absolutely, where ETFs won’t. I think it’s a different form of trading between institutions, and transfer of gold around the world that ETF doesn’t cater to. It’s going to be a lot easier to trade, it’s going to be on a variety of different venues, somewhat in the unregulated space but closer to regulation. Not fully unregulated, we’re not going to go near that space. But I want this token to also sit alongside crypto assets, and in many respects, be the bitcoin that bitcoin meant to be. So, at the retail level, it facilitates the digitization of all those gold stocks. It's about making it usable at the retail level.
You haven’t seen big increases in ETF buying despite high inflation. Why do you think that is?
I actually don’t know. I think, particularly talking about GLD ETF (Exchange Traded Fund), which is our major vehicle, it’s very much a speculative vehicle. Largely speaking, GLDM ETF is our constant buy and hold product and that hasn’t really fluctuated, hasn’t come off from its highs.
The GLD leviathan is quite volatile, it’s very active in periods of volatility. So, I think it’s more a case of the price has gone sideways. It depends who you talk to, you’ll get an opinion on it. What I would say is happening at a trading level, it’s very likely, people are getting more confident that it’s not going to move and from an options perspective, are caught selling the wings and selling volatility above USD 2,000 per ounce to one probably down at USD 1,500 per ounce levels saying it is never going to go there.
So, I expect that if you do get a surprise, it will be very fast, the next move, because they’re all going to be taken out of those positions. It’s a crowded trade and I think the longer a trade goes sideways, people tend to get out, not in. If they tried to earn some income by selling 2,100 USD per ounce and 1,500 USD per ounce, eventually it will break one side or the other and I expect it to be the upside in due course. And then, of course, there will be clamouring and buying back their volatilities.
What are your thoughts on what the Indian government is planning with or already has done with the national spot exchange?
It’s a marvellous move in the right direction. I think the international bullion exchange as well. We’ve worked closely with them as a partner to try and get that exchange, and the domestic exchange launched. I think it puts India on the map. I think the idea of having one conduit, the IBX, into the market into the country is definitively the right thing to be doing.
I think you’ve got to get participation in the exchanges. That’s obviously somewhat more difficult. The reason why I think the one conduit into the country is so important, goes back to my database. If you really can channel all gold into that world and from there, as you have done, give jewellers the ability to go directly to the exchange and buy from there, it’s just a fantastic progression. This will attract international investors. How you get the international banks here remains to be seen.
Do you think investment demand is what will propel gold prices for the next few years?
It’s very likely that inflation will continue and the central banks will tip us into recession because they’re ever so far behind the curve. So that scenario is looking good for gold unless you get rampant growth with inflation. That’s the only one that’s unfavourable.
I think the fundamental change to gold demand is this new dawn, that will open the ability for many of the investment funds that have hitherto not gone near this market, to suddenly look at it differently.
The reason people haven’t done it before is because it’s capital intensive and you’ve got other assets that are equally volatile to trade. We’re on the cusp of giving it an equivalency. I think that’s going to be your important driver, people flooding in to the market to trade it.
So, when you use technology like blockchain, essentially, that’s a way of getting over national boundaries and distrust. Is that correct? Is it a way to create a global system that’s truly neutral?
Not necessarily, not by design. We chose blockchain because it can be updated constantly. It’s visible to you. And if we were transacting, but not to anybody else, and it’s immutable, it can’t be broken. And it’s a great record, something you can rely on.
But in terms of creating a token, it’s undecided what form of technology we’re going to use at the moment.
So, this is not a form of circumventing rules or sidestepping regulations. In fact, in many respects, it makes taxation, transparency and monitoring of these things easier.
Are you seeing any early signs of central banks stepping up their gold purchases? Logically, when you have a situation such as the current one, you would expect to see central banks of countries opposing each other stepping up their purchases.
Not the Western countries, not the major holders because many of them have high proportions of gold as part of their reserves as it is. Last couple of years, predominantly, it’s been the developing countries that have been adding to their reserves. But if you look statistically, they are still at relatively low levels., notwithstanding the current crises. I would expect to see a continuation of that. There’s no hard and fast rule of what level you need or should have. But I would expect continued buying. It’s unpredictable.
The shutdowns in China have affected jewellery demand quite a bit. With that easing, do you expect a big rebound in demand?
I think, between last year and this year, we’ve seen a terrific uptick. I think in aggregate, now we’re high $600 million between investment and jewellery demand, very much similar to where we were in 2018 and 2019. It is a combination of things- bounce back from covid, pent up demand and savings and the price has come down.
Obviously, cost of living and inflation is going to eat into people’s disposable income. The amount of disposable income that gets spent on gold is going to be very probably dependent on culture. Do I expect to see that have much of an impact here? No, not much. In other countries where it’s considered a true luxury product, as opposed to something that’s part of your DNA, I expect to see more of a drift off, but not here. I think you can have a very positive outlook. It depends, to be honest, in summary, where the central banks end up. I’ve never seen a situation where central banks have been so far behind the curve.
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First Published:25 Aug 2022, 11:34 PM IST
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