Massive step-change underway for gold

For millennia, gold has been a store of value and wealth, its relevance arguably greater today than ever. But an antiquated market structure has held back its potential as a modern, widely owned financial asset. CEO of the World Gold Council, David Tait is addressing this challenge, rolling out a transformation program that fuses technology, standardisation and industry-wide collaboration. He explains how.

Many of us will have seen films and plays where someone is given a gold coin and immediately bites into it to test its authenticity.

It comes from a time when coins were frequently debased, and gold was plated over inferior metals such as lead. That may be a long time ago and now the stuff of fiction but some of that uncertainty about gold persists today but in a different form.

When I joined the World Gold Council in 2018, after having previously closed Credit Suisse’s ‘capital expensive’ global gold and commodity trading business, I recognised a huge lack of trust in gold, both at a retail and institutional level.

WGC data showed that 50% of people didn’t trust gold and 60% of people literally didn’t understand gold, its market, or how to safely access or invest in the asset.

I also recognised both a confusing product, in terms of shape, size and purity, and a highly fragmented and unregulated global ecosystem.

I wondered, why is gold - the physical product - not globally standardised, and why is the gold market not joined up and fungible, supported by a respected global governance body with regulatory powers, all things that would make the asset much more attractive to global investors?

It was in that context the WGC set out to find a solution for the integrity, accessibility and fungibility of gold.

The first critical step was to develop an international gold database that records gold once it leaves a mine site. Built in collaboration with the London Bullion Market Association (LMBA) and using Swiss technology firm Axedras, the Gold Bar Integrity (GBI) database allows buyers to know that the gold they are buying has been sourced responsibly, refined reputably, and passed only through the hands of legitimate actors.

All 33 WGC member Large Scale Mining (LSM) companies that produce over 36% of the world’s gold are currently in the process of adopting the database alongside their refining partners. This transparent miner/refiner handshake will enhance investor confidence in the immutability of the gold supply chain.

The day will soon come when it will be unthinkable to buy gold without first checking its origin and integrity.

With the GBI database as the trusted critical foundation stone, we are forging ahead with three more critical projects to solve for both accessibility to, and fungibility of, the gold market.

The GBI paves way for the WGC’s three-legged mission to digitalise gold and realise its enormous modern-day potential

The first strand, sitting atop the database, is an initiative called Wholesale Digital Gold – an initiative born from a four-year engagement between the Financial Markets Standards Board and all banks active in the gold market, tasked with making the markets more transparent, trusted and accessible, - principally through digitalisation.

Initially focusing on the global Over the Counter (OTC) market, which is the 400oz (~12.5kgs) Good Delivery Bar Market[1], the WGC has brought together many of the major banks to build consensus around the introduction of a digitalised gold market.

In this context we hope to achieve the pledging and transmission of digital gold as collateral between a collection of the most major bullion banks by year end, in what would be a hugely significant moment for the gold industry.

The second strand in the programme is the introduction of a Standard Gold Unit, or SGU, which will ultimately digitally standardise all shapes, sizes and purities of gold globally.

The SGU will provide such a level of investor transparency and simplicity that the many capital barriers to entry that currently constrain the gold market, will fall away, attracting many new institutional participants with their vast capital flows.

This SGU process, for which we have a patent pending, enables all physical gold of trusted integrity to be transformed into fungible, digital gold units that can be used to underpin a range of products and services, including tokenisation, vaulted gold, and collateral, irrespective of the physical bar’s attributes and location.

In other words, you convert all the gold in a database into digital units. It’s an unlevered one to one conversion that can be reversed and redeemed at any time. Importantly, this digital unit is not the trading item. Instead, you create a pool of digital gold that you can back many other financial instruments into. So, gold becomes trusted.

By removing the restrictive nature of today’s gold market, which inextricably links monetary value to a specific gold bar at all times, we have the potential to unlock vast opportunities for gold as a financial asset in the next generation of tokenised markets.

The third strand is a joint effort by the WGC and the London Bullion Market Association to pursue the reclassification of gold as a Level 1 High-Quality Liquid Asset (HQLA), within the Basel regulations. Although the journey to redesignate gold as HQLA will be complex and lengthy it is imperative that the industry enhances the financial market infrastructure, much of which will be realised through the Wholesale Digital Gold and Standard Gold Unit initiatives.

Through these efforts I am confident that the day will soon come when it will be unthinkable to buy gold without a) first checking its origin and integrity in the GBI database and b) using a digitalised market infrastructure to c) invest in a greater breadth of trusted gold products.

Achieving these objectives is for the future of the global gold market and will ensure that gold grows to become more understood, relevant and influential in the financial markets of tomorrow.

David Tait was in Australia in August to give an address at the Precious Metals Forum hosted by ABC Bullion. This is an edited version of his speech.