A Comparison of Platforms to Buy and Sell Gold

 

There has been much talk about Blockchain as a means to “tokenise” illiquid assets and so make them easier to trade by ordinary people.  HBW has researched this idea versus the alternatives using Gold as the asset type to be tokenised.  HBW is unconvinced it is viable yet.

 

Retail Gold ETF’s Blockchain Tokens E-money debit card
Costs 4 2 3 1
Advantages 1 3 4 2
Concerns 4 2 3 1
Regulatory protections 2 1 4 3
Extent of Democracy – Liquidity 2 1 4 3
Extent of Democracy – Access to asset 1 3 4 2
Points of Failure 2 1 4 3
Risk over Time 1 2 4 3
Total 17 15 30 18

Key: The table contains various points of comparison which are rated between 1-4. One being the best option and four being the worst. With this in mind, the total with the lowest score should produce the most viable platform to buy and sell gold.

 

 

Retail Gold: This is the simplest and most traditional of all the platforms compared. This is as easy as going to your local jewelers or going online.

 

ETF’s: An Exchange Traded Fund is a type of investment fund that is traded on a stock exchange. The example used in the comparison is Blackrock’s iShares Gold Trust.

 

Blockchain Technology: The example used is Digix Global’s blockchain technology on the Ethereum blockchain and represents physical gold like traditional cryptocurrencies through the DGX token.

 

E-money:  For this we use the example of GlintPay. GlintPay lets its customers buy and spend gold and other currencies with a pre-paid Glint Mastercard. Their objective is to give their customers the ability to use a gold backed currency.

 

Objective: The objective of this article is to produce the most viable platform to buy and sell gold for the average person who is seeking to invest in gold. This article will not go into depth into the advantages and disadvantages of investing into gold, but the pros and cons of the platforms which allows one to invest in gold.

 

Conclusion: Drawing on the parameters set in the objective and the totals produced from the comparison table, we see that ETF’s come out as the most viable platform to invest in, and blockchain technology as the least. The myriad of issues which the tokenisation of physical assets faces at the moment, from illiquidity, theft, lack of regulation and overall uncertainty leads HowBanksWork to believe that at least for the time being and for the immediate future that, tokenising physical assets is not a feasible means of trade. This does not mean that ETF’s are perfect, ETF’s are still quite complex financial instruments which require a considerable amount research before investment, especially for the average person. However what ETF’s do provide is a highly traded asset with low costs and appropriate regulations in place, which adequately mimics the price of gold.

 

Comparison of Platforms

The table below compares the four viable platforms by comparing eight key points. Firstly, concerns price. Which platform allows its customers to procure its tangible assets and store it as cheaply as possible? The next parameter is advantages. What separates each platform to make it the most viable option. Another important point of comparison is concerns. What are the the most pressing issues of each platform which people should be aware of? The next point of comparison is security. What regulatory protections are there that safeguard the investment and how easily can the investment be stolen? Ease of access to the platform is also compared. Can customers access the tangible asset from anywhere in the world? Points of failure of the platforms is also discussed. Which platforms have the least worrying aspects. Furthermore, which of the platforms have stood the test of time, and which should people be worried about when it comes to the number of years a platform has been an active means of trade. Lastly, and arguably most importantly is liquidity. How effectively and how cheaply can customers sell the tangible asset and get the best return on investment.

This article also includes an Appendix table of  other information that people might be interested in which is not included in the comparison table below. This includes descriptions of the processes which one takes to acquire the asset and the objective of each of the platforms.

 

 Retail Gold ETF’sBlockchain TokensE-money debit card
Costs
(storage, procurement and spread)
The cost of storing physical gold is variable to the customer. It can be as high as the customer wishes, such as placing it in a vault and buying insurance, to them storing it at home.

The cost of procurement with retail gold is high. You will not be paying any form of gold spot price. Instead retail sellers will be placing high premiums on the gold in order to gain a profit.

The spread on physical gold will also be incredibly high. Retailers famously have awful spreads.

With an ETF, the customer does not physically hold onto the gold. However, there are still storage fees applied by the brokerage firm on the shares - With the Barclays investment tool there is a 0.2% holding fee per annum. This is capped with a minimum fee of £4 and a maximum fee of £125.

Along with storage fees there are also transactions fees when you chose to buy or sell. For Barclays these are a fixed cost of £3.

Spread - As of 16.30 11/12/18 the bid per share was set at 11.91 and the ask was set at 11.92. This spread is very indicative of the historical spread of the fund and is one of the main advantages of using an ETF.
The purchase and sale of DGX tokens only take place in established crypto currency market places. This means that not only does Digix take a 0.13% transaction fee. There is also a spot trading fee that is is also applied by the market place. At Kryptono exchange this fee is 0.1%

The actual storage of the token itself is handled by the customer (placing it in an e-wallet, these come in different variants and prices). There is also a 0.6% demurrage fee (a fee for not selling) on the token itself taken by Digix.

Coinbase, another crypto currency market place, shows an average spread of about 0.5% for Digital Currency Purchases and Digital Currency Sales. However, the actual Spread may be higher or lower due to market fluctuations in the price of Digital Currencies on Coinbase between the time that they quote a price and the time when the order executes.
When buying gold from Glint, there is a 0.5% fee applied on the value of the exchange from whatever currency you choose to use. The rate of conversion is the gold spot price at that moment in time.

Glint takes on all of the costs concerning the storage of gold, none of this is transferred onto the customer.

There is 1% spread when using Glint. This is due to the 0.5% transition fee. This is a combination of the 0.5% used to invest and then the 0.5% used when using the gold.
Advantages Universality - where shares and other forms of investments can be lost in a miasma of financial jargon, physical gold holds a unique universal language which all cultures can understand

Tactile - Owners like to enjoy the touch and feel of their investment, unlike many other forms of investments.
Customers will be exposed to the day-to-day movement of the price of gold bullion

This is a convenient and cost-effective way for an individual to gain access to physical gold without the risks and costs of storage and transport which are associated with the purchase of physical gold

Theft is very rare. If something were to happen to your shares, there are legal bodies in place to protect your ownership over the shares. (e.g. FSCS in the UK)
Customers who wish to keep the transactional utility of their cryptocurrencies but want to hedge against the volatility of them can invest in a stable coin. (However, this transactional utility is only guaranteed in the realm of cryptocurrencies. Finding places where to use this coin outside of the market places will be very difficult)

Transferable - they are easily divisible, unlike physical gold to 0.001g, and can be stored in and transferred between etheruem wallets

Built on the blockchain - No centralised database management of Crypto Asset records - all chain of custody information is fully managed by the ethereal blockchain. This blockchain ledger is immutable with data upload taking significantly less time than on the bitcoin blockchain

Transparent - quarterly audits are conducted by Bureau Veritas. The tokens are also accompanied by a proof of asset card which contains time stamp of card creation, SKU of gold bar, bar serial number, chain of custody digital signatures, purchase receipt, audit documentation, depository receipt, storage fee due)
Least amount of investment in procurement and storage - The only cost that is involved in this service is the 0.5% transaction fee applied to all deposits, withdrawals and payments. There is no cost of storage or for their services.

Gold can be granulated to 0.0001g. This means that the customer has a higher level of utility when it comes to wanting to use their gold.

You can use your gold as currency. A Glint MasterCard accompanies the app which allows you to use your gold on a a day to day basis.

Easy access to your gold and its value - through the mobile app you can see how much gold is in your account and its market value at that moment in time.

Mastercard is a global brand. By partnering with them certain assurances are given to customers and the transactional utility of the assets is guaranteed with the accompanying card.
Concerns Highest cost - It will be very rare that by buying physical gold from a retailer that you’ll be receiving a good deal. Retailers understandably charge higher premiums as they live off the difference of the price, they buy it for compared to the price they sell it.

Fraud - Customers can be at risk of being conned if the gold they buy is either fake or not the quality which was advertised to them

Provenance - Risk is assumed if a customer is buying gold from retailers such as pawn shops, as if the gold is stolen, regardless of how much they have paid for it, the police can apprehend it off of you.

It can also be incredibly hard to buy large amounts golds. Homework and due diligence is required to find certified wholesale bullion dealers.

Theft is also a major concern. Home burglaries and muggings are common. It is also not unheard-of safety deposit boxes to be targeted.
Slippage - ETF’s are not a true 1 to 1 representation of the commodity that is underwritten by them. Due to this fact if we were to see a 2% rise in the price of gold, the ETF that is backed by gold may only go up by 1.8%. This is also true of the reverse where if gold dropped by 2%, the ETF may drop by 2.2%. Although these are small and minute differences, over a long period of time these differences can add up to a far larger amount.

Synthetic ETF’s - unlike IShare IAU 240, that stores all of the gold that underwrites the value of the ETF (currently at 267.59 tones) some ETFs do not store the commodity that underwrites it (although this must be done in some cases like corn which is perishable) They are underwritten by futures (a promise to buy at an agreed price in the future) which involves the ETF with counter party risk.

ETF’s are quite complicated to understand. They are surrounded by legal and financial jargon which the average person is not expected to know. The prospectus which is meant to add clarity is 44 pages of this jargon.
Storage - To store tokens, you need to have a digital ethereum wallet. The majority of cases where cryptocurrencies in general are stolen, are right out of wallets. This is due to the fact that most people with crypto use a software wallet which are susceptible to being hacked into, and once gone there is no process to get them back, or a central authority to report the crime to - This risk can be reduced by using a physical wallet which store your crypto offline, or paper wallets (literally printing off your crypto codes)

Smart contracts - when a token is issued to a customer, it is done with a smart contract. Although these are essential to the speed and convenience of crypto there are still issues - What happens when bad code gets put into the contract, they are irreversible, Governments do not yet regulate them, meaning that disputes cannot be resolved and there are issues with taxation.

Multi-party trust system - the system relies on multiple independent parties to provide a transparent platform of the physical assets. This means that there is a possibility of collusion. Though this may be mitigated somewhat as the parties involved have other customers, and reputations to uphold, it still does not mean that collusion won’t happen and if it does, does the whole system fail?
No option to actually sell your gold - Glint only allows you to convert your fiat currency into gold, then you would use the converted funds as currency.

No actual gold is traded in the moment - Glint’s MasterCard is simply a prepaid debit card using MasterCard’s “External Pre-Authorization” API. Glint has neither invented anything nor engineered any new technology; it’s simply pre-extending fiat-currency working capital into an account with MasterCard and then displaying to its customers, the investing public, and the press that it is gold rather than local currency which is being spent

Based on a presentation they gave in July 2017, the company has no more than one million pounds of capital at this moment meaning that, managing any more than one million pounds of client gold would be mathematically impossible; thus, they must be leveraging.
Regulatory Protections Nowhere else in the world are consumers more highly protected than in the UK. The UK is one of only a few countries in the world that have compulsory statutory hallmarking (Hallmarking Act 1973). This means that every item sold as precious metal must have been tested and hallmarked by an independent third-party Assay Office to guarantee that the precious metal is of the fineness stated

The law applies to everything sold in the UK, regardless of where it may have been manufactured. The only exemptions are items which fall beneath the specified weight thresholds which are 1 gram for gold.

It should also be noted that All retail shops are subject to the rules and regulations of trading standards.

Regardless of product structure, all ETFs and mutual funds must comply with the disclosure-based provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934 and associated Securities and Exchange Commission (SEC) rules.

These acts require all issuers of securities to disclose material information via prospectuses and annual reports to help investors make informed investment decisions.

Brokers are regulated overseas and by the FCA and FSCS in the UK.
Currently there are no mandatory regulations in place for any form of cryptocurrency, however Digix has taken steps to remedy some trust issues.

Quarterly audits of the gold by an independent authenticator, Bureau Veritas.

Their assets vendor is ValueMax Singapore. They regularly supply the London Bullion Market Association (LBMA
Glint Pay Services Limited (company No. 10117131) is authorised by the Financial Conduct Authority under the Electronic Money Regulations 2011 (FRN: 900657) for the issuing of electronic money.

Glint also uses KPMG to undertake both its company and physical metal audits.

As GlintPay uses the MasterCard service they are liable to its rules and regulations. Namely - 7.1.4 Staged Digital Wallet Operator in the Mastercard rules handbook.
Democracy Part I - (Consumer’s ease of access to the tangible asset)Easiest access - Solely the cost of the gold

However, there is also the issue of whether the person can get to the jewellers and whether the jewellers has enough gold to satisfy the customer’s needs.

Transportation - although physical gold is the most universal of all the platforms, transporting it across borders does have some accompanying issues. If you are carrying more than £10,000 worth of gold over the border a declaration must be made at customs.
Hard to access - There are many steps and costs involved in the purchase of the shares and there is still is a stigma that in order to invest in an ETF individuals would need to be financially savvy or need to seek out the help of a financial advisor

Due to regulations and competitive foreign exchange costs, outside the US and EU, ETF’s are not as commonly traded, thus finding a broker is far harder.
This route to accessing the tangable assets is by far the hardest. The asset has not been created for the average person to be able to trade daily with ease. The Co-founder of Digix Global has said that this asset is marketed towards those who are already Crypto Currency savvy.

There is a massive amount of information a person would need to understand first (the tokenisation of physical assets) before even understanding the economics of the asset.

This is also the least intuitive option. There are many steps and different parties (e.g. acquiring wallet, and then the etheruem to buy DGX) that people need to go through even before gaining access to the asset.

DGX token have no limitations in terms of geography. They can be traded without hassle.
Very easy access - All the customer needs is a smart phone.

To become a customer of GlintPay you must reside in the UK. However, you can use its services anywhere that accepts MasterCard.
Democracy Part II -
(How effectively can I sell the tangible asset/ granularity)
In smaller quantities, physical gold is incredibly easy to sell. All jewelry shops and pawn brokers will buy physical gold regardless of quality or condition.

However, in larger quantities retail shops will have difficulties either having the liquid assets needed to buy the gold, meaning that the customer may have to to visit several shops to sell off their whole supply. Shops in larger quantities will also have regulatory issues as they will need papers to prove provenance of the gold to assure it has not been stolen or is being used to launder money.

Granularity can also be an issue. It is very uncommon for customers to be able to break down their gold into smaller pieces. To do so would incur a cost. Thus, the customer would have to sell the whole piece of gold if they choose to sell.
ETF’ are the most easily sold assets out of tangible assets compared. This is due to the fact that there is no need for transport of the asset, nor is there a cap on how much an individual can sell. All a customer need do is place an “ask” for their shares on their investment brokerage app.

There is also no issues with demand. ETF’s in general are highly traded assets and customer will not have an issue selling them.

Due to the fact that you are not selling the physical assets but solely a share of the ETF that is underwritten by gold, granularity is not an issue. The shares are divided to a relatively low price (currently at $11.87). Thus, customer can choose how many shares they want to sell.

DGX coins can be bought and sold on all major cryptocurrency marketplaces. Since launch only 571 tokens have been purchased whereas 88,100 tokens have been minted. Thus, due to their low demand. Customer should be aware that it would be hard to sell the token as quickly as their ETF and physical counter parts, especially in larger quantities. However, if the holder of the token wishes they can travel to Singapore and transfer their tokens for the physical assets.

Each DGX token is the equivalent of 1g of gold and token are divisible to 0.001g. The granularity of the tokens should not be a concern to the customer.

DGX token have no limitations in terms of geography. They can be traded anywhere without any geographical hassle.
Glint has the highest level of granularity out of the platforms compared here. Glint offers their customers the ability to granulate their gold to 0.0001g. This level of granularity gives their customer’s more utility when they are choosing what to do with their gold.

No option to actually sell your gold - Glint only allows you to convert your fiat currency into gold, then you would use the converted funds as a form of currency.

However due to the fact that Glint utilises Mastercard’s services, it means that it is not inconceivable that they would allow payments to be made to at least other MasterCard customers.
Points of Failure Points of Failure This risk is high, yet at the same time understandably limited. There are only two parties involved, the retailer and the customer. This means that the retailer can easily con the customer, however many retailers will run their business off of their reputation, thus the understanding is that retailers do not want to con their customer, lest their reputation be at risk. Another of the main attractions of ETF’s is that there are many regulated and audited parties involved in the whole process.

Not only is the ETF itself audited and regulated by several government and independent parties, so too are the brokerage firms which the customer chooses. This means that there is a low level of failure in the multiple parties involved when choosing to invest in an ETF.

One point of failure however, is the fact the value of the ETF can and has diverted from the price of gold.
Like their ETF counterpart there are many parties involved in the process of acquiring tokens, however unlike ETF’s, these parties either have little regulation or none at all. This opens the system to collusion.

However, Digix tries to remedy this situation by firstly having quarterly audits by Bureau Veritas (only one auditor is still an issue) and many of the other parties involved have other customers as well and thus reputations to protect (multiparty trust system)

However, the abundant lack of government regulation and trust needed to be put into the system as a whole is concerning.


Deceiving their customers? - Due to the fact that Glint utilises MasterCard’s “External Pre-Authorization” API. There is an argument that the company is deceiving their customers into thinking that they are actually using gold rather than the local currency which is actually being traded.

Impossible to tell whether or not the gold which Glint stores in Switzerland actually matches what customers are shown on their app 100% of the time.

There is currently no way for customers to claim their physical gold. Although Glint claims that if they were to become insolvent the gold stored is 100% their customer and that their gold would be transferred to them, they have in no way showed how this would become possible.
Quantifying risk over time and proposed longevity The risk is very low. Holding onto physical gold has been a low risk investment for over 5000 years. Evident in the fact that banks like to invest in their gold supply as economic conditions worsen. Dubbing it the crisis commodity.

There is no evidence that in the future this form of buying gold will become obsolete
The first ETF was created in 1990 and within 20 years, U.S ETF’s hit $1 trillion in assets. They have changed the landscape of investing by offering the advantages of pooled investing and trading flexibility.

The iShare 240 fund has been trading since 21/01/05. This is significant as we have seen that it has been highly traded even through the crash of 2008 (in fact the fund reliably replicated the price of gold after the throughout and after the crash)
The technology (Blockchain) which Digix is built off of was invented in 2008, and the company Digix itself has only been operating since 2014. This is an incredibly young piece of technology and the company operating it is even younger.

The DGX token has also only been trading since the start of 2018. Since trading began, engagement with the token has been staggeringly low on both the crypto market places and customers buying straight from the Digix marketplace.

Since launch there have been 88,100 tokens minted (the equivalent of 6.7 bullion bars), yet only 572 tokens (563 grams of gold) have been purchased.

Digix and its DGX tokens are reliant on both the active trade of the token itself but also customers placing their faith in crypto currencies, and after the volatility of 2018 in this regard, it is easy to assume that people’s faith in the system is very low.
Glint was founded in 2015, highlighting the fact that it is a very young company that still needs to prove itself. They have released no data on how many customers they have, active daily users or the amount of gold that they store. It would be presumptuous to say now especially in their infancy as a company, to not put much faith in their longevity, however it is clear that that certain factors need to be addressed before more faith can be placed in them.

 

Appendix

The appendix highlights any other key bits of information that an investor would want to know, however, they are not part of the main comparison as they can not be intrinsically compared. This includes the process which one would need to go through to acquire the tangible asset, as even though ease of access is touched upon in the main comparison table, here the actual process is explained step by step. The Appendix also includes the objective of each platform. Due to the fact that each platform’s objective is not to buy and sell physical gold, the aspirations of each platform highlights the direction the platform is taking, giving consumers further information to base their judgment in the viability of each the platforms.

 

 Retail Gold ETF'sBlockchain TokensE-money debit card
Process of Procurement Customer goes to a retail jeweller and buys physical gold by weight or in the form of jewellery. There is no central system to buy and directly hold onto ETF’s.

If an individual is thinking of investing in an ETF, they must first choose an online brokerage firm. Examples of this include Fidelity and Barclays.

After the account has been verified by providing the necessary documentation, customers need to search for “IAU 240 iShares”

After finding the fund customer can directly invest in the fund.
Digix is a company that tokenises gold into a digital currency. This currency is the DGX token.

To acquire DGX token an individual must first register an account with Digix and download a desktop portal. They require that the account be protected with 2 factor authentication (can be done with G-suit)

You must then acquire a Digital wallet that can support ethereum, which you will then link to you Digix account whilst also verifying your own identity.

Finally, you will then be able to buy, store and sell DGX tokens. These tokens are minted so that each token is representative of 1g of gold. They are also divisible to 0.001g.

It should be noted that to buy DGX, you cannot pay with popular currencies (USD, GDP, EUR), you have to pay in Ethereum, a popular cryptocurrency.
Customers need to download the app on their phones, fill out the information they require within the app, then a card will be sent to your home address. Once the card arrives you will be able to activate your account and buy Gold/Fiat currencies by bank transfer from your main bank account.
What is the company trying to achieve Retail stores that deal in gold will be seeking to achieve the most amount of profit through the buying and selling of gold The IShares Gold Trust seeks to reflect generally the performance of the price of gold. They do this by storing gold in a vault and issuing shares of its value.

This means that there will be times that the price of the ETF will deviate from the value of the gold that is underwriting it.

This deviation can mean that the ETF can be worth more or less than the gold that underwrites it, and its value is determined by the demand and supply of the ETF’s share at that moment in time.
2018 saw some of the most drastic volatility in the prices of cryptocurrencies

Out of this the idea of stable coins arose.

By backing a cryptocurrency with something as stable as gold people can have the benefits of crypto (transactional utility) whilst also hedging against the volatility of them

Digix Global aims to be the de facto asset tokenisation platform on the etheruem blockchain
Glint is not trying to become a gold trading platform. Glint is trying to offer their customers a currency that is gold backed to provide more stability and safety against inflation then what a Fiat currency could provide.