London’s $900 billion gold market could be set up for a “transformative” shakeup as the World Gold Council (WGC) is trying to digitalize metals. On Wednesday, WGC, the gold industry’s leading trade institution, launched proposals to roll out a pooled gold interest (PGI) token, backed by a physical gold bar held in London. According to WGC’s global head Mike Oswin, the tradeable PGI gives market participants enforceable ownership of arched gold, allowing traders to purchase 400 ounces of bar fractions for the first time. “This is a way to get into the market and hold on a digital representation of gold with complete confidence that it’s there,” he said. “It can be used simply for investments. It can be used for collateral. We think this will increase market participation due to new use cases that are open,” he told CNBC in a call Wednesday. The gold market has already seen a surge in demand this year as market volatility, geopolitical tensions and macroeconomic unrest send highs. Oswin told CNBC that, in the midst of growing demand, WGC would like to create a “third pillar” in addition to two ways to trade gold. Currently, gold transactions are resolved either as allocated gold or receivables. Previous settlements include direct ownership of a particular gold bar or coin. Unallocated gold, the world’s most widely traded gold gold, gives investors a certain amount of gold claim, rather than owning a particular bar. In this case, investors are exposed to credit risks associated with the institutions holding the money. If the institution goes bankrupt, there is no guarantee that the investor’s claim for money will be satisfied. “The key objective of this Phase 1 initiative is to give money mobility that needs to be pledged as financial collateral,” Oswin said. Although allotted gold is accepted in many markets as a form of financial security, Oswin describes it as “never used” due to the logistical difficulties involved in the transfer of physical bars between vaults, bonds or cash are usually preferred. “We want to place gold as financial assets along with these types of collateral,” Oswin told CNBC. “So pledging money is as easy as pledging a digital native bond or a kind of cash.” The initial focus will be on the digitalization of gold for use as collateral, but PGI also have a range that makes the gold market more accessible in other ways, Oswin added. When asked whether PGI could one day be used to resolve futures contracts, he expressed his optimism. “In future conditions, is it a big step to say that if PGIs flow freely around the market as collateral exchanged between parties, then there are futures contracts that use this as an actual settlement mechanism?” he said. “(It’s not flagged as our core purpose) but potentially in the future, it could certainly be seen as one of the opportunities.” According to WGC data, the Roco London Gold Market’s reference to gold bullion physically held in the UK’s capital vaults amounted to 8,776 tons. The London market averages 20 million ounces in daily trade, but the trade agency’s outlook for digital gold is even further ahead, according to the WGC. “At this point, this is focused on the UK,” Oswin said in a call Wednesday. “(But) of course, it travels – it’s ambition. And we’re looking at other jurisdictions and how this works in the US and elsewhere.” In a white paper released this week, WGC lays out a digital gold vision statement, describing its proposal as “a unique opportunity to reconstruct the current landscape.” However, the appeal of physical assets is that Russ Mold, investment director at AJ Bell, argued that responses to digital forms of gold could potentially receive lukewarm or negative reactions from market participants. “The WGC may feel this is an important development, as it is itself and cryptocurrency and stable are trying to maintain the precious metals of the world that are currently favorable,” he explained in an email. “(But) the real gold bug may not bother you, you may not see the point, or you may even be wary.” Mold said the appeal of metallic Gold Bulls is that it remains a physical asset and that supply has slowly increased in the world where “money supplies can launch rockets when you press a button.” “They want to avoid financial complexity, opacity and leverage. The awful trio tend to have a confluence that tends to be at the root of events that encourage both volatility and confidence,” he told CNBC. “These are like events that gold bugs are seeking protection.”
