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Op-Ed: Imagine if Gold Exchanges Were Treated Like Bitcoin Exchanges

Payments - Op-Ed: Imagine if Gold Exchanges Were Treated Like Bitcoin Exchanges

Traditionally, gold has been the most trusted form of currency, globally. Up until the 1970’s, most paper currencies were backed in some shape or form by the barbaric relic. Due to the monetary folly of negative interest rates, western global savers are rediscovering the similar properties shared by money and the shiny metal.

In Germany, retail banks recently began charging their depositors to hold their money. This prompted an insecure flight to a cash under the mattress mentality. German savers began buying safes in record numbers. In addition, various gold exchange-traded products became even more popular.

Xetra-Gold is one of the most popular Exchange Traded Commodities (ETC). The key selling point is that clients can request delivery of the physical gold that their paper derivative represents at any time. Due to the financial chicanery of the past 7 years, investors rightfully do not completely trust that they own gold unless they can physically touch it.

Recently GodModeTrader published a troubling report about an Xetra-Gold investor whose request for delivery was denied. Xetra-Gold is not some fly-by-night operation. Their fund has over 1.5 billion Euros in assets and is sponsored by Deutsche Bank.

After this report gained traction on various online financial media outlets such as Zerohedge, Deutsche Borse and Deutsche Bank released a statement. The statement contained no substance and did not answer the crucial question: Why the client could not receive delivery of his physical gold?

Due to social and governmental conditioning, most people place immense trust in the banking system. Events such as these, while widely reported on fringe financial media websites, are rarely covered by mainstream news outlets such as The Financial Times, The Wall Street Journal, or Bloomberg. However, the Bitcoin community is inherently skeptical about any organization that cannot deliver the physical asset on demand.

What if Xetra-Gold had been a Bitcoin exchange? Every time a Bitcoin exchange is hacked, it makes the front page of the aforementioned publications. The most recent Bitfinex hack is a current example.

But if exchange-traded products with billions of Euros under management cannot make good on their fiduciary responsibilities, why is there not a bank run on these organizations? Why doesn’t every holder of Xetra-Gold paper request delivery immediately and determine if the gold actually exists where it should?

While gold has been the best store of wealth over many millennia, certain properties of the metal lead to third parties holding it on our behalf. Gold is heavy and voluminous; transporting and storing a large amount of gold is expensive. Gold can be forged; there are many instances where gold bars and coins have been found to include various amounts of tungsten or other cheaper metals. On-demand liquidity for gold can be tricky; buying and selling small quantities of physical gold is expensive due to the large bid / ask spreads of retail gold dealers.

Retail savers want a scarce, non-governmentally controlled asset that can be bought or sold easily, and they can fully control at all times. The Xetra-Gold example illustrates the pitfalls of entrusting wealth to paper derivatives.

Bitcoin is scarce and not backed or controlled by any government. The genuineness of every bitcoin can be independently verified by anyone with an internet connection due to the public blockchain. Bitcoin can be bought or sold in tiny quantities 24 hours a day, with spreads tighter than the physical gold market. Most importantly, bitcoin can be stored for zero cost on free-to-download apps on any smartphone.

Bitcoin is volatile, but so is gold. In the spring of 2013, gold dropped 30 percent in a few hours. It is not uncommon to see 5 percent pumps or dumps in the gold markets in 5-minute candles. The volatility of bitcoin is not an excuse to disregard it as a means of wealth preservation.

Retail savers escaping the insanity of negative interest rates should consider investing in bitcoin over gold. At least with bitcoin, you are in full control of your wealth at all times.

This op-ed is a guest post by Arthur Hayes. The views expressed are his own and do not necessarily represent those of Bitcoin Magazine.