(Kitco News) - Like all financial assets, it is only a matter of time before the gold market embraces tokenization en mass; however, according to one market analyst, trust remains the biggest hurdle for the precious metal.
In a recent interview with Kitco News, Martin Leinweber, digital asset product strategist at MarketVector, said that tokenizing gold and evolving blockchain technology will unlock new demand for the gold market. Leinweber explained that a big advantage of digital gold is fractionalization. Consumers can own a small amount of gold on a digital exchange, a more affordable option than buying physical bullion.
However, Leinweber added that the gold market has a long way to go to catch up to other digital assets. "Digital gold is still a very niche market. But that is also a reflection of the overall landscape. Globally, hedge funds own less than 5% of gold in their portfolios."
The biggest challenge the gold market faces as it progresses through the digital landscape is trust, said Leinweber. He noted more investors would be inclined to embrace digital gold products if there were more regulations and standard auditing procedures. He explained that investors need to be confident that all digital tokens are backed by the physical metal that is securely stored.
The good news for investors is that the gold market is making significant progress in overcoming these challenges. In September, the World Gold Council launched Gold 247, an initiative helping to build the infrastructure for a precious metal digital marketplace. Using blockchain technology, the WGC, in partnership with the London Bullion Market Association, is building a digital ledger to track gold bars through the supply chain, ensuring market integrity.
"The World Gold Council's initiative to build a digital ledger will go a long way to create an essential trust in the sector," said Leinweber. "Having a third-party organization involved in the market should create some important transparency for the market."
Leinweber said that although gold's tokenization is still in the early stages, it is inevitable that it becomes a digital asset.
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He explained that the growing global inflation threat is forcing consumers to search for value in alternative currencies. Inflation is being acutely felt in Europe as high food and energy prices drove the European Union's Consumer Price Index to a record high of 10.7% in October.
"We will continue to see demand for digital assets like gold as consumers continue to worry about the health of their currencies," he said. "There will be global inclusion in the gold market as it becomes more tokenized. You won't need a bank account. People will be able to hold real wealth with just their cellphones."
Although gold's potential as a digital asset is unlimited at this early stage, Leinweber said that he doesn't expect it to become more popular than Bitcoin, the world's leading digital currency. However, he added that there is a place for consumers to hold both gold and bitcoin in a digital portfolio.
"Investors can build their wealth with Bitcoin and they can protect it with gold because it is less volatile. Both assets make sense," he said.
MarketVector is a wholly-owned, independent subsidiary of Van Eck Associates Corporation. It is a European Benchmark Administrator that develops, monitors and markets a selection of pure-play, investable benchmark indexes with assets under management of roughly $23 billion.
