In recent years, two digital tokens backed by physical gold have emerged. Pax Gold (PAXG) was the first to launch in 2019, followed by Tether Gold (XAUt) in 2020. We’ll discuss everything you need to know about investing in digital gold, drawing on PAXG as an example.
What’s a gold-backed token?
PAXG Gold is a digital token, whereby each token represents ownership of an ounce of London Good Delivery gold. The London Good Delivery specification, issued by the London Bullion Market Association (LBMA), refers to a set of rules standardizing the physical characteristics of gold and silver used in the wholesale London bullion market.
When you buy a PAXG token in full, or even in part, the Ethereum blockchain will record your ownership of physical gold stored in LBMA vaults. In fact, you can even enter your Ethereum wallet address on PAXG’s website to look-up your allocated gold bar’s serial number.
How safe is digital gold?
The physical gold that backs PAX Gold is held in LBMA vaults in London. Every month, Paxos publishes an attestation report issued by a third-party accounting firm into its gold reserves. The report states the total amount of gold held in custody, as well as the total circulating supply of PAX Gold. Paxos maintains a 1:1 peg between gold held in custody and tokens in circulation. In other words, there should be an ounce of gold for every PAXG token.
How expensive is it?
The costs associated with buying PAXG will vary based on your purchase method.
- If you buy or sell PAXG from your Paxos account, Paxos charges fees to process both the creation and destruction of PAXG tokens to and from USD, gold bars or unallocated gold. Unallocated gold is gold that hasn’t yet been assigned an owner.
- However, these fees don’t apply if you buy or sell PAXG through a crypto exchange, like Binance. Instead, you’ll pay the exchange’s trading fees, whose level usually depends on your monthly trading volume. Additional fees will apply if you trade on margin.
- On-chain transaction fees apply whenever PAGX tokens are sent from one wallet to another over the Ethereum network. This is in addition to Ethereum gas fees. Paxos charges 0.02% of the amount of PAXG sent. For example, if you were to send 10 PAXG, the recipient would receive 9.998 PAXG, before Ethereum gas fees.
No additional storage or custody fees apply, at this moment in time.
Alternatives to digital gold
For centuries, bullion bars have served as a popular store of wealth for banks, companies, and individuals. The Royal Mint offers a range of gold, silver, and platinum bars in different sizes and designs. This includes their iconic Britannia minted bars as well as cast bars, which are favored by those making higher value investments. Each gold bullion bar from the Royal Mint features a unique serial number for enhanced security.
There are more ways than one to invest in gold, from buying physical gold, to investing in ETFs, CFDs and even digital tokens. We’ll touch on these briefly before contrasting their pros and cons with that of digital gold.
- Gold CFDs: are perhaps the purest way to speculate on the price of gold, without owning it. A CFD is a contract whereby two parties agree to exchange the difference in price of an underlying asset between the time of purchase, and time of resale. Trading fees apply whenever you buy and sell gold CFDs, and additional fees may apply if you use leverage. To make sure you get low fees, take time to compare brokers through a comparison service like TrustedBrokers.com.
- Gold ETFs: allow you to buy and sell shares in exchange-listed investment funds that own physical bullion. Gold ETFs, listed on the NYSE Arca exchange, are highly liquid instruments. However, unlike gold-backed digital tokens, they provide no direct proof of ownership. Instead, you’ll be exposed to counterparty risk. You’ll also incur annual management fees between 0.12% and 0.40% of the fund’s asset value.
- Physical gold: in the form of jewelry, coins and bars is and remains the traditional way in which most buy-and-hold investors get exposure to the precious metal. However, ownership of physical gold could expose you to personal harm and theft. It can also be costly if you decide to store your gold in a safe deposit box with a bank or specialized provider.
Coins and Bars vs. Digital Gold, the Royal Mint Pov.
Bullion coins, highly collectible and easy to trade, are often more affordable than bars. They are available in various sizes, starting from tiny 10th ounce coins up to spectacular 10 ounce coins. This affordability makes them attractive to investors with different budgets, as well as those who prefer to sell small amounts of their precious metals at a time. The Royal Mint’s bullion coins, such as the sovereign and the Britannia, are exempt from capital gains tax for UK residents.
With the Royal Mint’s bullion bars and coins, investors have the option to take delivery and arrange their own security measures. Alternatively, they can choose to store their bullion in the vault, the Royal Mint’s dedicated on-site precious metals storage facility.
An increasingly popular alternative to physical coins and bars is digital gold. This allows investors to purchase fractional amounts of the 400-ounce bullion bars held at the Royal Mint’s secure site. Starting from as little as £25, investors can invest as much or as little as they want with a simple click of a button, without the need to worry about storage and insurance. Digi gold makes investing in precious metals easier than ever before.
In a nutshell.
The emergence of gold-backed digital tokens like PAX Gold has provided investors with a new avenue to invest in gold, and a viable alternative to investing in physical gold. For the first time, these tokens pair direct ownership of physical gold with the security and liquidity that come with owning digital assets.