Blockchain May Become an Important Part of the Gold Market
There is a lot of talk about Bitcoin versus gold, but the blockchain technology that serves as the foundation for Bitcoin may become an important part of the gold market in the future.
Markets in commodities from crude oil to diamonds and even tomatoes are looking at using the digital ledger technology that underpins cryptocurrencies like Bitcoin — known to some as ‘digital gold’ — to track ownership. Tracing gold supply is key to preventing metal that funds armed conflict from entering world markets, identifying owners and maintaining security from mine to vault.”
What exactly is the blockchain?
In simplest terms, the blockchain is an extremely secure, digital record book where you can record information.
More technically speaking, the blockchain is a distributed database. Think of it as a ledger that is replicated and stored on thousands of different computers. The fact that it is distributed across multiple locations means it’s decentralized. The redundancy in the system makes it extremely secure. No one computer is necessary to make it work. That makes it nearly impossible to hack or shut down.
The secure, decentralized nature of the blockchain makes it perfect for recording transactions.
The LMBA oversees the world’s largest spot gold market. Its London Good Delivery List sets global standards for large gold and silver bars. The LMBA wants to modernize trade and increase transparency in the market. LMBA executive board director Sakhila Mirza explained how blockchain could help modernize the system.
Everything that ends up in an LBMA good-delivery refiner needs to be tracked in the supply chain, regardless of whether it ends up as a large bar in a London vault, a kilo bar shipped to the Far East, or a coin owned by a collector. A lot has been done already but it’s still very paper-based. We now want to formalize it through an efficient and possibly technologically based solution.”
Meanwhile, the World Gold Council is studying the creation of a global standard for gold kilobars so they can be deployed as collateral in futures markets. Blockchain technology could also be part of this effort.
According to Reuters, these 1-kilogram gold bars dominate Asian trade. But problems with transparency relating to their origin and the absence of global standards hinder their use on other exchanges. A physical gold trading source told Reuters that using blockchain to record and track kilobars would help allay fears in the marketplace.
The plan is to create a standard for kilobars that can be adopted around the world, delivered anywhere, possibly using blockchain to identify the bars, their origins. Rigid standards and blockchain would bring in people who are worried they could be getting conflict metal.”
According to Reuters, some clearinghouses allow bullion to be used as collateral on futures markets. The would be more willing to accept kilobars if they all met a set of internationally recognized criteria. Currently, anybody wanting to deliver kilobars in London must accept a deep discount on the value of their gold, or they have to have them melted and reformed into Good Delivery bars. Including kilobars on the Good Delivery List would be less costly and more efficient. The blockchain could facilitate the inclusion of kilobars.
Supporters say it would boost the market, particularly if the identification process used blockchain, scrapping paper documents for their digital equivalent and giving the buyer the assurance the gold had not been mined to finance a conflict. ‘You can add a lot of information with blockchain, where the gold was mined, where it was refined, serial numbers, who owned it previously. It could bring new demand to the market,’ a physical market source said.”
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