Gold has many purposes including a preserver of wealth, a portfolio diversifier, a reserve currency, and an industrial commodity. In this article, we'll review gold in the context of the first two purposes. Many investors keep a small allocation of gold in their portfolio as hedge as against monetary policy malfeasance. With central banks around the globe racing to zero interest rates and engaging in quantitative easing (QE), many investors are reevaluating their gold positions. Gold may appreciate in the setting of monetary policy fallout, yet it's often scathed by investors for not producing any income. Based on his interview responses, Warren Buffet is perhaps the most notable critic of gold,
“You could take all the gold that’s ever been mined, and it would fill a cube 67 feet in each direction. For what it’s worth at current gold prices, you could buy — not some — all of the farmland in the United States. Plus, you could buy 10 Exxon Mobils (XOM), plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which would you take? Which is going to produce more value?”
Unlike a business or a farm gold doesn't produce any cash flow for the investor. For this reason many luminary investors prefer buying businesses and limiting their exposure to precious metals. However, the macro picture has noticeably changed in the last few years. It's become abundantly clear the monetary policy of central banks isn't tamed as we once thought. Cracks are forming in areas like the repo market forcing the Fed to intervene with QE. This is forcing investors to take a defensive position in gold causing a rally in the spot price this year. **
Earn Interest on Your Gold
There are many ways to gain exposure to gold in the modern financial system. Stocks, ETF's, leveraged products, physical, futures, and many more. Today we'll focus on a new product made possible by blockchain technology. Paxos has managed to successfully digitize gold. Leveraging the benefits of the Ethereum blockchain, Paxos has created an ER-20 token backed 1:1 to an ounce of gold referred to as the PAXG token. This token entitles the holder to redeem the token for LBMA-accredited Good Delivery gold bullion bars. With low investment minimums anyone can own a fraction of gold that can be easily traded or moved around the world. Moreover, Paxos is a trust company and a custodian regulated by the NY State Department of Financial Services.They've recruited a nationally ranking auditor to ensure the supply of gold in the vault matches the supply of circulating PAXG tokens.
With the tokenization of gold, many finance based platforms are now able to offer new services. For instance, crypto.com and Nexo have both unveiled their plans to offer PAXG depositors interest on their tokens. In other words, investors can now earn interest on their gold holdings! Here's how it works. To illustrate we'll use crypto.com's app.
1. First purchase PAXG token. This can be done crypto.com, an exchange, or at paxos.com
2. After purchasing your PAXG, click Earn and select a term.
3. Once locked, you will receive interest every 7 days. Here is 1 btc locked up for 3 months earning 8% APY. Instead of BTC, PAXG depositors will be paid in the PAXG token.
Each platform will have its nuances and terms for earning interest. For example, Nexo doesn't require depositors to lock their tokens and offers a flat interest rate USD stable coins. Once Nexo begins accepting PAXG tokens you may want to explore their platform before making any commitments. The Paxos team has been hard at work to expand their partnership, so you can expect to see a proliferation in platforms supporting the PAXG token.
Get A Gold Based Loan
Aside from earning interest, platforms like Nexo also provide short to medium-term liquidity to PAXG depositors.Given golds relative low volatility, it's likely to have high loan to value (LTV) of 50% or more once Nexo officially begins supporting deposits. Translation, a PAXG deposit value at $10k USD will enable the depositor to take a 5k USD loan. This service is available for the physical metal through Banks and Jewelry shops but is often a cumbersome process with sizable fees. With Nexo, the process literally takes minutes and your immediately funded with a USD stable coin or a direct deposit to your bank account. The liquidity created in the process is non taxable and can be used an auto loan, traveling expense, or a means to diversify your portfolio. As long your LTV doesn't cross a predetermined threshold, you can keep your exposure to gold and raise additional liquidity. Many savvy investors already deploy this strategy to add diversity to their portfolios. For example, individuals will use their equities as collateral to get real estate loans. Through this method, they are able to retain their equity exposure and add real estate to their portfolio.
Another strategy includes buying more gold with your loan to leverage to your gold position. You can use the newly bought gold (PAXG) to lend out an earn interest to cover some of your loan fees. By doing so you would effectively increase your gold position by 50% and it would cost very little in loan fees to carry the trade. Also, as gold appreciates in price the LTV drops and enables depositors to take out a larger loan. The new funds could be used to further add to your gold position or used elsewhere.
Closing Thoughts
For the first time financial tools once only available to the wealthy are being delivered to retail investors. Rather than sitting idly by why not try out some of these new services. The best way to learn is by getting your hands a little dirty. I've personally leveraged the tools on these platforms to earn interest and get loans to diversify my investment portfolio. I've created a few tutorial videos using my actual account on both Nexo and crypto.com to dissolve some of the complexity. To broaden your understanding you can visit my youtube page or educate yourself with other online resources. We are arguably on the precipice of history's largest wealth transfer event. Make sure you arm yourself with the tools to optimize your gains.
