Could gold ETF providers develop their product to offer bullion-backed currency?
Gold ETFs and ETCs have been perhaps the biggest success story in the exchange-traded products market’s near 20-year history.
These bullion trackers have greatly democratised access to precious metals. They’ve offered investors exposure to gold and silver more efficiently and at a much lower cost than the traditional route of buying coins or bars. Price competition amongst issuers continues to push costs down, dealing spreads are tiny, and competing products like Bullionvault are also there to keep ETP providers on their toes.
In fact, exchange-traded precious metals have offered one of the few means for the average investor to defend his or her hard-earned savings from the currency depredations wrought by Greenspan, Bernanke, King and their fellow central bankers over the last decade. I’m one who’s been able to make use of them for this purpose – I hold both gold and silver ETCs in my personal pension plan.
But while gold and silver have performed two of the three commonly held functions of money very well – by acting as a store of value and a unit of account (try looking at the performance of equity indices in gold terms and you might reconsider your view of the strength of the share markets) – they are still hardly used, in “developed” markets at least, in their third, and historically their primary function: as a medium of exchange.
In other words, you can easily buy gold and silver in ETC/ETF format to hold in your brokerage account or savings plan, but you can’t (yet) easily do your weekly shopping in gold or receive your salary in ounces of silver.
Several variants of bullion-backed electronic currency have been launched over the last decade in an attempt to fulfil this role, as a means of everyday payment, and thereby to compete with national currencies. None has yet grown to significant size, while some have been plagued by allegations of fraud. In one well-publicised case, a digital gold currency (eGold) attracted a lawsuit from the US Department of Justice that is still being contested by the currency’s operators.
I don’t want to venture into the realms of conspiracy theory and I have no idea what went on at eGold, but I think it is fair to point out that a successful and secure electronic gold money medium would pose a significant threat to the traditional role of central banks, to law enforcement agencies and, perhaps more importantly, to governments’ ability to tax.
On the other hand, it would be incorrect to represent central bankers as die-hard opponents of any challengers to their monopoly role as issuers of legal tender. It was, after all, Mervyn King of the Bank of England who argued in a 1999 speech that “there is no reason, in principle, why final settlements could not be carried out by the private sector without the need for clearing through the central bank.”
Incidentally, King posed a rhetorical question in the same talk.
“Could it be that 1999 is the apogee of the power of central banks? I believe that if central banks are to retain their central position in economic policy making, they must face up to the intellectual and technological challenges that lie ahead. Unless they do so, popularity will turn to disillusion.”
It looks as though the gold price change since 1999 – which was, ironically, the year in which Gordon Brown dumped two thirds of the UK’s reserves at rock-bottom prices – has answered King’s question for him. It’s up fivefold.
But the problem with existing digital gold currencies is that they’re rather expensive. Perhaps the most successful of them, GoldMoney, charges a 2.74% “buy fee” for purchases of gold of under £6000 in value, and 4.24% for an equivalent amount of silver. If you were considering, for example, asking your employer to pay your salary in GoldMoney, one of you would have to pay that fee. Payments using GoldMoney cost less than an average bank transfer, but as the system is currently set up few will use it for everyday transactions.
If you had indeed had your salary paid in GoldMoney over the last few years, you’d have covered these fees handsomely in bullion price appreciation, of course, but you’d probably have done better by taking your salary in pounds or dollars and buying bullion ETFs/ ETCs.
So there still seems to be a small but undoubtedly bridgeable gap between the use of bullion (in the form of ETFs, ETCs and other structures) as a store of value and between its much broader (and potentially revolutionary) application as a means of everyday payment. If someone could get critical mass into a digital gold-backed currency, the world’s central banks would have serious competition, and helicopter Ben might find his rotor blades clipped a bit. Isn’t there a golden opportunity for the firms that have pioneered exchange-traded bullion to expand their offering into providing a currency?