Gold price disconnects outdated legacy logistics and delivery eased with Digital Asset Tokens

Gold in London 1675 offered, Gold in New York 1775 bid. 

Brilliant what could be better – even I could make money as a trader, or so you’d think. 

The Dollar value of daily gold traded is small in comparison to the sentiment, its a staple component of our financial News, for our core economic data; how we’re doing, how we are going to be, what’s going to happen, what has happened, buy a House, go on holiday,  get married, have kids – all round indicators of everything. 

At this point in time it looks broken, messed up, and to a certain extent it is. I’ve had a look under the bonnet to try to understand what’s going on, here are my high-level thoughts and what I think the solution should and could be. 

In a globalised market place the price disconnect is unsettling. Bringing back memories of expressions like; Sub-prime, over leverage etc. A public struggling with sensationalised data reporting needs the essentials clear and understandable. 

The price you see reported in the news for gold is based on one troy ounce of gold held in London. That ounce is in a bar, one of hundreds of thousands held in an unspecified vault in London. The bar is assumed to be 400 ounces but can actually range between 350 to 430 ounces in reality, this is how physical London Good Delivery gold is held.

The Gold is held in high security vaults and overseen, administered and capitalised by some impressive banks. The banks provide a service to the bullion producers and refiners who need a reliable market to deliver, hedge and sell their production of physical gold. On the other side of the  trade are investors, financiers and of course the global jewellery industry.  

The Chicago Mercantile exchange, or CME as it is known, runs a speculator futures market in gold, highly liquid, where open interest often dwarfs available inventory. Few positions actually go to physical delivery, most are closed financially settled or rolled forward before settlement date. An exchange a lot is based on a 100-ounce gold bar, but pricing remains in USD per Troy ounce, as in London.

There is arbitrage between each of the markets, basically, London spot delivery versus CME futures price.

At different points in time, one market may drive the other, speculator against physical in the broadest terms, but both markets are largely inter-dependent for price discovery. 

So, what has happened to cause the price disconnect between London and New York? Covid 19 has affected the production and available supply of 100-ounce bars to CME vaults in New York. The market started to price in a shortage of bar supply, thus pushing up the price of the near dated futures. Where a normal price differential of circa $1.5 this Is the norm it pushed out to $50 then $70 and briefly almost $100.

The question would be why not satisfy the bar shortfall in NY and ship gold from London 400-ounce bar reserves on the plane to New York, it’s all gold right? But, like a bizarre pound shop that only accepts pounds, not fivers or teners, the CME only accepts 100-ounce bars! This is an issue I assure you that is costing some players big. Good as gold, unless the bars the wrong size.

How can such a thing happen to this market, what can be done to bring stability and return a comprehendible price. 

To my mind, a strong contender for a solution to this and other delivery-based contracts, WTI futures as another example in the news, are Digital asset tokens. They are already gaining some street cred; two Dutch banks have agreed to the use for proof of warehoused metals holdings. High yield Gold mine finance is available via digital token, property investment via digital token, it’s a growing list. 

It’s all in the packaging, effectively the digital token can be proof of structure or product, carrying all the relevant performance, KYC/AML, legal and financial data for the product, immutable, incorruptible. 

For gold, both London and New York markets are priced in USD per ounce for the same fineness. As discussed earlier, you can’t deliver the bar to NY to offset obligations in NY, the bar is too big. 

New technology should be solving this legacy issue that comes to light in times of stress, just when the markets need stability and sense. 

A digital token for an ounce of gold held in a vault in London, New York or any other trusted vault location should suffice. There’s no logic to shipping gold, oil or any other commodity to a location just to prove it exists. 

Rent, lease, buy, invest, hold the tokens as you do the underlying asset, gold. The system guarantees no forgery or double spend with the tokens exchangeable for metal or currency, and instantly transferred securely and rapidly. 

The technology is proven, secure, and can be enhanced with addition supply chain proof of provenance within the same package. 

Mike Greenacre – Co founder of Digital RFQ. Initially an exploration geophysicist, Mike has traded and brokered precious metals for over 20 years and provides Fintech solutions to the Bullion market including the LBMAi global price transparency project.