Gold Market Buying Frenzy

The gold market is currently experiencing a surge, with prices soaring over 80% in the past year, making it one of the top-performing assets.

However, Bjorn Schmidtke, the CEO of Tether gold asset manager Aurelion, warns that many investors are overlooking potential risks lurking beneath the surface.

Schmidtke describes “paper gold,” or shares in gold exchange-traded funds, as the simplest way to invest in gold. Investors often believe they’re purchasing actual gold bars, but what they really acquire is “a little piece of paper that says ‘I owe you money.’” He pointed out in an interview that most people agree this paper holds some value.

This method spares investors the hassle of owning and storing physical gold, but therein lies a significant problem.

Hidden Risks

Consider this: investors buying “paper gold” think they own actual gold bars. Although redeemable for cash, they have no clear knowledge of which specific gold bars correspond to their shares in the ETF. There’s no solid proof of ownership aside from buying these shares.

Schmidtke estimates a staggering 98% of gold exposure is unallocated to tangible assets. Despite holding billions in “paper,” many investors remain unsure of their actual gold bar ownership.

For now, the system functions well enough, having operated for decades without much pushback from investors. But what happens if there’s a crisis, like a sharp decline in fiat currency value, leading people to want the physical gold they believed they owned when they opted for “paper gold”?

If that “earthquake” moment arrives and investors demand actual gold bars, the question arises: how can they prove ownership, and how will those gold bars be delivered? Schmidtke emphasizes that “it’s impossible to move billions of dollars worth of physical gold in a day.” Without ownership proof for those gold bars, a logistical nightmare could ensue, risking a market collapse as panic drives investors to redeem their assets. In such scenarios, physical gold prices may rise while paper gold lags, potentially leaving derivatives holders high and dry.

“The risk is real, and we’ve already seen signs in the silver market,” he notes, referencing past instances where spot premiums surged but prices remained stable. He suggests that a similar pattern could emerge in the gold market.

This is where on-chain gold solutions come into play, according to Schmidtke.

Ensuring Ownership

Imagine a real estate scenario where a developer offers unique payment options for housing units. Purchase ten shares in a project, and investors receive an IOU for ten housing units. But without signing any ownership deeds, there’s no searchable record of which units are theirs, leading to potential chaos.

It seems straightforward, but since ownership is not documented, the developer could, in theory, mix up units during delivery, causing substantial delays and confusion about who gets what.

Schmidtke argues that on-chain gold ownership addresses these complications by removing delivery bottlenecks associated with physical gold.

With tokenized gold like XAUT, ownership is decoupled from the logistics of moving the actual metal. Each XAUT token directly corresponds to a specific gold bar held in a Swiss vault, allowing for the “title deed” to transfer globally in seconds using blockchain technology.

This mirrors the real estate issue. If investors initially sign deeds instead of merely buying shares, they’ll know exactly which properties they receive, allowing developers to sort and deliver efficiently.

Using on-chain gold tokens ensures that these allocations are both searchable and redeemable. While physical delivery may still take time, at least investors can be confident that their gold ownership, along with title deeds, is secure and traceable.

Long-Term Strategy

This approach informs Aurelion’s strategic planning.

The company has thoroughly examined its treasury holdings, investing in blockchain-based tokens backed by physical gold stored in Swiss vaults.

Schmidtke maintains that XAUT combines the advantages of digital transactions and physical assets seamlessly. Unlike paper gold, these tokens represent actual allocated bars and are fully redeemable. “How you own the gold is as vital as whether you own it,” he stressed.

He believes XAUT is still in its early stages and has significant growth potential. When asked if Aurelion might sell gold, Schmidtke indicated it would only consider this if the market conditions led to a “significant and sustained discount” on its holdings. For now, the focus is on long-term growth.

“This is not about quick gains,” he concluded. “We need to build a robust Tether Gold portfolio for investors to engage with over time.” Aurelion also plans to secure further capital in the upcoming year to expand its gold asset collection.

According to recent data, the company currently owns 33,318 XAUT tokens valued at around $153 million.