The Role of Gold in a Digital World
Gold is money.
Any paper currency in your wallet, on the other hand, is fiat money. Backed by nothing other than faith in government.
One of the arguments in using gold as the basis for a monetary system is that it’s stable.
A second — and very important — argument is that linking a currency to the precious metal prevents governments from debasing currencies.
Former US President Richard Nixon ended the Bretton Woods agreement by breaking the US dollar link to gold. From that moment, all currencies around the world became fiat. Backed by nothing other than the belief that governments would support their respective currencies and keep them stable.
In the four decades since the gold standard was dropped, gold has had an inverse relationship with the US dollar. If the greenback rises, the gold price tends to fall. When the price of gold rallies, the US dollar becomes weaker.
The same can be said about some cryptocurrencies today. In spite of so many initial coin offerings (ICOs) filtering through the financial system, the price rises in cryptos tell us that many people are losing faith in fiat money.
The flocking to digital money is down to two things: a deep mistrust of the financial system, and investors looking to get rich quick.
But could there ever be a ‘crypto standard’ in the vein of the gold standard?
Up to now, none of the 1,384 cryptocurrencies were linked to gold. But that has changed, thanks to Singapore-based KaratBank.
KaratBank prefers to put its faith in gold rather than fiat dollars. So in 2011 it set out to create a gold-based currency. Thanks to advances in printing technology, they worked out to embed 24-karat gold in polymer banknotes.
KaratBank Coins — notes backed by gold
Each of the four KaratBank Coin notes has either 0.1, 0.2, 0.4 or 0.6 grams of pure 99.99% gold welded into the note. The gold is then secured by a transparent cover.
By embedding actual gold into the note, this innovation overcomes one of the biggest barriers to gold’s useability as money. Making the precious metal both portable and readily exchangeable.
Now, you couldn’t go to the local shops and buy some bread with it. It’s not legal tender.
But it has enabled KaratBank to launch a cryptocurrency linking it to the value of gold.
The ICO will have a total of 12 billion coins valued at 0.01 US cent, ideally getting the 12 billion tokens to equal the value of 0.1 grams of gold — working towards a 1:1 ratio.
However, to support the currency, KaratBank have said their coin can be cashed in at any time for polymer notes with a little gold. In other words, your digital stash could be swapped for gold.
Sounds neat, doesn’t it?
Now, let’s be clear: I’m not suggesting you rush out and buy into this ICO. When it comes to ICOs, let the fools rush in. You can sit out and wait to analyse the results.
Furthermore, the notes with gold in them are incredibly overpriced for the amount of gold you get. Take 1 gram of gold at US$43 (AU$54) based on today’s spot price. A KaratBank 0.1 gram note would cost you around AU$90. And that’s for one tenth of the amount of gold.
So buying any digital tokens from KaratBank and cashing them in for notes embedded with gold isn’t going to make you rich.
Either way, you should definitely keep an eye on how the market responds to KaratBank.
This is the first company since 1971 to try and link money to the value of gold. It’s an attempt to provide a stable base to a digital currency. Meaning the KaratBank Coin is unlikely to see the wild price swings Bitcoin and Ethereum have experienced.
The US dollar was once a stable currency. That was when it was linked to gold. Once the US dollar became a fiat currency, the volatility in gold increased. KaratBank is attempting to bring the monetary system back to its roots — only it’s using new cryptocurrency technology to do so.
Co-editor, The Daily Reckoning Australia