Traditional methods of investing in gold through derivatives and ETFs (often referred to as “paper gold” to distinguish them from physical gold) are facing a paradigm shift with the advent of cryptocurrency technology.
Various alternatives have been developed to invest in tokenized gold that is backed by physical reserves.
This modality is Allows investors to maintain indirect and fully allocated ownership of precious metals. The tokens are undermining the foundations of the fractional reserve system that has dominated the market for decades.
The rise of gold-backed stablecoins, led by companies like Tether and Paxos with their assets Tether Gold (XAUt) and Pax Gold (PAXG), is not only capitalizing on investor demand, but also exposing potential vulnerabilities in the traditional system.
Economist Ingo Fiedler says this imbalance could culminate in what he calls a “Minsky moment” for the global gold market.
A Minsky moment is a sudden, nonlinear collapse of a highly leveraged system that occurs after a long period of stability that has encouraged risk-taking. In the gold market, this risk is further exacerbated by the ongoing geopolitical realignment. Countries such as China, Russia and Turkiye are repatriating physical gold, reducing liquidity in paper systems. Due to this scarcity of physical metals, digital assets take their place due to their tangible support in the comparison of gold investment roles and tokens.
The fragility of “paper money”
paper gold system It is based on the principle that only a small number of holders require physical delivery of precious metals.. Within this framework, Fiedler points out, “customers do not own specific gold bars, but rather have unsecured claims against bullion banks.”
Banks operate with leverage ratios of 20x to 50x. Although efficient in times of calm, “this structure becomes fragile if long-term pressures consistently reduce the availability of physical gold,” Fiedler cautions. This is where the evolution from paper to tokens in gold investing provides a secure path for investors.
Tokenized gold, a digital asset that represents a specific bar, offers investors the ability to circumvent this system. An example of tethered XAUt is: Provides direct ownership of deliverable physical bullion stored in Switzerland outside of the segregation system LBMA (Major Market Regulatory Association) over the counter the amount of unallocated physical gold in London) and the COMEX (the precious metals futures arm of CME Group, where the majority of “paper” gold derivative contracts are traded).
According to a report by CriptoNoticias, the company recognized for issuing USDT, the stablecoin with the largest market capitalization, has established itself as a major non-central bank investor with 116 tons of precious metals.
“As more investors realize that tokenized gold is superior to other forms of gold exposure, not only will demand for paper gold plummet, but more and more collateral will abandon the paper gold system,” Fiedler said. This transition creates the conditions for a sudden non-linear collapse in the global gold market, or a “Minsky moment.”
Tokenized Gold: Ownership Allocation and Paper Rights in Gold Investing
For individual investors, The best protection against system collapse is to maintain fully allocated metal.. However, as traditional physical gold has high holding costs and is difficult to trade, paper gold has become preferred as it has lower storage fees and is easier to use as collateral. This demand has kept the system stable so far, analysts say.
Tokenized gold is presented as an alternative that combines the security of an allocated asset with the fungibility and liquidity of a digital asset. “Each XAUt token corresponds to a different physical bar stored in Switzerland,” he explains. Unlike futures and ETFs, which only offer a monetary claim without direct physical collateral, tokenized gold offers direct ownership and the possibility of physical redemption at any time.
In addition to security, tokenized gold solves the drawbacks of traditional assigned ownership. Allocated gold takes longer and costs more to transfer, buttokens can be transferred “at any time, of any size, in seconds for a few dollars per transaction.”
Given these advantages, we expect the adoption of this digital asset to grow and put significant pressure on the paper gold system over time. “Investors moving from unallocated fractional exposure to fully allocated tokenized bullion gradually depletes the liquidity supporting the paper gold market,” Fiedler said.
This reduced margin of safety creates a dynamic in which allocated gold is exponentially more favorable than paper gold.
Traditional companies join tokenized gold
The importance of this market is evidenced by corporate moves such as the acquisition of Gold Token SA by MKS PAMP SA, which has 60 years of experience in the precious metals sector, announced on November 20th. operation Aiming to expand MKS PAMP’s presence in real-world asset tokenization (RWA), which focuses on tokenized gold supply.
The emergence of tokenized gold products like Tether’s XAUt not only provides a superior digital asset, but also accelerates the erosion of the paper gold market’s foundations. According to Fiedler’s paper, this convergence of structural factors and technological innovations indicates that the possibility of a sudden collapse of the traditional system is increasingly approaching.