As gold miners begin reporting earnings this week, it's time to ponder the long-term future of bullion demand. One of the most intriguing developments in that regard is an audacious $1-billion (U.S.) project to create a freely traded gold-backed digital currency.
To be sure, it's easy to mock the new venture as a way-too-trendy attempt to marry the traditional appeal of precious metals with today's enthusiasm for the blockchain technology behind bitcoin.
But the project has two big-name backers behind it and their reputation suggests investors might want to pay close attention. CME Group Inc. is a U.S.-based company that operates the world's largest options and futures market. The Royal Mint is a thousand-year-old institution owned by the British government.
The partners announced RMG – short for Royal Mint Gold – late last year and plan to begin offering the product this summer with an initial $1-billion worth of gold.
For now, they're billing it simply as a new way for people to trade bullion. Viewed more broadly, though, RMG is the first in what could prove to be a wave of commodity-backed cryptocurrencies.
What's the appeal of such a creation? Many gold enthusiasts insist that any government-issued fiat money – the U.S. dollar, the Japanese yen, the British pound or whatever – is doomed to fail. They argue that governments will always eventually yield to temptation and debase their own currencies as a way to pay off their accumulated debts.
Precious-metals fans look back fondly on earlier times, when currencies were typically backed up by gold reserves. Back then, the tight tie between currency and bullion limited governments' ability to easily create new money. But gold's central role in the world monetary system ended in the 1970s, when governments abandoned the link between money and precious metal.
Now, the private market is ready to step into the spot that governments left. If lots of investors actually do feel nostalgic for a bullion-backed currency, RMG or similar products could prove to be a tempting alternative to fiat money.
Anyone who buys RMG will gain ownership of physical gold stored in the Royal Mint's vaults. RMG owners will have the option of taking physical delivery of the underlying bullion, but the hope seems to be that most people will treat it as a digital currency and trade it on a platform run by CME.
RMG will use blockchain technology – something like bitcoin's – to offer fast, cheap, secure transfers. Unlike exchange-traded funds that hold precious metals, all of this will done at zero storage cost, according to the partners.
In theory, then, RMG should offer all the technical dexterity of bitcoin with all the hard-currency appeal of gold. And that opens up a whole range of possibilities.
For instance, Max Gulker, an economist at the American Institute for Economic Research, says that businesses given a choice between gold-backed and fiat money might decide to accept only the money backed by gold, "rendering fiat money without value."
Of course, such a shift would not happen immediately, Dr. Gulker acknowledged. But if inflation surges or the economy suffers another crisis, there could easily be a shift among buyers in favour of RMG, meaning that the value of the gold-backed currency would rise against its fiat counterparts.
"Even if change comes slowly, the new world of blockchain-enabled cryptocurrencies should be exciting for those who favour less government involvement in monetary affairs," he wrote.
To be sure, many economists might take a different viewpoint. But, whatever your perspective, RMG is poised to offer a real-world test of whether gold-backed currencies have new appeal in a digital age. It's an experiment to keep your eye on.