There is a buying frenzy in the gold market that has propelled the price of the precious metal by more than 80% in the last 12 months, making it one of the best performing assets.
However, investors are not paying attention to a hidden threat brewing beneath the surface, according to Björn Schmidtke, CEO of gold treasury company Tether Aurelion (AURE).
The easiest way for someone to buy gold is to buy what Schmidtke calls “paper gold” or shares of a gold exchange-traded fund. When buying such stocks, investors think they have purchased the physical gold bar, when in reality they have purchased “a little piece of paper that says, ‘I owe you gold.’ And people collectively agree that this piece of paper has value,” he said in an interview with CoinDesk.
While this avoids the hassle of owning and storing a physical gold bar, that’s where the real problem begins, according to Schmidtke.
“Seismic event”
Think of it this way: an investor buys “paper gold” thinking they now own a gold bar. Although it is redeemable, the investor does not know which gold bar he owns. There is simply no evidence of ownership of a gold bar, other than the fact that an investor purchased a share of the ETF.
Schmidtke estimates that 98% of gold exposure is effectively unallocated in IOUs, in which investors hold billions of dollars of pieces of paper supposedly backed by the gold they represent, but they don’t know which gold bars they own.
This is great for now, as the current system has worked for decades because few investors demand delivery.
But let’s say a catastrophic event occurs in which fiat currency is exponentially devalued and people rush to get back the physical gold they thought they bought when they bought their “paper gold.”
When such a “seismic event” occurs and the investor wants his gold bar, where is the proof that the gold bar belongs to that investor, and how are these gold bars delivered to the investors?
“You just can’t move a few billion dollars of physical gold in a single day,” he said. And if those gold bars don’t have proof of ownership, that creates an even bigger logistical bottleneck, which could lead to a market breakdown if panic drives investors toward redeemable assets. In such a crisis, the price of real gold could skyrocket while paper gold prices lag, leaving derivatives holders unable to resolve their disputes.
“The risk is real. We’ve seen it before in the silver market,” he said, pointing to past events where physical premiums rose while spot prices remained stable. “We believe this will happen in the gold market as well,” if such an event occurs.
This is where on-chain gold comes in, according to Schmidtke.
Proof of ownership
Think about a theoretical real estate ownership scenario.
Let’s say a real estate developer offers investors a unique way to purchase homes. If they buy 10 shares in the project, they instantly receive an IOU promising the delivery of 10 housing units. This developer also promised the same to other investors. The whole process is completed by the simple purchase of shares in the project, without signing a title deed.
Sounds easy, right?
Now, when it comes to taking possession of the units, since the investors did not sign ownership but purchased shares, there is no searchable proof of the units they purchased, and developers might try to deliver them haphazardly, creating a nightmarish bottleneck, where the units will likely be delivered to the investors, but it will take a long time and with no guarantee of who will get which units and when.
Schmidtke says on-chain gold ownership solves this problem by eliminating the bottleneck in the delivery of physical gold.
To redeem physical gold, investors would have to physically move it, while tokenized gold, like XAUT, decouples ownership from the physical movement of the metal.
Since each XAUT token is inextricably linked to a specific, allocated gold bar stored in a Swiss vault, “title” to that gold can be transferred globally within seconds on the blockchain.
This is similar to the theoretical problem of real estate. If, instead of just buying shares, an investor signed a title deed up front, they would know exactly what units they were getting, and it would be easier for developers to quickly sort through those deeds and deliver those units to their rightful owners on time.
With the on-chain gold token, these allocations will be searchable and tradable. While actual physical delivery may still take time, investors can at least be confident that their gold, as well as their deed to it, remains safe and traceable.
A “sustainable” property
This vision shapes Aurelion’s strategy.
The company has reshuffled its cash position to hold a blockchain-based token backed by physical gold stored in Swiss vaults.
Schmidtke argued that XAUT offers the speed of digital transactions without sacrificing physical settlement. Unlike paper gold, tokens represent allocated bars and are fully tradable. “How you own gold is just as important as whether or not you own gold,” he said.
Schmidtke considers XAUT early in its adoption cycle, with room for growth.
When asked if Aurelion would consider selling its gold, Schmidtke said if market conditions presented a “significant and sustained discount” to the company’s underlying holdings. For now, the company is focused on long-term capitalization.
“This is not a short-term arbitrage strategy,” he said. “This is about creating sustainable Tether Gold capital that investors can participate in over time.”
Aurelion also plans to raise more capital over the next year to increase its gold treasury.
The company, according to CoinGecko data, currently holds 33,318 XAUT tokens worth approximately $153 million.
