Why digital assets change the trade of commodities

Acquiring precious metals and commodities in general comes with a usual set of complications.
First of all, purchasing small amounts requires a quota of premium to be paid on top of the spread. This might be a huge 40 per cent commissions on top of a gram of gold for example. The buyer interested in saving on the premium, can choose to purchase larger quantities of the precious metal, but that usually bring up the second problem: Liquidity.
In fact, acquiring a kg of gold, for example, would necessarily lock approximately $40,000 that can neither be spent nor fragmented into smaller units without selling the whole lot — unless the owner decides to mint coins or produce jewellery of course.
Also, purchasing odd quantities is quite rare. Usually — gold for instance — is sold in denominations of 1 gram, 2 grams, 5 grams, 10 grams and so on. Not really available in odd numbers like 13.21 grams for example.
Therefore liquidity is a crucial aspect for many people interested in investing in commodities and precious metals, because they are “afraid” to begin with the investment without knowing when they will be in need of cash.
If a person buys a kg of gold for long- term value storage, but after a couple of years requires some spare cash, then the only option would be to sell the bullion. However, if price of gold at that point is lower than at purchasing time, the person would generate a loss.
When it comes to gold, which technically speaking never changes in value, its price is determined by the fluctuation of USD, which is the currency used to measure the price of an ounce.
So occasionally price of gold goes up in India while it goes down in the USA. Not because gold is worth more or less, but simply because the currencies are fluctuating. So when a currency is strong, the price of gold goes down and the other way around.
Lack of liquidity is the second of the 3 main problems related to commodities and precious metals. The third problem is storage.
Gold is extremely valuable. In a 35 litres backpack one could store nearly $28 million worth of gold. Silver would require a much larger space to store the same value.
So either very valuable or less valuable, precious metals are challenging to store. If a metal is very valuable, it requires small space to store, but increases dramatically the risk of being stolen or lost.
When a metal or another commodity has low value, it requires a large space to store small value. Hence commercial storage solutions come in place, but at a cost which sometimes nullifies the potential profitability of the asset.
But the world of technology has evolved quickly and especially with blockchain, a storage of value can be held in digital form without necessarily collecting the physically linked asset.
The company Copernicus Gold has managed to receive a patent in the USA able to mathematically regulate the issuance and the circulation of any digital asset linked to a physical asset.
And while for Copernicus Gold the concept was applied to the gold trade, other players are already thinking of using the same logic to regulate the trade of diamonds, oil and even real estate.
With such technology, a customer could now purchase any amount of gold regardless of the correspondent number in grams, for instance 13.21 grams or the equivalent in any currency. Such amount can now be circulated, transferred or used to pay for goods or services.
Of course more traditional owner could still collect their precious metals physically as in the closest denomination in grams. In addition, as the operators usually store large quantities of precious metals, are able to resell storage solutions at “wholesale price” to individuals.
In some cases even at no cost at all, like in the case of Copernicus Gold, whereas other player such as HelloGold or GoldCoin charge very small storage fees to individual customers.
The more traditional customers should not fear technology as such improvement allows purchase and storage at incredibly low price, which in the long run can contribute to the acquisition of wealth for a family. For instance many among the reader might be familiar with the tradition of collecting gold for their children’s wedding.
For those who cannot afford large bulk purchase, the traditional trade would force them to lose value while paying premium after premium.
However the new solutions allow the purchase of small quantities, at low premium, with low or no storage cost and the ability to either use the metal as liquidity tool or collect it physically, solving in one go all the 3 typical problems related to the acquisition, storage and liquidity of any asset, especially precious metals.

Stefano Virgilli
stefano@virgilli.com

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