Gold-Backed Stablecoins Race to Keep Up With Crisis-Driven Demand

Gold-backed crypto tokens continue to rise in price as sourcing gold itself during the coronavirus-induced downturn is reportedly getting more difficult.

Demand for Paxos Gold (PAXG) and XAUT$4,244.27, two of the most liquid gold-backed token projects, has surged this week. Both blockchain-backed tokens each represent a legal entitlement to one ounce of gold stored in institutional vaults. Both tokens are redeemable for physical gold.

The uptick in demand comes as traditional gold suppliers face shortages and difficulties in bringing physical bullion to the market, according to reports.

“The Fed completely changed the rules – the real rate of interest swung even more and so we are seeing all that money flow into gold immediately,” Roy Sebag, founder of metals custodian Goldmoney, said regarding the Federal Reserve in a phone interview with CoinDesk on Tuesday.

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Purchases of new PAXG – which represent one ounce of London Bullion Market Association (LBMA) institutional-grade gold – have nearly doubled day-over-day since Monday, according to Paxos spokesperson Becky McClain. Paxos said Thursday it had enough gold to cover current volumes.

On the other hand, demand for Tether’s offering led to the XAUT market cap hitting $50 million on Wednesday, according to data provider Nomics. Yet supply-chain issues in sourcing the gold itself could hinder further issuance of the token, according to The Block.

“XAUT simply represents a new and technologically innovative way for people to hold gold without annual fees,” Tether told CoinDesk in a statement, declining to comment on daily market movements. “We have seen strong growth for XAUT and we anticipate XAUT will continue to grow as it establishes itself as the dominant digital token representing gold ownership.”

Trade volume for both tokens has also increased in recent days, according to market data from Nomics and CoinMarketCap.

“We’ve all seen unprecedented volatility in the markets the past few weeks, so naturally people are looking to safe havens like gold,” Paxos executive Walter Hessert told CoinDesk. “As a blockchain-based token, it also offers holders the greatest level of control and accessibility outside the financial system.”

Price premium

An increase in demand for physical gold paired with supply chain issues for sourcing the precious metal has increased the price per ounce.

Bloomberg reported earlier this week the price of gold futures spiked against the price of gold in a premium not seen in over 40 years due to the inability to settle contracts physically in New York City as COVID-19 spreads.

Gold-backed crypto tokens currently hold a premium for traditional trading of both spot and futures gold markets on exchanges such as FTX. However, current prices could be a continuation of past premiums held by gold-backed tokens, according to CoinDesk Research.

Indeed, PAXG and XAUT have consistently held above the spot price of gold since their inceptions. XAUT launched in January 2020; PAXG launched in September 2019.

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Still, traders are looking for small denominations of gold, which are becoming more and more difficult to find, Sebag said.

“Something changed in the last few days. Not a lack of physical gold, but denomination problems,” Sebag said. “Definitely a shortage.”

Paxos said the increased demand for PAXG is not leading to the supply constraints reportedly seen by Tether.

“We're only dealing with London LBMA gold, and there is plenty of metal there! Benefits of being a trusted, regulated player – we can get access to that market unlike anyone else,” McClain said.