Introduction to Gold Investing
It’s a volatile world out there. This year, we’ve seen stocks take a wild ride as gold has pumped and crypto has been caught somewhere in the middle. Investors have dumped risk assets and scrambled for safe havens. Gold is leading the charge. While gold is safe, it is not very hard-working. Unlike cash and treasuries, the yellow metal does not generate income. Now, more than ever, investors need to be able to earn yield on gold — particularly in the decentralized finance (DeFi) sector.
The Limitations of Traditional Gold Investing
The only way to make money from gold is to buy low and sell high. Most investors don’t tend to buy gold like this. That’s for good reason — over the long term, gold’s performance is typically consistent, if not without a few peaks and troughs here and there, as we have recently seen. For example, after the 2008 financial crisis, the price of gold soared 148% but stagnated for nearly a decade before the COVID-19 pandemic triggered another rally, and it’s likely we will see gold hold, if not fall from its new record high once markets revive. While it remains an excellent hedge, gold’s long-term track record is not a growth story.
The Appeal of Alternative Investments
Investors prefer US Treasurys or high-yield savings accounts as part of a balanced portfolio. While gold may outperform these assets in uncertain times, it offers a better balance of security and predictable income over the long term. This is where alternative investments come into play, offering potentially higher returns and more flexibility.
The DeFi Solution
This is where DeFi brings innovation to the world’s oldest asset. DeFi can significantly modernize gold investing, offering the speed and transparency of blockchain-based transactions and the ability to earn returns. Currently, though, most tokenized gold is much the same as holding it in an exchange-traded fund (ETF). Stablecoin giants like Tether and Paxos have launched gold-backed tokens, which they say are fully backed by physical, audited gold reserves, yet offer no yield.
Unlocking Income from Gold
Most DeFi investors prefer liquid, tradable assets like cryptocurrencies and stablecoins, which can generate attractive returns. Many would rather, for example, buy Tether’s USDt (USDT) stablecoin and stake it, earning rewards while still maintaining ownership. Perhaps this is why the market capitalization of gold-backed tokens remains modest. Tether Gold, the world’s most significant gold token, has a market capitalization of just under $835 million, for example, while Paxos Gold sits at around $799 million. Combined, this is equivalent to just 1% of the market cap of USDT.
Creating a DeFi Ecosystem for Gold
To unlock gold’s full potential, we need to take tokenization a step further by creating a DeFi ecosystem where tokenized gold is actively put to work — borrowed, lent and integrated into yield-bearing strategies. One possibility is for companies such as gold miners to issue tokenized versions of their reserves that can be turned into stablecoins that can then be staked to earn a yield. Leveraging protocols whose liquidity mechanisms enable the trading of stablecoins and real-world asset (RWA) tokens, holders could take advantage of further yield opportunities throughout the DeFi ecosystem.
The Future of Gold Investing
It is, perhaps, ironic that — just as governments worldwide are starting to put their stamp of approval on digital finance — gold is becoming a highly desirable commodity again. The public’s interest in it will grow as governments essentially ratify digital finance. At the same time, the appetite for gold in these uncertain times will also increase. DeFi could bring these trends together and kickstart a natural evolution in gold ownership that provides a solid bridge between traditional and digital finance. While gold inside traditional markets attracts investors looking for stability, DeFi brings opportunities that don’t compromise that stability, as it presents new and unique yield opportunities.
Conclusion
Gold has captivated humanity for thousands of years. It’s the foundation of myths, the standard of wealth and the ultimate hedge against uncertainty. But in today’s financial world, it needs an upgrade. Through integrating gold into the DeFi ecosystem, we could unlock its true potential — not just as a store of value but as an income-generating asset. The world’s oldest safe haven asset is finally on the brink of a digital evolution.
