The Midas Touch: Why Gold And Its Tokenization Is As Relevant As Ever

As the world continues to be rocked by the economic tsunami created by the novel coronavirus, investors can find solace in assets that have held their value for centuries. Gold, a precious metal desired for its scarcity, durability, and beauty, has weathered countless crises up until now and will continue to do so.

Gold has held economic value from as early as 550 BC when King Croesus, king of Lydia－situated in what is now Western Turkey－minted gold coins as a form of currency. And while informally used in economies for centuries, it was only in 1821 in England that the gold standard was officially adopted as a value upon which to back a monetary system, setting the tone for other countries to similarly support their currency values with the previous metal. Eventually the system was disbanded in 1971 by President Richard Nixon, at which point the U.S. owned the majority of the world’s gold, leaving other countries unable to redeem their dollar foreign-currency reserves for gold. The move off the gold standard has been widely celebrated by most economists, and a 2012 study by Chicago Booth of leading economists found that all of them agreed going back to the gold standard would be a bad idea.

This move, however, has led many investors to hail gold as an investment bulwark against excessive money printing by governments. It was clearly stated by President Herbert Hoover at the height of the great depression in 1933, when he famously declared: "We have gold, because we cannot trust governments”.

As fears of the global pandemic and the likely onset of a global recession loom large, it is worth revisiting the role this precious metal can play in an investment portfolio.

What's interesting is that, although gold has shown it’s worth during economic downturns, can the same be said during a pandemic? Yahoo (NASDAQ:AABA) Finance performed an analysis on gold’s performance during pandemics, and the results were mixed. During the H1N1 flu outbreak in 2009, gold remained flat. During the MERS outbreak in April to May 2014, the price of gold actually declined. During the Zika pandemic between March and November 2016, gold rallied. However, the rally had already begun months before, so it was unlikely that the virus caused it in the first place.

The price of gold doesn't always rally during or after pandemics. But what's unique about COVID-19 is that economies are in stages of lockdowns to combat the spread, something that wasn't necessary under previous pandemics. At present, nearly 20 percent of the world’s population is staying home, a dire economic consequence of the lockdown, and no one is suffering more from the effects than the U.S. As it stands, the country is facing a potential 30 percent unemployment－an unimaginable number until now and one that's unprecedented in American hisotry. So, it's more accurate to consider how gold performs in economic crises rather than pandemics.

Since our move away from the gold standard in the 1970s, gold has served as a protective asset during times of severe uncertainty. Recent economic events that have sparked a gold rally include the 2008 Lehman Brothers crash, during which gold doubled in value between 2008 and 2012. Around the same time, gold reached an all time high during the Eurozone debt crisis.

Why does gold perform so well during economic downturns? It's rather simple. Investors perceive gold as fulfilling a protective function and wealth preservation in market meltdowns. It also carries no default risk, unlike fiat currencies, which are based on sovereign debt.

A record $2-trillion economic stimulus package has been signed off during this crisis. It stands to reason that gold should perform well as purchasing power diminishes over the coming years. Gold’s historical record in retaining its store of value is solid, with its purchasing power increasing 17 times over the five years following the 1929 Great Depression, and 15 times in the decade after the gold standard was disbanded in 1970.

It's worth noting that during the onset of a crisis gold usually loses value since there is a flight-to-cash pattern. Because monetary stimulus causes cash to lose value, however, people eventually look for stores of value.

Since most recessions are multi-year, it makes sense to look for gold products that can help protect investors' portfolios over time. Innovations in the blockchain space have led to gold becoming highly accessible in token form.

There are two forms of tokenized gold: PaxGold and Tether Gold. Tether is now the largest gold stablecoin by market capitalization, and according to the CEO of Paxos, tokenized gold is better than traditional gold, because it's easier to trade, divide, transfer, and verify, which are typical hurdles with owning traditional gold assets. Tokenization makes gold investing accessible to a global audience by eliminating the need for investment minimums and reducing the transfer costs and storage costs. Essentially it democratizes access to pure gold investing.

Ultimately, as we enter an uncertain future and the likelihood of a prolonged global recession increases, there is some comfort that an age-old allay, in the form of a yellow precious metal, is still there to protect our investments. This time, with the benefit of blockchain, it comes in a newer, much shinier, case－one that might even make King Midas roll with envy in his grave.