Comparing Physical and Digital Gold: Which Is the Better Investment?

2024年7月24日

Comparing Physical and Digital Gold: Which Is the Better Investment?

2024年7月24日

Origins of Digital Gold

Digital gold is an investment asset that consists of physical gold bullion, usually stored in a central vault, and a digital proof of ownership. Digital gold originated in the 1990s and 2000s, alongside the dawn of the internet. At first, it simply involved investors buying gold online and committing it to the care of a custodian, who would provide a written receipt of ownership.

Challenges of Physical Gold

Physical gold has several drawbacks as a store of wealth, and digital gold emerged to combat some of these disadvantages. The two most important are:

  1. Accessibility and security – the inconvenience of secure transport and storage of physical gold, and the accompanying risk of loss, damage or theft, means that there is a limit on how practical physical gold is for the individual. There is also usually a direct trade-off between accessibility and security.

  2. Transaction costs – physical gold bullion can be difficult to trade. It is relatively high value, typically thousands of US dollars even for a small bar, and when used as payment, will need to be assayed (tested for purity) before each transaction, which can only be done by a specialist. As a result, fees and costs can be several percentage points of a transaction’s value.

Cost Considerations in Physical Gold Transactions

To understand shipping and storage costs, we can look at some typical numbers. Transporting significant quantities of gold domestically will usually require use of armoured vehicles and security personnel. For example, transporting gold from a vault to a private address within Switzerland may cost $1,000 to $2,000. Inter-vault transfer is usually cheaper, perhaps starting from $500. International gold shipping is usually arranged with specialist shippers, and transported via cargo plane, with other high value goods. It could cost around $1,500 to ship a moderate quantity of gold (e.g. 20kg) from Zurich to Singapore. Additionally, we would need to buy insurance against loss, theft or damage. Many countries will also have specific regulatory requirements around imports of precious metals that must be adhered to – such as commercial invoices that should be presented on arrival, and import duties may also apply. Travellers entering the United States with goods worth more than $10,000 must make a declaration to customs officials. These can be bureaucratic processes that involve documentary proof of ownership, a valuation or appraisal, and potentially, the issuance of import permits.

Transaction costs when selling physical bullion can also be considerable. First, it is important to consider that bullion prices are location dependent, and physical gold can trade at a discount or premium of up to several percentage points to the paper gold price depending on the supply and demand situation in the local market. The bullion will also need to be assayed or inspected prior to the transaction, to verify the fineness and purity, and this can cost around $5/oz. When moving gold from a vault, the storage company will often charge a handling small fee (such as $1/kg), but with a minimum value (such as $50).

Advancements in Digital Gold

So, while the theoretical advantages of digital gold to investors with moderate amounts of bullion were clear, there were significant practical limitations. The problem with the first iterations of digital gold was that the proof of ownership could be stolen, or forged, or simply out of date. A receipt is simply not sufficient to put ownership beyond any reasonable doubt. But verifiable proof of ownership is obviously an essential component when selling bullion worth tens, or hundreds, of thousands of dollars. However, in the 2010s a solution began to emerge, with the growth of blockchain-based cryptocurrencies. Blockchain is based on the notion of zero-trust architecture, meaning ownership of an asset can be validated without knowledge of identity. When applied to physical assets, such as gold bars, this allows DuBois’ clients to provide independent, real-time and incontrovertible proof of ownership of a specific gold bar. This proof means that clients can always maintain full control of their gold, wherever they are in the world. They can sell it or transfer it remotely, to a third party. If desired, they can even take physical possession.

Trust in Bullion Quality

Alongside the difficulty of validating receipts, the early digital gold market suffered from the problem of insufficient audit and controls on the physical gold. Here, DuBois relies on a much more traditional solution – use of the deep and long-established trust mechanisms within the global bullion market. DuBois obtains our gold exclusively though the London Bullion Market Association. The LBMA is the world’s most trusted network of gold market intermediaries, including refiners, vaults, auditors and assayers. DuBois works entirely through LBMA member firms. DuBois sources the highest quality bullion to our clients – 99.99% purity, exclusively from a small number of refiners on the LBMA’s Good Delivery List (GDL) – Argor Heraeus, Degussa Goldhandel, and Valcambi. A position on the GDP means these refiners have been assessed by the LBMA as meeting the highest standards for quality, purity and provenance.

Accessibility for All Investors

Finally, one of the perennial limitations of bullion as an asset class for smaller investors, is the relatively large amounts of money required to hold individual physical bars. A 1-kilogram kilobar costs around $75,000 at current prices. Together with the cost of storage and insurance, this led to paper gold being the default investment choice for those with smaller portfolios. However, with DuBois’ DAU digital gold product, it’s even possible for smaller investors to hold a fractional share of a specific physical gold bar, making bullion an affordable option for all.

Conclusion: The Rise of Digital Gold

The combination of modern blockchain technology and the secure, longstanding member network of the LBMA has enabled digital gold to overcome the problems of traditional gold by eliminating transaction costs and simultaneously providing both security and accessibility. Digital gold combines the benefits of paper gold, such as liquidity and flexibility, with those of physical bullion – a secure, non-financial asset, available even in difficult times. These advantages have led to digital gold rapidly maturing as an asset class in recent years, gaining interest from both high-net worth individuals and institutional investors.


Origins of Digital Gold

Digital gold is an investment asset that consists of physical gold bullion, usually stored in a central vault, and a digital proof of ownership. Digital gold originated in the 1990s and 2000s, alongside the dawn of the internet. At first, it simply involved investors buying gold online and committing it to the care of a custodian, who would provide a written receipt of ownership.

Challenges of Physical Gold

Physical gold has several drawbacks as a store of wealth, and digital gold emerged to combat some of these disadvantages. The two most important are:

  1. Accessibility and security – the inconvenience of secure transport and storage of physical gold, and the accompanying risk of loss, damage or theft, means that there is a limit on how practical physical gold is for the individual. There is also usually a direct trade-off between accessibility and security.

  2. Transaction costs – physical gold bullion can be difficult to trade. It is relatively high value, typically thousands of US dollars even for a small bar, and when used as payment, will need to be assayed (tested for purity) before each transaction, which can only be done by a specialist. As a result, fees and costs can be several percentage points of a transaction’s value.

Cost Considerations in Physical Gold Transactions

To understand shipping and storage costs, we can look at some typical numbers. Transporting significant quantities of gold domestically will usually require use of armoured vehicles and security personnel. For example, transporting gold from a vault to a private address within Switzerland may cost $1,000 to $2,000. Inter-vault transfer is usually cheaper, perhaps starting from $500. International gold shipping is usually arranged with specialist shippers, and transported via cargo plane, with other high value goods. It could cost around $1,500 to ship a moderate quantity of gold (e.g. 20kg) from Zurich to Singapore. Additionally, we would need to buy insurance against loss, theft or damage. Many countries will also have specific regulatory requirements around imports of precious metals that must be adhered to – such as commercial invoices that should be presented on arrival, and import duties may also apply. Travellers entering the United States with goods worth more than $10,000 must make a declaration to customs officials. These can be bureaucratic processes that involve documentary proof of ownership, a valuation or appraisal, and potentially, the issuance of import permits.

Transaction costs when selling physical bullion can also be considerable. First, it is important to consider that bullion prices are location dependent, and physical gold can trade at a discount or premium of up to several percentage points to the paper gold price depending on the supply and demand situation in the local market. The bullion will also need to be assayed or inspected prior to the transaction, to verify the fineness and purity, and this can cost around $5/oz. When moving gold from a vault, the storage company will often charge a handling small fee (such as $1/kg), but with a minimum value (such as $50).

Advancements in Digital Gold

So, while the theoretical advantages of digital gold to investors with moderate amounts of bullion were clear, there were significant practical limitations. The problem with the first iterations of digital gold was that the proof of ownership could be stolen, or forged, or simply out of date. A receipt is simply not sufficient to put ownership beyond any reasonable doubt. But verifiable proof of ownership is obviously an essential component when selling bullion worth tens, or hundreds, of thousands of dollars. However, in the 2010s a solution began to emerge, with the growth of blockchain-based cryptocurrencies. Blockchain is based on the notion of zero-trust architecture, meaning ownership of an asset can be validated without knowledge of identity. When applied to physical assets, such as gold bars, this allows DuBois’ clients to provide independent, real-time and incontrovertible proof of ownership of a specific gold bar. This proof means that clients can always maintain full control of their gold, wherever they are in the world. They can sell it or transfer it remotely, to a third party. If desired, they can even take physical possession.

Trust in Bullion Quality

Alongside the difficulty of validating receipts, the early digital gold market suffered from the problem of insufficient audit and controls on the physical gold. Here, DuBois relies on a much more traditional solution – use of the deep and long-established trust mechanisms within the global bullion market. DuBois obtains our gold exclusively though the London Bullion Market Association. The LBMA is the world’s most trusted network of gold market intermediaries, including refiners, vaults, auditors and assayers. DuBois works entirely through LBMA member firms. DuBois sources the highest quality bullion to our clients – 99.99% purity, exclusively from a small number of refiners on the LBMA’s Good Delivery List (GDL) – Argor Heraeus, Degussa Goldhandel, and Valcambi. A position on the GDP means these refiners have been assessed by the LBMA as meeting the highest standards for quality, purity and provenance.

Accessibility for All Investors

Finally, one of the perennial limitations of bullion as an asset class for smaller investors, is the relatively large amounts of money required to hold individual physical bars. A 1-kilogram kilobar costs around $75,000 at current prices. Together with the cost of storage and insurance, this led to paper gold being the default investment choice for those with smaller portfolios. However, with DuBois’ DAU digital gold product, it’s even possible for smaller investors to hold a fractional share of a specific physical gold bar, making bullion an affordable option for all.

Conclusion: The Rise of Digital Gold

The combination of modern blockchain technology and the secure, longstanding member network of the LBMA has enabled digital gold to overcome the problems of traditional gold by eliminating transaction costs and simultaneously providing both security and accessibility. Digital gold combines the benefits of paper gold, such as liquidity and flexibility, with those of physical bullion – a secure, non-financial asset, available even in difficult times. These advantages have led to digital gold rapidly maturing as an asset class in recent years, gaining interest from both high-net worth individuals and institutional investors.