What is digital gold?
Digital gold is a form of currency, purely electronic, that is based on troy ounces of gold. It is a form of representative money, directly representing gold held on deposit or in custody. Digital Gold Currency (DGC) can be exchanged for the physical gold at any time.
Aims of Digital Gold
Advocates of DGC believe such a currency is the only global and borderless currency system available in today’s world. If everything were priced in comparison to gold, there would be no possibility of prices fluctuating due to exchange rate fluctuations or political manipulation.
It is also believed holding DGC protects the value of one’s assets. DGC providers, about whom we’ll talk later, hold 100% of the underlying physical gold on behalf of the holders of DGC.
Proponents of the system also say that deposits are protected against inflation, economic risks, and devaluation by governments or market forces.
How does DGC work?
Perhaps the best way for a novice to think about digital gold is to consider his bank account. Cash is deposited and held in a separate account for the benefit of the account holder. In effect, that cash is no more than a number on a piece of paper (the bank statement), until it is withdrawn. Transferring money from the account holder’s account to the account of another person can pay for goods and services. Think of paying for goods at a supermarket with a debit card. Physical cash is not handed over, merely an electronic transaction of the underlying cash held in an account.
Digital Gold Currency works in the same way.
Can I use DGC to pay for goods and services?
The easy answer is ‘yes’. However, in order to do so, then the person or company you want to pay by such means must be willing to accept payment in DGC form. DGC is not a currency in the traditional sense. Governments issue traditional currencies, and as such they are freely available to everyone. We are all members of the society that uses pounds, or dollars, or euros to conduct financial transactions. Companies, independent of government, issue DGCs, and so only account holders of DGC issuers can trade amongst each other.
How can I buy Digital Gold?
There are a number of providers of DGC, and each one offers the ability to purchase digital gold and conduct financial transactions with other account holders. Accounts can be opened easily using a debit or credit card, or direct bank transfer to purchase digital currency on line – after all, its digital, how else would it be bought!
A good place to start would be to use Google and search for a DGC provider. However, here at thegoldeconomy.com we will be looking more closely at DGC providers in the next week or two and comparing their offerings.
Are there any risks involved?
As with the currency in one’s pocket, or bank account, there are risks. It’s not often that we associate risks with traditional currency, but essentially the risks are the same.
Exchange rates of national currencies move against each other. Last year the euro was worth £1, this year it’s only worth 87 pence. In exactly the same way, DGC rates fluctuate against national currencies. The exchange risk is the same as the exchange risk of a holder of a bank account in a foreign currency measured against the account holder’s domestic currency.
Risks of Management
Like holding money in a bank or other financial institution, a deposit may suffer if management decisions are bad ones. One of the underlying reasons for choosing a particular DGC provider should be the level of corporate governance applicable to that provider. Some are self-certified, meaning that their deposits, and the level of security, are not checked by an outside party, and others are audited on a regular basis by independent auditors.
DGC providers are not regulated in the same way that banks are. Much of what eh DGC providers tell the markets has to be taken as a matter of trust. This, in itself, can be a dangerous situation. Even in a regulated environment, false accounting, or false reporting of facts can lead to collapse of businesses and the disappearance of investments. Think about Enron, or Barings Bank, or the credit crunch and financial crisis of 2007/ 8. The key, as with all types of investment, is to conduct proper research.
In the early part of the 21st century, several companies claiming to be DGC currencies began and failed. Principals at companies such as OS-Gold, Standard Reserve, and INTGold diverted deposits and used them for other purposes rather than the holding of physical gold. Of course, this type of behaviour exists elsewhere, also: Bernard Madoff stole billions of dollars from investors in his equity funds.
One of the largest risks, and one often overlooked, is the political risk of owning gold. A government may ‘confiscate’ holdings at any time, and without warning. The most obvious example of this is in times of war or a change of administration. A new government may not feel obliged to honour the deposits of foreigners. It is well known that Germany seized gold from all territories it invaded in the run up to and during World War II, for example.
A more up to date example is how the United States Department of Justice forced e-gold to liquidate $20 million worth of e-gold in April 2007, and freeze its assets. This action meant that investors could not access their deposits.