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The price of gold has gone up 85.56% in the last 12 months—it currently sits at over $5,100 on the Comex continuous contract—so if you bought some a year ago, you are probably pretty happy.
But if you are a jewelry maker or retailer who needs to buy gold repeatedly as part of your manufacturing operations, you’ve got a logistical headache. You can wait until all your current inventory has been sold and then use that cash to buy more gold for new products. But that takes time, and while you are waiting the price of gold may move against you.
Or, you can do what jewelry companies actually do, which is to constantly borrow a supply of physical gold on the promise that what is owed back is that same amount of gold, not its dollar value. The cost of carrying this borrowed gold are the interest payments on the loan. But because the debt is the physical gold, and not its ever-changing dollar value, the jeweler can reduce their exposure to negative price changes in favor of only being exposed to the interest payments.
This, of course, is its own logistical headache. But some crypto companies—Theo, Libeara, and Falcon Finance, in particular—think they have created a solution that will make investing in gold even more attractive.
“Tokenized gold” has been around for a while, of course. The concept is simple: You buy a crypto token representing an amount of gold, the platform you buy it from promises to back that token with gold assets on a 1:1 basis, and now you own the crypto version of gold. (It is similar to the way a gold exchange-traded fund owns gold but offers investors shares in the fund on the basis that each share is worth a certain amount of the underlying gold.)
Currently, the two largest tokenized gold cryptocurrencies are Tether’s XAUT (with a market cap of $2.6 billion today) and Paxos’s PAXG ($2 billion). Combined they have a market cap of $4.6 billion.
But there’s one obvious downside to owning tokenized gold: If the price of gold goes down, the value of your token will fall by the exact same amount. Gold is technically an “idle” risk investment because it pays no interest (unlike bonds) and it pays no dividends (unlike stocks). That’s one reason why, historically, gold has been a surprisingly bad hedge against inflation. Tokenized gold is basically just gold in a crypto format.
Theo, Libeara, and Falcon Finance believe they have a fix for that: Tokenized gold that pays a yield to investors simply for holding it. Even if the price of gold goes down, holders of their tokens will be paid an interest-like percentage along the way, these companies promise.
In the case of Theo, the company recently launched a token named “thGOLD.” Each token represents a slice of the MG999 On-Chain Gold Fund, a tokenized, secured private credit fund managed by Libeara and backed by FundBridge Capital. (Libeara is backed by Standard Chartered’s VC fund.)
The underlying fund lends gold to jewelers who pay interest in exchange. Net of fees, holders of thGOLD can expect to receive an annual yield of 2.3%, Theo cofounder Arijit Pingle told Fortune.
thGOLD is tradeable on decentralized finance platforms like Hyperliquid, Uniswap, Morpho, and Pendle.
Libeara’s first borrower is Mustafa Jewellery, a Singapore-based retailer that has revenues in the region of $550 million and transacts about two tons of gold annually, Libeara CEO Aaron Gwak told Fortune.
Photograph: Libeara
The advantage for Mustafa is that obtaining gold financing from the crypto markets is easier than transacting with banks, who often require claims on company assets like real estate to secure loans for gold.
The interest rates are cheaper for gold borrowers, too.
“In Korea, I was talking to some of the gold merchants out there who borrow gold, and [I said] we borrow a gold at 2.5%, [annually] and they’re, like, oh, we borrow gold at 1%. I was, like, ‘Wow! That’s great!’ But [they were paying] 1% a month,” Gwak said.
Falcon Finance has a more complex, crypto-based solution to the “idle” gold problem. It offers a “vault” into which customers can place their XAUT gold token as collateral. Falcon then uses that collateral to buy a hedged position on a decentralized finance exchange, for instance, by being equally long and short in Bitcoin at the same time, so that no matter what happens to the price of Bitcoin the position’s value stays the same. This position can be offered as loan liquidity on the platform to borrowers willing to pay a yield in interest.
Falcon CEO Andrei Grachev told Fortune that traders can expect a 4% yield after various fees. Falcon currently has only a few dozen customers testing the product, but Grachev hopes it will grow into $500 billion in assets under management “within a few months.”