The buying frenzy in the gold market has sent the price of the precious metal up more than 80% in the past 12 months, making it one of the best-performing assets.
However, Björn Schmidtke, CEO of Tether gold finance company Aurelion (AURE), said investors are not paying attention to the hidden threats developing below the surface.
The easiest way to buy gold is to buy shares in what Schmidtke calls “paper gold,” or a gold exchange-traded fund. When buying such stocks, investors think they are buying a physical gold bar, when the reality is they are buying “a little piece of paper that says ‘I owe you gold'”. There’s a consensus that the paper has value,” he told CoinDesk.
Schmidtke said that while this avoids the hassle of owning and storing physical gold bars, that’s where the real problems begin.
“Seismic event”
Think of it this way: Investors buy “paper gold” thinking they now own a gold bar. Although redeemable, investors do not know which gold bars they own. There is no proof at all that the investor owns gold bullion, other than the fact that he purchased shares of the ETF.
Schmidtke estimates that 98% of gold exposure is not actually allocated in the form of IOUs, meaning investors hold billions of dollars worth of notes that are supposed to be backed by the gold they represent, but they don’t know which bars they own.
That’s fine for now, as the current system has worked for decades and few investors are asking for delivery.
But let’s say a catastrophic event occurs and fiat currencies lose their value exponentially, and people rush to buy the physical gold they thought they were buying when they bought “paper gold.”
When such a “seismic event” occurs and an investor wants gold bars, where is the evidence that the gold bars are owned by that investor, and how are these gold bars delivered to the investor?
“You simply can’t move billions of dollars’ worth of physical gold in one day,” he said. If the bullion lacks proof of ownership, it creates a larger logistical bottleneck and could lead to market ruptures if panic drives investors toward redeemable assets. In such a crisis, real gold prices could surge while paper gold prices lag, leaving derivatives holders unable to settle.
“The risk is real. We’re already seeing this in the silver market,” he said, pointing to past instances where physical premiums have risen while spot prices have been flat. “We believe that if an event like this occurs, we will see it in the gold market as well.”
Schmidtke said this is where on-chain gold comes into play.
Proof of ownership
Consider a theoretical real estate ownership scenario.
Suppose a real estate developer offers investors a unique way to purchase homes. If they buy 10 shares of the project, they immediately receive an IOU promising to deliver 10 units. The developer has made the same commitment to other investors. The entire process can be completed by simply purchasing project shares, without signing an ownership deed.
Sounds easy, right?
Now, when acquiring housing units, since investors do not sign any ownership rights but instead purchase shares, there is no searchable evidence of which units they purchased and developers may try to deliver the units randomly, creating a nightmare where units may be delivered to investors but take a significant amount of time and there is no guarantee of who gets which units when.
Schmidtke said on-chain gold ownership solves this problem by removing the bottleneck of physical gold delivery.
To redeem physical gold, investors must physically move it, whereas tokenized gold like XAUT decouples ownership from the physical movement of the metal.
Because each XAUT token is inextricably linked to a specific allocated gold bar in a Swiss vault, the “deed of ownership” of that gold can be transferred globally in seconds on the blockchain.
This is similar to a theoretical real estate problem. If investors don’t just buy shares but sign title deeds from the outset, they know exactly which units they will receive, and it becomes easier for developers to quickly put together these deeds and deliver the units to their rightful owners on time.
With on-chain gold tokens, these allocations will be searchable and redeemable. While actual physical delivery may still take time, at least investors can have confidence that their gold and its ownership deeds remain safe and traceable.
“Enduring” ownership
This perspective is shaping Aurelion’s strategy.
The company overhauled its finances to hold a blockchain-based token backed by physical gold stored in Swiss vaults.
Schmidtke believes that XAUT provides the speed of digital transactions without sacrificing physical settlement. Unlike paper gold, tokens represent allocated gold bars and are fully redeemable. “How you own gold is as important as whether you own gold,” he said.
Schmidtke believes XAUT is still early in the adoption cycle and has room to expand.
Asked whether Aurelion would consider selling its gold, Schmidtke said it would only be if market conditions created a “significant and sustained discount” to the company’s underlying assets. Currently, the company is focused on long-term compounding.
“This is not a short-term arbitrage strategy,” he said. “This is about building a durable Tether Gold stock that investors can participate in over time.”
Aurelion also plans to raise more capital next year to expand its gold vault.
According to data from CoinGecko, the company currently holds 33,318 XAUT tokens, worth approximately $153 million.