Series Introduction: The Case For

"The Case For" series is a series of blogs where I outline why I like and own certain investments in my portfolio. While in most cases I do own these assets, the opinions expressed here are not meant to be financial advice. It is merely an expression of why i like certain assets in my portfolio.  

Introduction: What is Pax Gold? 

Pax Gold is a Real World Asset (RWA) digital token backed by physical gold. It is issued by the company Paxos, the same company that has worked with Paypal to issue their stablecoin, PUSD. 

In the Pax Gold Whitepaper, Paxos guarantees that:

• one token of Pax Gold represents one fine troy ounce of a London Good Delivery gold bar, stored in professional vaults in London
• Customers can convert their Pax Gold into physical allocated gold via Paxos (although customers will need to meet the minimum threshold of more than 430 oz in PAX Gold) 
• All Pax Gold proof of reserves are reviewed and attested by 3rd party accounting firms, who then publish a proof-of-reserves report monthly 
• Owners of Pax Gold can also lookup the serial numbers and information about their gold (see picture below) 

If we take Paxos at their word (and Paypal certainly does, having entrusted them to create their stablecoin), then owning Pax Gold is essentially the equivalent of owning digital gold on the blockchain. Digital gold that can be exchanged for real gold AND also transacted across the ETH blockchain. Having understood the main properties of the token, it is now time to examine The Case For Pax Gold. 

The Case For Pax Gold

1. Gold Prices have been rising in the past year

Gold prices have been rising consistently in the past year, driven by global conflicts and economic uncertainty. While the rise in price was due to various factors, what is certain is that Pax Gold has been rising in tandem, and as of today, both assets have chalked up a 40% increase YTD. 

Source: TradingView

Source: CoinmarketCap

As someone who has been periodically adding to my holdings of Pax Gold since the Ukraine war, i have made a decent profit from the asset. My view is that the price of gold would continue to rise in the short term due to various factors:

• Global uncertainty from Ukraine, Middle East and South China Sea conflicts
• Trend of US reducing interest rates for the foreseeable future (investors lighten up on yield bearing assets and explore other options)
• Short term US election risks and volatility 
• Speculative Opinion: With US debt continuing to break all time highs, the risk of a US default continues to increase. Rivals would stand to gain if the USD were to be devalued and may wish to usurp the US$ as the global reserve currency. What better way than to peg your own currency against the gold standard (that the US has abandoned)? Dangerously, given the rise of global conflicts, the US has no lack of rivals. 
  • Standard Chartered reports that the BRICS countries are considering launching a gold backed currency 

Because of the above reasons, my thesis is that gold prices will continue to rise in the short to mid term, and Pax Gold along with it. 

2. Pax Gold has the same properties that has made bitcoin successful, and is backed by an established commodity 

Bitcoin is deemed to have value because it has the properties of money. This excellent article explains that bitcoin has monetary value because it fulfills and exceeds the 9 properties of money. 

Crucially, Pax Gold also fulfils the same criteria - Lets examine each property and confirm this:

• Store of Value: Bitcoin and Pax Gold are considered to be inflation resistant and have values pegged to them
• Medium of exchange: Gold has been fulfilling this role for even longer than BTC. The rise of companies accepting BTC as a mode of payment has also been increasing
• Unit of Account: Both BTC and Pax Gold can be divisible to extremely small units and therefore can function as units of account
• Scarcity: Bitcoin and Pax Gold are considered to be inflation resistant
• Durable: being digital assets and immutable, both assets pass this test
• Portable: you can send BTC and Pax Gold across the blockchain
• Recognisable: the BTC and Pax Gold you own can be confirmed on the blockchain. The Pax Gold you own can also be traced back to Paxos' Proof of reserves 
• Fungible: both BTC and Pax Gold are identical in value to the next token of the same type

With the above test, we have proved that both BTC and Pax Gold have value and can very possibly be used as money. However Pax Gold has one advantage that BTC does not have:

The value of Gold is already well established and accepted universally.

While bitcoin usage and legitimacy is increasing over time, Gold is universally valued. Tell the guy on the street that youre giving him $50k worth of gold vs $50k worth of bitcoin and i suspect most people would go for gold (pun intended). Countries and institutions have varying opinions on bitcoin while most of them would not have the same concerns about gold.

3. Pax Gold removes the need for various fees that Gold investors typically incur link

In most cases, buying gold related instruments incur either custody costs (gold custody) or management fees (gold ETFs). The table below illustrates this well: 

Source: Pax Gold investment 1 sheet (Link)

However, potential owners of Pax Gold should note may also incur certain costs that traditional gold instruments do not incur:

• Gas fees when sending Pax Gold across the blockchain
• Conversion fees when converting Pax Gold token to real gold

It is notable that these costs are optional and only incurred when the owner takes action other than hodling. 

4. Owning Pax Gold unlocks new financial possibilities 

One of the big criticisms of Gold as an asset class is that it doesnt generate a yield. In his 2011 letter to shareholders, Buffett describes gold as an asset "that will never produce anything" , and that is true to some extent in the world of traditional finance. 

However, changes in the world of crypto and defi may prove Buffett's opinion to be untrue. Here are 2 ways you can potentially earn a yield on your Pax Gold.

a. Liquidity pools 

By contributing to a Dex liquidity pool, you can potentially earn profits on your Pax Gold. One way to do this is on uniswap:

Souce: Uniswap (Paxgold/USDC liquidity pool. For illustration purposes only)

When contributing to liquidity pools however, it is extremely important to know what youre doing. There is a potential to lose money to impermanent loss, so it is important to do your own research and understand exactly what you are doing. 

b. Lending Services

Personally, i dont have the time (or knowledge) to manage liquidity pools on Dexes. What i personally do (and in the interest of objectivity, im not recommending you to do this), is to keep my Pax Gold tokens on lending services like Nexo, who pay up to 7% on my Pax Gold.

Source: Nexo Website

Earning interest via lending out crypto has some advantages compared to yields from a liquidity pool. Firstly, the yield you earn tends to be more consistent compared to a lending pool which is heavily based on market conditions and demand for a token. Secondly, there is no need to actively manage your asset, in the case of Nexo, you send your tokens over and the system automatically lends and compounds your holdings. 

While I would like to reiterate that Im outlining my strategy and none of the above is financial advice, if you are interested to use Nexo, you can use my referral link here , and we both get rewards if you install and top up your account with crypto. If you're not interested, no hard feelings dear reader. 

The Case Against Pax Gold

1. The gold trade has limited upside

While gold prices have indeed risen significantly in the past year, one questions how much upside the trade continues to have. Prices are likely to continue to be volatile in the short term, all the way up to the US election in early November. However if the election is carried out smoothly without incident, and a new US administration crystallizes their economic and foreign policy, it is likely that gold prices will recede. We can therefore question the long term profitability of the gold trade 

2. Counterparty risk of Paxos (Or Nexo)

Counterparty risk is defined as "the probability that the other party in an investment, credit, or trading transaction may not fulfill its part of the deal and may default on the contractual obligations." In short, there is a risk (however small) that Paxos doesnt actually have the gold they claim to have and the whole thing is one big fraud. On the other hand, you can be more assured that there is less risk of established ETFs doing the same thing with your money. 

The risk is further amplified if youre storing your gold with a lender like Nexo. Those who have been in the crypto market for some time know that the industry has its shady side and we will continue to see more cases similar to Celsius and Blockfi over the years.

Ending Thoughts and Why Im Bullish

Ultimately Im bullish on Pax Gold in the long term. While we may experience short term volatility in prices as we move on from the US election period, global uncertainty continues to persist. Because Gold continues to be considered a safe-haven asset by many, it is likely that Gold prices will not fall significantly even in the long term. 

As for Paxos and Nexo, the risk will always exist - one of the maxims people learn early-on in crypto is "not your coins, not your crypto" - and this will continue to be true. My only advice for users is to manage your risk properly, take profits from time to time and diversify your holdings. Personally for me, i have been in Pax gold and Nexo since 2021 and have not encountered problems so far, I can only hope that their standard continues to be as good as gold.