Expanding the trusted gold ecosystem; building a more transparent and trusted gold supply chain

The gold industry is going through a period of significant change, including the important steps that are being taken by gold miners to disclose the refineries to which they send their gold.

This disclosure is a good start. It is an important step in strengthening trust in the gold supply chain through an increased commitment to transparency.

Arguably, the commitment to upload core data onto the Gold Bar Integrity (GBI) platform is equally important in increasing trust in the gold supply chain. It is creating a digital ecosystem that builds greater transparency in where gold comes from and the manner in which it has been produced.

This upload of core data in most instances will not be publicly disclosed. This data, including the weight of gold transferred and the purity of that gold, is commercially sensitive and could conceivably create a security risk. As such, it would not be appropriate for miners to publicly release this information.

However, committing this data to a centralised GBI platform creates an immutable record of what gold has left a mine site. Over time, as more refiners also come onto the GBI platform, it will also create an immutable record of what gold has arrived at a refinery.

This information will, however, be available to trusted organisations – including governments and potentially the LBMA, the independent authority for the precious metals market. Governments of producing countries can use this to corroborate how much gold the mines have produced – and validate that they have received the correct royalties for this gold. Governments of countries where the gold is refined will have a better system for monitoring imports and exports, again important to ensure the correct taxes are paid, and to support appropriate monetary oversight. The LBMA can use the GBI platform to get more accurate and more timely information on gold flows, aiding their objectives in disclosing trade data which supports the effective functioning of the international gold market

Once all gold from “legitimate” operations is included on the GBI platform, it will become increasingly obvious when “illegitimate” gold has entered the market.  It has been well-documented, that gold has been used to fund illicit activities. If enough market participants join the GBI platform, over time, it should help reduce the ease of gold being used to support criminal enterprises.

The gold market works best when counterparties can trust each other; and therefore, trade freely with each other, with minimal friction in the system. To put it simply: Company A can buy gold from Company B knowing that the gold they will receive is the weight and purity it claims to be; and that the gold has been responsibly sourced.

This is effectively how the London gold market works – there is a “closed loop” of trusted counterparties, including refiners, vault operators (custodians) and logistics companies – who move gold between them continually. The gold is in a standard form (400 oz bars) and the companies within the closed loop trade in what is likely the most efficient gold market in the world, which leads to greater liquidity and extremely low transaction costs. The participants trust each other because they all follow high standards; and because gold is regularly tested – for both weight and purity – as it “flows” around the closed loop. As such, any deviations from the expected standard are quickly identified.

In effect, the GBI platform is expanding the existing “closed-loop” nature of the London wholesale gold market to encompass a broader set of market participants. The trusted network would include companies operating around the world in a range of bar sizes, beyond those operating in London in 400oz gold bars. Trading will become more seamless and transaction costs reduced because each gold bar will have a “digital twin” that can demonstrate that all the gold contained in the physical bar has been responsibly sourced; and that the physical gold bar has been vaulted and owned by responsible parties. This GBI platform will also, over time, open new digitalised gold products, including new forms of gold lending and collateralisation, because the digital twin will give confidence that the gold bar is “legitimate.” In addition, once in digital form, there is much more flexibility in how that gold can be utilised.

Of course, there are challenges to reaching this desired state. Firstly, many mining companies have invested significantly in their existing enterprise resource planning systems and are reluctant to invest more in committing to upload their data to the GBI platform. After all, they already have a high degree of control over the gold that they produce and the GBI platform doesn’t immediately offer financial benefit to an individual company. However, members of the World Gold Council have committed to putting their core data on the GBI platform because they recognise the long-term benefit of the platform to the industry at large – creating additional trust in gold and growing the ecosystem will benefit all producers.

Many producers – and indeed refiners – may decide that because the GBI platform isn’t intended to improve their financial performance in isolation, they won’t participate. But we strongly believe that the collective system-wide benefit will ultimately drive all responsible producers and refiners, as well as companies offering vaulting and transport services, to adopt the GBI platform. Put simply, the gold ecosystem will increasingly “accept” gold on the GBI platform in an efficient and frictionless manner, making it more difficult (rightly) to trade gold if it is not on the platform. This supports raising of standards for all responsible businesses; and ever more pushes unsavoury companies to the margins.

Of course, there is much more work to do; and we are only at the early stages of this journey. But growing the trusted ecosystem is in sight. This change in approach from “my company operates responsibly” to “my entire supply chain operates responsibly” is gaining traction and will herald a positive transformation in the way in which the gold market operates.  In turn, it will lead to many more customers and investors deciding that they have trust in gold and in the gold market.

*Note: This article was originally published on Mining Weekly: Opinion: Expanding the trusted gold ecosystem; building a more transparent and trusted gold supply chain