Markets • March 25, 2020, 4:26PM EDT

Gold supply issues are putting pressure on a stablecoin tied to the precious metal

Quick Take

As gold enjoys a historic rally, companies and traders are reporting issues sourcing the precious metal
That has put pressure on Tether, which operates a gold stablecoin, to find new sources of gold
Paxos, meanwhile, is reporting record interest in its PAX Gold product.

The price of gold has been riding the wave of market anxiety during last few trading sessions as investors seek safety – and it's having an impact on crypto firms like Tether that use the precious metal to underpin their stablecoins.

While gold was trading in the red during Wednesday's session after news that the White House and the U.S. Senate reached an agreement on a $2 trillion stimulus package, its price is still up 7.5% since Friday's close.

Still, issues with the availability of gold bars has underpinned this price action. Reports also indicate that major gold refiners have been idled to curb the spread of coronavirus and that border control measures and flight route suspensions have also exacerbated the situation.

In an interview with The Financial Times, Markus Krall, chief executive of German precious metals retail Degussa, said the firm is "being creative to find new sources but what is driving it all are the measures by authorities to stop coronavirus."

It's against this backdrop that gold-backed stablecoins are seeing a similar surge in demand. PAX Gold, for instance, has seen its supply spike from $17 million on Saturday to over $22 million during Wednesday's trade. Meanwhile, Tether Gold's supply has hit $50 million.

"Interest in PAX Gold has surged, with our full supply increasing about 20% over the last three days," Paxos chief executive officer Charles Cascarilla noted in an email to The Block.

As for Tether, the firm is having trouble sourcing gold since Switzerland went into full lockdown, according to a source familiar with the situation. The firm is currently working on finding another source for gold. If the firm is unable to do so, it would not be able to issue more Tether Gold. The source said the firm has sent a request for information to a Swiss government agency.

As for Paxos, Cascarilla said the firm isn't experiencing a supply issue.

"Right now there is no shortage of gold in London, so we have no supply issues," he said.

Wider market context

As for the broader market, analysts at investment bank Goldman Sachs wrote in a note to clients Tuesday that it was time to buy the metal.

"We have long argued that gold is the currency of last resort, acting as a hedge against currency debasement when policy-makers act to accommodate shocks such as the one being experienced now," the note reads.

The U.S. Federal Reserve has pumped money into the financial system in an unprecedented fashion, announcing a plan to buy an "unlimited" number of corporate bonds, Treasurys and mortgage-backed securities in a bid to shore up the U.S. economy.

Demand for gold has translated into similar demand for gold-linked products, including futures and exchange trade funds (ETFs) such as SPDR Gold Shares ETF.

The product has been clocking in volumes topping $100 million per week over the past month, hitting its highest levels in five years, according to data from Factset. Volumes this month were the highest since 2013.