A Capex-Light Way To Get Gold Exposure (Not Royalties)
Video: An update on what Abaxx Technologies is working on.
Transcript
Traditionally, if you wanted higher returns through a bet on gold then instead of just buying the metal itself, you need to buy gold miners.
But there are various risks there…
Operational issues are common in mining.
Building a mine is incredibly expensive and time consuming.
Most mining companies ultimately fail because of how challenging it is.
Those are just some of the issues.
So, the natural solution to this has been buying royalty companies instead. By owning gold royalties like Franco-Nevada does, for example… you get exposure to gold mines without dealing with most of these risks.
At this point, the commodity royalty space has matured, so the returns likely won’t be as great anymore. But there is another capex-light option I think more investors should take a look at…
Abaxx Technologies (ABXXF) is the parent company with approximately 90% ownership of the Abaxx commodity futures exchange and clearinghouse in Singapore.
Exchanges represent an even better capex-light opportunities than royalties, because all of the costs of building the exchange are behind them now. At this point, Abaxx just has to onboard more participants to trade, they don’t need to deploy any additional capital to buy more royalties and bet on whether a mine might produce gold or not.
Abaxx launched the exchange in the summer of 2024, so they are still ramping up the exchange and onboarding more trading or clearing firms. At this point, they have launched LNG, carbon credit, and nickel sulfate futures contracts.
Recently, they announced they would have 3 lithium carbonate contracts launched on March 7th, with delivery points in Singapore, Rotterdam, and Baltimore.
Albemarle has agreed to onboard and trade its lithium on the exchange as the first approved brand. That company is the second largest producer of lithium in the world, so that is a great start.
A large focus of the company is on launching new battery metal or environmental contracts. But the next one after lithium will be gold.
By investing in Abaxx, if their gold contract takes off, then we as investors benefit from the volatility in gold markets when contracts are traded on the exchange. The more volatility in the futures prices, the more contracts traded, and the more revenue an exchange makes. So, Abaxx would offer exposure to changes in the price.
The contract will be a combination of both a futures market and a spot market for gold kilo bars in Singapore. It has been mentioned that major bullion banks want to see a similar market created in New York after they launch this one in Asia. But for now, the first version will just be in Singapore.
Unlike other contracts they have designed, gold is a market that is already dominated by large competitors. LNG, carbon credits, and nickel sulfate are still markets that lack any physically-settled benchmark contracts.
There are already existing benchmark gold contracts with the COMEX in New York, owned by the CME Group and the London Metals Exchange (LME) in the United Kingdom.
The London markets typically serve as a spot market where commodities stand for immediate delivery, meanwhile the COMEX dominates the futures market for gold.
Having those two, separated markets has typically been fine, but prices started to diverge with supply chain disruptions during 2020, and changing policy like tariffs could lead to further differentials.
This has led to growing interest for a centralized gold price, with both futures and spot markets located in the same place. That is what Abaxx is setting up in Singapore.
As I mentioned earlier, the CEO of Abaxx, Josh Crumb, has talked about how bullion banks want a similar system in New York. So, even with the COMEX already there, interest is starting to come in for Abaxx to create similar products abroad.
Additional validation that the contract might get some legs is that Abaxx has a former chairman of the London Bullion Market Association working with the company to design the futures contract and spot market. Along with collaborating with market participants, as the company has when creating previous contracts. So, there’s a good chance Abaxx has confirmed that the market wants to trade what they are designing in the gold space.
Now, in addition to the COMEX and the LME, there are also existing, competitive gold contracts in the Asia region. Particularly the Shanghai Futures Exchange (SHFE) and the Shanghai Gold Exchange (SGE) in China, as well as the Tokyo Commodity Exchange in Japan. While China is difficult to get access to as a trader outside of the country, Japan is certainly accessible.
Point being, gold is a competitive market. So, how does Abaxx hope to garner a foothold and gain market share?
Primarily through technological innovations.
I’m not going to explain in-depth about how the technology works in this video, you can check out my write-up on Abaxx to read more about it, link in the description. I’ve already explained it a few times, so I won’t get into it again.
But essentially what Abaxx hopes to do is to create what they call Full Digital Title (FDT), by using blockchain technology. Their technology will allow them to immediately transfer ownership of a commodity to the buyer, allowing for instantaneous trade settlement. As of right now, transactions in the financial and commodity space typically take days to settle.
Even better, tracking everything through smart contracts and the blockchain eliminates the risk of fraudulent transactions. Which has been an issue in the commodity industry because they have been slow to adapt to new technologies. Every gold bar will have a unique ID, which can be easily tracked to ensure that every gold bar is where people say they are. This also allows firms to use that gold as collateral, since every transaction is being tracked and verified, and settling instantly.
You could also see Abaxx allow firms to settle trades in Gold instead of fiat currency if they wanted to, which is not a thing on any other exchange.
As a new exchange and clearinghouse, Abaxx can utilize technologies that other exchanges couldn’t dream of using right now. The company built up its own tech stack for this reason.
So, Abaxx’s advantage over the incumbents is their location, Singapore and Asia at large has been the region driving demand for gold. The other advantage is that they built the exchange from the ground up with technological progress in mind. Even if a market is already saturated with existing futures contract benchmarks, Abaxx might be able to make inroads through offering new technologies.
Something else to take note of is that Abaxx recently established new offices in Hong Kong and Beijing. They did not do that for shits and giggles.
Chances are, they will likely work with an exchange like the Shanghai Futures Exchange to offer cash-settled contracts and spreads based on the contracts offered within China. As I mentioned earlier, there are a variety of restrictions that make it difficult to trade futures products in China when you are outside of the region. So Singapore could act as an intermediary for trading firms.
So, new events to look out for over the next year are:
The lithium contract, which should launch soon.
The gold contract and spot market, which shouldn’t be far away either.
After gold, it seems like the next contract coming up will likely be related to copper.
Beyond those futures contracts, we also have the potential cash-settled contracts and spreads.
Additionally, Abaxx could start offering third-party clearing services through its clearinghouse for existing exchanges.
There’s also plans for Abaxx to elaborate further and their plans for Full Digital Title and the technology development roadmap in 2025.
While it is unclear how much market share Abaxx will ultimately capture with these efforts… the company has entered its growth stage. The network effects continue to grow as more clearing members are onboarded, and trading firms start to use Abaxx contracts.
This is an investment we need to be patient with, as it takes time to build out these markets and attract liquidity. But the management team is experienced in doing just that. So, I’m not all that worried about whether or not Abaxx will succeed. In my opinion… the main question is how long it will take.