When gold flows through its value chain (from the producer at the mine, via brokers and refineries, to the traders and ultimately the sellers on the global market) participants within the chain convert to and back from USD into gold multiple times.
If we simplify the gold chain for a second, we have five participants: the mine at the source, the broker after the mine, the refinery after the broker, the bullion trader after the refinery, and finally the seller into the global markets.
The miner extracts gold and receives USD for it, at a price matching the current global market price of gold. The broker now holds physical gold, having given away USD to acquire it. A day or two later, and with prices having fluctuated, the refinery pays the broker likewise in USD; the refinery now holds the gold and is exposed to its price fluctuations, having once again performed an implicit conversion from XAU to USD when buying from the broker. This same pattern continues to the trader, and then finally to the wholesaler, who receives USD from their counterparty and ends up 'long' gold.
So the 'long' gold position, and therefore the price risk, moves through the chain, where each handover implies a conversion. There are, in essence, n conversions, where n is the number of hops.
Gold moves through the chain like a hot potato, each participant trying to hold on to it, and to any price fluctuations measured in USD, as briefly as possible. Traditionally, that gold exposure was hedged using futures (or, more exotic and newer, perpetuals in a similar fashion). Here too, each participant would 'buy' a short gold position equivalent to the inventory they're holding, denominated in USD, each managing that short independently, opening and closing it according to their needs, each paying a brokerage fee and managing liquidity separately.
But what if we flipped this around, and moved FX to the two endpoints of the chain, at the very source, the mine, and at the destination, the wholesale seller, and switched the mode of payment in between to be gold itself, with the markup paid as a fraction of the gold being shipped? In such a scenario, gold positions get naturally hedged, because the mode of payment is gold itself: a naturally long gold position is exchanged for gold itself, two positions which are, obviously, pegged. It would not, however, make much sense to do this with physical gold. What's the point of buying gold using physical gold? Ultimately that would just create gigantic physical gold markets at the mine's level, turning the mine itself into the largest seller and lopsiding the structure as a whole.
It needs to be a medium that's pegged to gold, that is priced like gold, but that's ultimately independent from any specific physical gold; that can easily traverse the value chain; and for which sufficient liquidity exists at the ends to convert both into and out of it using either USD or other liquid tokens. Tether has a token with exactly those properties: XAUT, a tokenised version of gold, backed by gold stored in Switzerland.
Now imagine the following scenario. The refinery buys XAUT using, say, USDt, then pays the broker in XAUT, and the broker uses that XAUT to pay the mine. Throughout this process, and throughout the supply chain, the value of gold in terms of XAUT never fluctuates, other than by the individual markups added by each participant. So the mine might sell 1kg for 0.98 × 1kg in XAUT, the broker for 0.99 × 1kg, and so on. Each middle player is happy to be paid in XAUT precisely because they were going to pass the gold straight on anyway: holding a gold-denominated token instead of dollars means they carry no price exposure to hedge and pay no conversion spread on the way in or out. Instead of multiple parties each hedging their full gold exposure, the only exposure that needs to be hedged (if any) is the revenue generated by each player in the chain, while the miner can easily exchange XAUT for USDt (which they prefer) at the point of sale. That means there's no requirement for the mine to hedge gold at all, since they can simply convert XAUT to USDt at the moment of sale on their end.
We believe structures such as these are only the beginning. We'll see more tokenised commodities used within supply chains to provide natural price hedges. They're an elegant way to transform complex financial operations involving both FX and hedging into simple token exchanges.