Why it makes sense to invest in digital gold

The yellow metal’s sparkle shines bright but is it inexhaustible? No one knows. There’s only so much you can procure under given circumstances, and only so much that the earth has in mines and people have in their vaults and lockers. All this gives it a commanding street value. That said, anything physical and valuable calls for upkeep, security, storage and maintenance that sometimes works up to a neat sum of money for ensuring asset-safety.

Security and wellbeing being a primary human need, gold has played its part in being the perfect repository of value from time immemorial with most wars at one time being fought to get control over the precious metal. Today things may look different but we continue to hold and being in possession of gold due to its value, more so in times of emergencies. India’s pledging its sovereign gold way back in 1991 to fund its essential imports in the absence of adequate forex reserves, is the perfect example. The pandemic in the recent past wreaked havoc on earnings with gold in some cases tiding over tough times.

That brings us to the newest idea in gold: digital gold. With everything physical and paper-based having outlived its utility, it’s time for tradable commodities to go digital. So has gold; and from the looks of it most aren’t complaining unless you consider gold only in the jewellery form!

Advantages of procuring digital gold

The Indian government had to charter an aircraft for the gold it pledged to international bodies for a sovereign short-term loan in 1991. That is not to mention what it may have paid for its physical security and safe-keeping. Can everyone be expected to do the same? Certainly not.  

That said, not all the gold that’s procured has ornamental and sentimental value. Most of the gold that can’t be seen in fact acts as collateral security for loans. Converting the latter into a digital form that indicates ownership and existence in safe lockers, is a better and safer way of offering a collateral security without the attendant and heightened risk of security. If you think safe deposit vaults are safe, think again. They don’t offer insurance! Digital gold with the promise of delivering the yellow metal is then far better. Security aside, digital gold is also not affected by tampering in any form. These aside, digital gold has an edge in taxation with respect to indexation that allows calculating purchase price after adjusting for inflation which is said to result in reduced taxes.

Disadvantages of procuring digital gold

Ah, the feeling of being covered in gold! That’s something that you will never get with digital gold. Wearing gold is an obsession in places like India and digital gold may not ring the right bell in certain sections. That said, (and thankfully so!) not everyone thinks along those lines. There are those who look at gold as pure investment, and given the easy and safe way, opt for digital gold.

What are the best ways of procuring digital gold?

Sovereign Gold Bonds (SGBs)

These are government securities issued by India’s central bank, the RBI. Denominated in gold, one can buy these in quantities as low as 1 gram to a maximum of 4 kgs. Transactions are purely book entries and mirror the existing gold prices at the time of buying and selling. It eliminates all the minuses of holding and storing while essentially remaining a thing of value. The added advantage is the interest (presently 2.5 per cent on the amount of investment) that the investment attracts. It can be held in paper form or in one’s demat account and transferred or assigned just as easily. Like new equities being announced by corporates, the RBI announces their issuance and the public can apply for the same.

Gold Exchange-Traded Funds (ETFs)

To put it bluntly, a Gold ETF is a mutual fund with the underlying asset being gold. And like any mutual fund that’s linked to the bourses, can be bought and sold there, though one has to be aware that holding and sale is always in currency and never in physical gold form. One can hold Gold ETFs in paper or demat forms with each unit of ETF representing a gram of gold. It’s the ideal cross between pure gold and pure convenience, with its biggest advantage being its tradability across bourses including the NSE and BSE.

Gold trading on the MCX

From 2003, the year when the multi-commodity exchange (MCX) came about, gold is being traded on this commodity exchange platform. The advantages here include the facility to hedge and speculate as per one’s needs and appetite for risk. For these reasons the platform is for those with a certain understanding of trading and speculation. That said, gold on MCX can be traded in quantities as low as 1 gram. For those preferring futures, it can go up to 10 kgs.  

Digital Gold purchase

Gold having gained its sheen during the pandemic, practically every entity in the world of finance and money is today attracting buyers to invest in gold online. From banks to digital wallets that include the likes of Paytm, Phonepe, Google Pay, Airtel Payments Bank, Amazon Pay, and HDFC Securities, everyone is entices the world into buying gold as a form of investment for sums as low as Rs 1.00! Procurements are stored in registered depositories under insurance that guarantee safety till their eventual delivery to the buyer.

Where’s it all headed?  

The digital gold-rush being what it is, keeping records of purchases and ownership can be a task. That, and the fact that gold in whatever form can’t be used unless it’s liquidated has brought in a new way of dealing with digital gold. Tokenizing the digital certificate of ownership down to 1-gram digital gold coins whose details are firmly and indelibly registered on a block-chain!  

The “G-coin”, a creation of US-based fintech company Emergent Technology Holdings makes digital gold entirely tradeable in its existing form for investing, wealth transfer and payments! India could be their next destination!  

Views are personal. The author is the Chairman of Vighnaharta Gold

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