Digital Gold: how it works, where to buy, advantages and disadvantages

By Vivek Bajaj

Today, gold is no longer used as currency, but it can still be used as currency. In fact, gold has been a store of value for over 3000 years. Much longer than any currency anywhere. In India, gold is considered “God’s silver” and is offered to sacred temples on almost any auspicious occasion. This makes India the largest importer of gold in the world today. Despite being in the midst of a global pandemic, Indians have found a new way to invest in the yellow metal – digital gold.

As people are reluctant to visit jewelry stores and gold dealers, being able to source gold online has become a perfect solution for many investors. A digital gold trader, Augmont Gold Ltd., saw its business increase by 40 to 50% during the lockdown period.

So, before we dive into what digital gold is, let’s take a quick look at how we’ve invested in gold over the years:

How to invest in gold?

Well, historically the most common way to invest in gold has been to buy physical gold in the form of:

1. Coins
2. Bullion and
3. Jewelry

Apart from that, we have a choice of gold sovereign bonds, gold mutual funds, and gold ETFs.

But during a pandemic, another method of investing in gold that has gained immense popularity is the form of digital gold.

What is digital gold?

Buying physical gold certainly has its drawbacks. There are issues of identifying its legitimacy and purity, and then there are issues of custody and storage. Another problem is that we are in the midst of a pandemic. It is not entirely ideal to go to gold dealers or jewelry stores.

Digital gold, on the other hand, can be purchased online and is stored in vaults insured by the seller on behalf of the customer. It also helps us overcome all of the aforementioned issues related to physical gold purchases. All you need is internet / mobile banking and you can invest in gold digitally anytime, anywhere.

How does digital gold work?

You can invest in digital gold from several mobile electronic wallets such as Paytm, Google Pay and PhonePe. Brokers such as HDFC Securities and Motilal Oswal also have an option to invest in digital gold.

Currently, three companies are offering digital gold in India.

1. Augmont Gold Ltd.
2. MMTC-PAMP India Pvt. Ltd. a joint venture between the State MMTC Ltd. and the Swiss company MKS PAMP.
3. Digital Gold India Pvt / Ltd with its SafeGold brand.

Apps and websites like Paytm, G-Pay, etc. only provide a platform for SafeGold and MMTC PAMP metal trading companies. Once you invest in digital gold, these trading companies buy an equivalent amount of physical gold and store it under your name in secure vaults.

But is the process actually as simple and convenient as it sounds? Let’s see how you can invest in digital gold

How to trade digital gold?

First of all, you visit one of the platforms that offer digital gold investments such as Groww, Paytm, HDFC Securities, G-Pay, Motilal Oswal, etc.

Once you’re on their platform, you perform the following steps:

1. Enter an amount in INR or grams – You can buy gold at a fixed value or buy by weight at the live market rate.

2. Choose your payment method – Once the KYC process is complete, you will be given a number of payment options to choose from, such as an account, card, or wallet.

3. Store your gold in a secure locker – Your account is updated instantly and is accessible 24/7.

4. Sell when you want – You can choose to sell your gold itself digitally at the platform whenever you want.

5. Take physical delivery of gold – In case you have chosen not to sell gold, you can request home delivery of your gold in the form of coins or bullion. Note: delivery charges apply.

Benefits of investing in digital gold:

• You can take physical delivery of the gold to your doorstep.
• You can invest an amount as low as Re.1.
• Digital gold can be used as collateral for online loans.
• Digital gold is genuine and the purity is 24K 99.5% for SafeGold and 999.9 for MMTC PAMP purchases.
• Your purchase is securely stored and is also 100% insured.
• You can exchange digital gold for physical jewelry or gold coins and bullion.

Cons of investing in digital gold:

• Limit of Rs.2 lakhs for investment on most platforms.
• Lack of a formal government regulatory body such as RBI or SEBI.
• In addition, delivery and manufacturing charges are applied to the price of gold.
• In some cases, companies only offer a limited storage period, after which you must either take physical delivery or sell the gold.

Why gold shines during a pandemic:

Price as of January 1, 2020: Rs. 39,100
Price as of October 28, 2020: Rs. 52,300
Returns%: 33%

Gold serves as a safety net in times of crisis

Take the recent Covid19 crisis as an example to corroborate the previous statement. A nationwide lockdown meant time off and increased debt burdens for consumers and businesses. To maintain economic growth, the government and the Reserve Bank of India have had to increase spending while limiting growth in debt levels. Such measures came through a fiscal stimulus program and Atma Nirbhar Bharat.

It basically meant more money supply, which put more liquidity in the hands of the Indian people. This excess supply reduces the purchasing power of money and fears of rising inflation are growing.

But gold as an asset class preserves purchasing power against falling currencies. As a result, the demand for gold increases and, consequently, an increase in the price of gold. This vicious circle of increasing debt burden leading to a need for stimulus packages always results in a weakening of the purchasing power of money or inflation. So, in times of uncertainty, gold really shines!

Conclusion

There is no doubt that gold as an investment class should be a small part of our portfolios. But there are better options for investing in gold, such as sovereign bonds and gold ETFs, rather than looking to digital gold.

The main reason being that gold should be part of a long term portfolio. In this sense, it is better to go for gold bonds as they pay an additional 2.5% interest. But since bonds are less liquid, for short-term hedges, investing in gold ETFs is a better option as they fall under the regulator of SEBI.

Once the investment limit of Rs. 2 Lakhs and a regulator are appointed, Digital Gold would be an attractive investment for those who prefer to invest in physical gold.

(The author is co-founder, StockEdge)