Digital gold gives you the comfort of buying the metal for as little as one rupee without having to worry about purity and storage. While purchasing gold over your smartphone has been made simple, before making any kind of investment, you need to be aware of the basic features and risks involved.
What is digital gold?
It is the purchase of physical gold that can be held by the investor in digital form via various online platforms. The quantity will be stored on behalf of the buyer by authorised vendors. The metal will be bought and sold at live market prices.
If you wish to, the gold purchased can also be delivered to your home in the form of bars or coins.
Purpose of digital gold
Unlike purchasing gold from a jeweller, digital gold is mainly for investment purposes. You can buy as well as sell your accumulated digital gold online.
Who exactly sells this gold?
Vendors or producers such as MMTC-PAMP India Pvt Ltd and Digital Gold India Pvt Ltd have partnered with digital platforms of banks, broking and fin-tech companies to make these transactions possible. When you purchase digital gold from an app, say Patym or Google Pay, you are buying it from MMTC-PAMP India (for example) and the fin-tech company (Google Pay or Paytm) is an intermediary.
You can also choose to sell this accumulated gold back to the vendor at live market rates.
Until you make a sale, the vendor will hold the quantity on your behalf as a custodian.
The vendor's name will be specified on the app.
Purity at offer depends on the vendor that the platform has partnered with. It is wise to read the details and FAQs provided over the app to find out who the vendor is and the purity they offer. For example, MMTC-PAMP sells 24-carat gold of 999.9 purity, the highest quality of gold, while SafeGold offers 24-carat gold of 995 purity.
Since the vendor is holding the gold for the investor, it will take measures to ensure its safety. Both MMTC-PAMP and Digital Gold India have appointed IDBI Trusteeship Services Ltd as their trustee. A trustee ensures the quality of the gold and that metal being sold to investors is segregated and available in the vaults.
The vendors also have the gold held insured against any loss.
Cost of purchase and sale of digital gold
Ideally, distributors like the fin-tech companies allow you to purchase digital gold for as little as one rupee.
The prices quoted over the app that you purchase on is based on live market rates and includes customs duty and other applicable taxes like GST.
You have two choices with the accumulated gold. Sell it back to the vendor at market price or seek delivery of physical gold.
Some also provide the option to redeem this gold against jewellery purchased from approved jewellers.
Usually, if you were to sell the gold immediately after purchase, you will see that the rate will be slightly lower. This is because the purchase price includes costs related to the transaction like maintaining the platform, processing payments, procuring and selling physical gold, insurance and storage up to five years.
Vendors also recover the cost of liquidity from you as they have to maintain adequate funds at all times to repurchase the sold quantity. These charges could make up to 2.5 percent of the price you pay.
Further, if you were to take physical delivery of the gold accumulated, you have to bear the costs of minting and delivery as well.
Lack of regulatory benefits
The major concern when it comes to digital gold is the lack of a regulatory mechanism. The contribution of digital gold to total gold sales in India is still fairly low, but problems could arise when sales pick up.
These issuers have appointed independent trustees, which provides some level of assurance, however, concerns arise over the liquidity of the asset held by investors.
The benefit of digital gold is that one can buy and sell over their smartphone at the right gold rate that they want to without losing time, but that means that the issuer will have to maintain a high level of liquidity to honour the sale orders.
Further, with no set regulations on who can offer these products, how can investors verify whether the extent of charges on the purchase quoted by the issuer is correctly determined?
If things go wrong, there is no regulatory grievance mechanism in place to report it.