What is Digital Gold and why you should avoid it?

With the advent of online platforms, now many are investing in Digital Gold without any hassle. However, understanding what is Digital Gold, and why you should avoid it is also an important aspect.

What is Digital Gold

Gold is always a kind of safe haven for many of us. Especially after the last few year’s uptrends in price, many try to invest a certain portion of their portfolio in Gold. However, long back I wrote an article on how volatile this asset is and why you should avoid it “Gold Price of Rs.18.75 in 1925 to Rs.47000 in 2020 – Should you invest?“.

But still, we have a tendency and firm belief that gold is always the best investment option and in fact the SAFEST investment option. In reality, like other asset classes, this asset also has certain risks, which many of us ignore.

What is Digital Gold?

For decades we love to buy gold. The majority of us earlier used to keep this in physical format. Safekeeping of such physical gold was the biggest headache as the probability of accidental loss or theft is common. One more disadvantage of holding the gold in physical format is the resale value of gold due to wastage and making charges. In fact, keeping your gold in Bank Locker is also risky. Why? Refer to my latest post “Latest Bank Lockers Safety Rules in India – 2021“.

Digital Gold is just like the regular gold you buy, without the hassle of being responsible for security and storage for your asset. Eradicating the obstacle of finding an authentic seller and negotiating a fair selling price. If you are investing in Digital Gold, then they are assuring you certified 24 Karat, 999.9 pure gold.

It’s a product offered by vendors and refiners of gold through various platforms, including wallets such as Paytm, Amazon Pay and investment platforms such as Kuvera, Groww and stockbrokers. However, recently SEBI cautioned NSE in offering such Digital Gold product due to it’s safety and authenticity. Hence, asked NSE to stay away from offering such products on their platforms. Accordingly, National Stock Exchange (NSE) has directed its members, including stockbrokers, to discontinue the sale of digital gold on their platforms by 10th September 2021.

As safekeeping is the biggest issue, once you purchase online, the risk of safekeeping transfers from you to the seller. They claim that they will hold your gold held in insured, and secured vaults while maintaining the transparency of your transaction. And for the first five years, you won’t even have to pay anything for storing this gold.

There are no limitations on an investment amount, you can start as low as Re.1 and go up to INR 2 lakhs (across 1 or multiple transactions) in a single day.

The process to redeem your Digital Gold in exchange for 24 Karat, 999.9 purity bars or coins is easy and reliable. The redeemed unit will get delivered to your doorstep.

The price of Digital Gold is linked with live international markets and is unaffected by local factors. So irrespective of the market scenario, you will receive a fair price on your investment if and when you decide to sell. You can cash out via a simple bank transfer.

Digital Gold – Why you should avoid it?

As the first red flag with respect to this product is SEBI’s recent warning to stock exchanges from offering such product is itself a warning to all of us who are investing in such Digital Gold.

Currently, there are three companies offering digital gold—Augmont Gold; MMTC-PAMP India Pvt. Ltd, a joint venture between state-run MMTC Ltd and Swiss firm MKS PAMP; and Digital Gold India Pvt. Ltd with its SafeGold brand.

However, there are a lot of risks involved in investing in such Digital Gold products. Even though you can buy at as low as Rs.1, their claim of safekeeping, purity, and physical gold delivery to your doorstep, there are certain risks in investing. Hence, try to understand these risks at first.

# Regulatory RISK

In the case of Digital Gold, there is no regulator. This poses the biggest risk for investors. When you buy digital gold, the producer purchases gold of equivalent amount in your name. This gold is stored in vaults of a third party or in the vaults of the seller as in the case of MMTC-PAMP. The trustee is appointed to see if the quantity and purity of gold are maintained in line with the gold purchased by the investor. However, there are no regulators to monitor the activities of trustees.

In the case of Gold ETF, SEBI acts as a regulator and in the case of Sovereign Gold Bonds, RBI acts as a regulator. However, in the case of Digital Gold, there is no regulator to safeguard your interest.

Even though they claim that they keep an equal amount of gold and safe keep, there is no such auditing by any regulator regarding their claim. In the case of gold ETFs, regulatory audits are done by Sebi, and a report is submitted to the regulator.

# GST on Digital Gold

When you buy a Digital Gold, you have to pay the GST of 3% like how you pay it while buying a Digital Gold. Hence, if you are buying Rs.1,000 of Gold, then the actual buying for you is Rs.970 than Rs.1,000.

Digital gold providers charge a spread ranging between 2-3%, which provides for the expenses such as cost of storage, insurance and trustee fee. While gold ETFs also buy physical gold to back the investments but they get the credit back for GST paid in the form of input credit.

# You can’t hold it forever

Digital Gold units can’t be held forever. There is a maximum term for holding Digital Gold after which the investor has to take delivery of gold or sell it back. If you are unable to take the delivery of the gold, then you have to pay certain charges to hold your gold.

In the case of MMTC-PAMP investors will have to mandatorily take delivery or sell the gold purchased. The investor will have to pay extra charges decided by MMTC-PAMP, if the delivery is not taken.

However, in the case of Gold ETF, you can hold it for as many years as you wish.

# Delivery and making charges

One of the biggest advantages of this Digital Gold as per their claim is that you can take physical gold delivery when you sell the gold or after the completion of the holding period.

Hence, there are making charges as physical gold will have to be delivered in the form of coins or bars, depending on the quantity. Making charges varies depending on the design of the coin. Apart from this, delivery charges will have to be paid separately.

Conclusion – Considering the risk of absence of a regulator, charges and long-term holding is not possible, it is better to explore Gold ETF (for your long-term holding) or Sovereign Gold Bond Schemes rather than using such fancy online Digital Gold investment.

16 thoughts on “What is Digital Gold and why you should avoid it?”

  1. Hi Basu,
    I want to accumulate gold for my daughter marriage which will require after 15 yrs .
    Can you pls suggest what to do

    1. Dear Shrinidhi,
      Why to acquire future requirements of gold through gold only? Instead, I strongly suggest you to use equity and debt funds (in debt you can use PPF also) to accumulate

  2. Hi Basu Sir

    With the article info i stopped further investment in digital gold and found out that as per SEBI guidelines, brokers have stopped selling it. Just wanted to know if the invested amount should be withdrawn immediately or we should wait till gold market gains. also please clarify if there is a future possibility of these digital gold transactions will get regularized.

  3. Dear Basu Sir,
    Very nicely explained and well written article. Basunivesh is doing very good job and i have learnt a lot in last 5 years after i started following basunivesh. Inspired by your articles, i have rectified all my previous investment mistakes and today i feel proud about following you.
    You are an inspiration to all investors.

  4. Hi,
    Pls share your opinion on gold miners ETF if such fund exists in India and equities like PCJ ( jewellers equities) and how about owning them instead of any of the above gold bonds, digi gold/etf

    1. Dear Santosh,
      As of now, no such gold miners ETF. But you have a fund like DSP World Gold Fund, which invests in Gold mining companies.

  5. I started investing in digi gold but soon I realised that it is not a good choice owing to 2.95% spread and GST. So straight away I loose 6% immediately after investing money.
    It is good for people who does penny investments.

  6. This is the stupidest article I’ve read in a while. No consumer is worried about charges… We are only worried about HIDDEN charges. All the Digit Gold companies indicate the charge clearly.
    GST is a Govt charge… If you stay away from digi gold for GST… You might as well stay away from food, water and anything else.
    The author seems to have been refused an option to sell Digi Gold. No.wonder such a dumb attempt to hide the truth.

    1. Dear So-Called SMART investor,
      I feel pity for your knowledge. When you are investing, cost is the first consideration. However, for you it doesn’t matter 🙂 You are following GST cost of investment to the GST cost of consumables 🙂 Go ahead…invest in Digital GOLD. None is holding you 🙂

      1. Spot on! Investment in SGB doesn’t attract GST plus it also gives you a ?50/gm disc for online transaction in addition of 2.5% pa interest paid every six months on the booking rate.

        For me, this is the best form of investment in Gold – although I avoid investing in it?

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