Gold investment in a digital age

Gold investment

Gold, with its unique combination of high extrinsic and intrinsic value, is a peculiar metal. Its shiny exterior and lushness make it highly attractive in jewellery; on the other hand, you can find it in common smart devices. Gold is the most fungible asset in the market after legal tender money. Interestingly, it defies the concept of elasticity in economics, which says that as the price of high-value goods rises, the demand for them falls in the same proportion or higher. Even though gold comes in the category of “luxury goods”, its demand over the long run is inelastic. Consequently, upward price fluctuations have not reduced the demand for the metal by any significant margin. That’s what makes gold investment a power move.

Gold investments are always considered safe and reliable, generally promising good returns. Therefore, despite the pandemic causing unprecedented downturns in several sectors, gold demand has remained more or less unaffected. In the first quarter of 2022, for instance, the World Gold Council (WGC) reported a 34% increase in gold demand from the corresponding period in 2021, fueled by investments in gold exchange-traded funds (ETFs). This point brings to light an essential aspect regarding gold: you don’t need to buy it in its physical form anymore.

Investing in gold jewellery: is it worth it?

If you come from a typical Indian middle-class household, you will know the importance placed on buying gold during festivals and celebrations. India is one of the largest importers of gold, and Indian households are the largest hoarders of this metal worldwide. Gold jewellery, in particular, experiences high demand in India since it symbolises social status. However, it may not always be wise to invest in gold jewellery. 

First and foremost, ornaments made out of gold are expensive due to their making charges. Depending on the jeweller and the shop’s location, these charges can range from 5% to 20%. If you plan on reselling the jewellery, these making charges will be ‘sunk cost’ (money that has been already spent and cannot be recovered). Second, the jewellery you buy requires a hallmark that guarantees its purity and authenticity. Otherwise, the jeweller may not offer you its total value when you resell or mortgage it. Checking the hallmark on your purchase also prevents the circulation of fake items in the market. 

Gold investment: choose bars over bangles

Gold bars are a more efficient alternative to gold jewellery, mainly due to the absence of making charges. This factor also makes it easier to sell bars than ornaments. Additionally, the bullion form allows the buyer to convert a part or whole of the bar into jewellery when required.

Holding physical gold, however, comes with a lot of limitations. For example, if you buy a gold bar, you need to keep it safe in a locker or some other secure space due to the possibility of theft. Moreover, in Indian homes, people associate physical gold with social status, infusing it with a strong emotional value. Therefore, parting with it in times of need or for other investments becomes difficult. Thankfully, one need not invest in physical gold today, as there are other options available which are more manageable, convenient, and efficient.

Digital gold

Is virtual gold verifiable?

With the advent of digital technology, investors can access a wide range of previously unimaginable investment options. Gold is one such commodity that is gaining immense popularity on digital investment platforms. You can invest in digitised forms of bullion in two ways: gold exchange-traded funds (Gold ETFs) and digital gold. Gold ETFs are investments wherein the underlying asset is gold. Fluctuations in gold prices will determine the value of your investment. 

Moreover, these are regulated transactions on the Bombay Stock Exchange (BSE) or the National Stock Exchange (NSE) in India. All you need is a Demat (dematerialisation) account and a trading account with a verified stockbroker, and you are good to go. You can buy an ETF through a lump-sum payment or in the form of a systematic investment plan (SIP).

Digital gold is an excellent option for small-time investors. People can buy this gold form using apps such as Google Pay and Paytm. You need not worry about the authenticity of the gold you buy, as these apps are linked to MMTC-PAMP India Pvt. Ltd., a joint venture between Metals and Minerals Trading Corporation of India (MMTC) and PAMP SA (Produits Artistiques Métaux Précieux), a Swiss gold brand. Since the venture involves a government organisation, selling digital gold is also not a hassle.

Gold ETF

Sovereign Gold Bonds scheme: potential gold investment game-changer?

The Indian government introduced the Sovereign Gold Bonds (SGBs) scheme in the 2015-16 Union Budget. This scheme aimed to contain India’s current account deficit (CAD), which was widening due to the massive import of physical gold into the country. SGBs have emerged as a highly desirable investment option, especially for long-term investors. SGBs provide unmatched safety. The Reserve Bank of India (RBI) issues SGBs on behalf of the Government of India. In other words, these bonds are backed by the government directly, eliminating the possibility of default.

Furthermore, SGBs are exempt from long-term capital gains tax. People can also use them as collateral for obtaining loans from banks and Non-Banking Financial Institutions (NBFCs). Additionally, an investor will receive interest on the bond. The bond’s value will depend on the prevailing gold rate at the time of redemption. The only catch with SGBs is that they have a lock-in period of 5 to 7 years. This condition has been incorporated into the scheme to protect small investors from the medium-term volatility of gold prices. Being exempt from capital gains tax and tax deducted at source (TDS) ensures that SGBs yield healthy returns to investors. With no safety costs and making charges incurred on the investment, an individual is likely to benefit significantly from SGBs. More importantly, SGBs can unleash the power of gold by transforming it into a formidable financial instrument, helping the economy expand in different directions.

Sovereign Gold Bond

Ditching the tried and tested

The lure of owning physical gold is hard to shake off. Nonetheless, the range of alternatives available today has made holding gold in physical form obsolete. From an economic standpoint, investing in gold ETFs or SGBs can make the bullion market more competitive. It can also keep the market less prone to cartelisation, which is a discreet agreement between manufacturers and suppliers to uphold steep prices and shield their territory. So, now is the perfect time to scrap the traditional modes and pave the way for the future in gold investments.

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