No glitter in digital gold: Why convenience is no reason to buy it

Many of us tend to purchase gold in the form of coins, bars and jewellery. Another new product is vying for attention this Diwali – digital gold.

What is digital gold?

Digital gold is an offering of refineries such as MMTC PAMP, Augmont and SafeGold through different distributors such as digital payment-service providers Paytm, PhonePe banking, e-commerce platforms and even jewellers. This product allows you to digitally purchase 24Karat gold of 99.5/ 99.99 purity.

The price of the gold would be based on the intra-day price movements of gold in the commodity market.

While you purchase this digitally, you don’t physically get to experience this gold, as it is stored in the special vaults hired by refiners. Once you purchase it, you have a digital invoice sent to your email address, which is the proof of your purchase.

The storage of such digital gold purchases is free for the first five years. Later, a fee is charged for the next five years. The charges would be levied by deducting a specific percentage from your digital gold balance at the end of each month. The gold will not be stored beyond this total 10-year period. Upon expiry, 0.40 percent of the gold value in the vault would be levied as storage charges.

You can get the gold delivered to your place by paying the necessary charges.

Digital gold too has seen increasing demand, thanks to the low entry limit of as low as Rs 100. “Last week’s sale was higher by more than 45 percent as compared to previous week,” says Ketan Kothari, Director at Augmont Gold.

SEBI bars financial advisors from suggesting digital gold

Market regulator SEBI has barred brokers from offering digital gold. Recently, it also banned registered investment advisors from recommending digital gold due to the structure of the product.

The main reason for prohibiting these entities  is that there is no assurance that a physical gold purchase is taking place when an investor buys through the platform.

Digital gold providers, however, say that trustees have been appointed to ensure transparency. “As per a globally-accepted security charter, IDBI Trusteeship provides additional security as a custodian on behalf of the investor, ensuring that all digital gold holdings remain safe and secure,” says Anika Agarwal, President, Consumer Business, MMTC-PAMP.

If the refiner sinks, so could your gold holdings

Digital gold cannot be pledged or transferred to any other user.

Product brochures don’t give you many details such as how to nominate a person. Moneycontrol visited five jewellery shops and sent emails to many digital gold providers and found that the digital gold account is non-transferrable. Also, most don’t offer nominations. And those that do offer are limited to the jeweller or refiner that you select.

Also, double taxation is applicable if you wish to convert these digital gold balances into jewellery. “A 3 percent GST is levied twice – once when digital gold is ‘sold’ to the consumer and again on the final value when the finished jewellery is sold to the consumer,” says Dr C Vinod Hayagriv, Managing Director, C Krishniah Chetty Group Of Jewellers.

Also, in case of default or bankruptcy or non-payment of intermediary charges by the refiner, the customer can partially lose his balance. “…if a digital gold provider or refiner is unable to pay these expenses or charges for any reason …then the Security Trustee will be entitled to sell part of the Customer Gold and satisfy such outstanding expenses or charges,” state the terms and conditions of digital gold.

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Customers need to understand that they are likely to lose a part or whole amount if the refiner enters into liquidation. Typically, customers form the last layer in the pyramid of payments made in the case of liquidation. It is cumbersome process and they are likely to lose money as payments are made proportionately,” says Abhishek Rastogi, partner at law firm Khaitan & Co.

He adds that if the distributors terminate the services, the digital gold account content would be inaccessible to customers. “People wouldn’t be able to access the units available in their account or recover the gold if the services are terminated,” says Rastogi.

But Agarwal of MMTC-PAMP, says, “In case any partner platform declines transaction service, MMTC-PAMP would aid the investor to further transact on MMTC-PAMP’s direct platform for sale of their digital gold holding.”

What’s more troubling is this: At the moment, only an email address and a common contact number of MMTC PAMP, SafeGold, Augmont are available for people to trace their investments.

Better alternatives

There are better ways to invest in gold. Says Vivek Rege, founder and CEO of VR Wealth Advisors, “Regulated products such as gold exchange-traded funds are fairly transparent, tradable and the units are immediately visible in your portfolio. These are better alternatives to digital gold, which is an unregulated product.”

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Sovereign Gold Bonds, which not just offer an option to invest in gold but also give returns on the stored gold are good options. Suresh Sadagopan, founder of Ladder7 Financial Advisories, says, “Regulated products are best from the investor’s point of view. Sovereign Gold Bond is a good product from the Government. This is tax-free at the end of the eight-year holding period. Also, one gets 2.5 percent p.a. returns on the invested amount.”