While exchanges have instructed brokers to stop selling digital gold, you can still buy from wallets. But be cautious and buy only in smaller amounts
Come September 10, you cannot buy digital gold from your stock brokers as the markets regulator has asked exchanges not to let brokers sell this product. This comes at a time when demand for digital gold, especially from millennials, is picking up because of the onset of the festive season. Though experts suggest caution, you can still buy digital gold from non-broking platforms or wallets, subject to Reserve Bank of India (RBI) guidelines.
The Securities and Exchange Board of India (Sebi) has flagged digital gold sales as breach of Rule 8 (3) (f) of Securities Contracts (Regulation) Rules, 1957. In fact, digital gold does not come under the definition of securities as defined in Securities Contract (Regulations) Rules 1957. National Stock Exchange has instructed its members, stockbrokers and wealth managers not to offer digital gold on their platforms from September 10.
What is digital gold?
Investors buy digital gold online without holding the metal in the physical form. Three metal trading companies—Augmont Gold, MMTC-PAMP India (a joint venture between state-run MMTC Ltd and Swiss firm MKS PAMP) and Digital Gold India with its SafeGold brand— sell digital gold. These trading companies purchase the physical gold and keep it in a secure vault for the amount of digital gold sold on stock broking, non-broking and metal trading platforms. Investors can take physical delivery of the metal in the form of coins or bullion and can even sell the gold purchased digitally to the platform itself.
Digital gold is not regulated by any regulator and there are concerns whether the certificate issued by the entities is backed by physical gold. However, experts say metal trading firms maintain equivalent weight of physical gold in their vaults which is ensured by IDBI trustee. Digital gold gained popularity amongst millennials due to ease of investing through mobile and online platforms and the cash-back rewards offered by the wallets. Sales grew during the Covid-induced lockdown period as investors could not visit jewellery stores and many found it convenient to invest in the metal in the electronic form as there are no storage costs.
While stock brokers will stop selling digital gold, wallets and platforms will continue to sell it. Non-broking platforms such as PhonePe and Google Pay that offer digital gold to its customers won’t be affected by this ruling. In fact, Augmont Gold directly offers digital gold to its customers.
What should investors do?
Individuals who have bought digital gold from brokers can sell through their brokers or take physical delivery. After September 10, investors have to directly deal with the metal trading companies.
Gautam Kumar, co-founder & head of investments and research, Pennywise, says those who have purchased gold from stock brokers need not panic as whenever they buy digital gold, they automatically become a member of the gold provider/ manufacturer. “If you want to hold your investments, you will have to directly get in touch with the manufacturer of the product after the deadline. You can even exit your investments through your broker,” he says and adds that those who are sceptical about the regulation of digital gold but want to buy from wallets can accumulate in smaller amounts.
Chirag Mehta, senior fund manager, Alternative Investment, Quantum Mutual Fund, says one should look at safer and regulated avenues to avoid any regulatory surprises in the future. “Gold ETFs and gold fund-of-funds serve as good choices. Besides being regulated, they are backed by 24 Karat physical gold, price and tax efficiency, liquid and available at lower denominations,” he says.
Investors should look at Sovereign Gold Bonds as they pay annual interest and are tax-efficient. However, they suffer from low secondary market liquidity resulting in price inefficiencies.