There exist multiple options for those looking to invest in gold-related investment products some of which include gold exchange traded funds, sovereign gold bonds, purchasing physical gold and holding it in private or bank vaults. Among these, buying gold digitally (popularly known as digital gold) where a third party or the seller vaults the gold for you has become quite popular.
However, low barriers to entry into the trade of digital gold with almost no regulatory oversight has made it an easy zone to operate for fraudsters as well. It is hence, investors need to evaluate certain factors and do their due diligence before venturing into digital gold investments. Here is a checklist of what investors interested in digital gold investments should look for.
The service provider is the company that offers you the service of purchasing gold through electronic payments and they hold your gold in the physical form at a secured vault on your behalf.
- Before you choose the service provider, do not forget to exercise your due diligence.
- Understand who is offering the service of holding gold on your behalf at a vault.
- Know their partner institutions, the parent organization or the companies that have funded the business.
Vaulting location of gold
There are some service providers that would hold your gold on your behalf in an overseas location. The pricing would be comparatively competitive to vaulting in India as the gold price is exclusive of customs duty. This would mean you buy gold in Indian rupees, the service provider simultaneously buys it in overseas locations on your behalf in dollars.
However, when you seek to redeem the investment, the service provider would close the gold position in an overseas location, buy physical gold from their domestic location and deliver it. If the risk management by the service provider is not efficient, there can be serious risk of default on delivery.
They are the intermediaries between the service provider and customers. It could be a payment wallet or a scheduled commercial bank. They are entities regulated by the central banking authority, the Reserve Bank of India. Although these products are third-party products, these regulated entities do their due diligence before offering to their customers. This in a way adds to the layer of trust. Thus, unless you have your confidence in your service provider, buy through the market intermediary.
Stamp of trust
The seller of digital gold should ideally have an independent SEBI-registered trustee who audits and confirms the gold holding each month. It is the trustees who provide surety about the gold in the warehouse with a monthly audit.
Safe storage of your gold is of utmost importance.
- Do your due diligence about which exigencies are covered by your insurance. This is crucial as some insurance plans might not provide a cover in the event of a natural calamity, although most provide coverage against theft.
- Understand the recourse measure if the gold held in the vault turns to be just gold-coated tungsten bars as against original fine bullion.
- As an investor, you need to have clarity on the checks in place by the vaulting company or those holding gold in the same company vault.
- Typically, a vaulting company doesn’t have the infrastructure to confirm the purity of gold that is coming into the system. Its role is limited to providing the safe custody of your gold.
The minimum grammage of delivery on redeeming your investment and the cost related to conversion are details you as an investor need to know. This information should be made available to you in advance either through frequently asked questions (FAQs) on the website or documentary evidence on registering as a customer.
The pricing would definitely vary with every service provider, as it would depend whether the price is based on 995, 999 or 9999 purity. Some of the service providers operate a fully integrated business. For instance, they might have a captive refining unit, could have bullion stored in their own vault or an active trading desk with access to global markets, thereby keeping the cost of hedging lower.
These factors eventually have a greater influence on the pricing ability of the service provider. However, typically everyone tries to price it around the same level with a wider difference only in the price at which the customer wants to redeem the units of digital gold.
When you walk into a jewelry store, a price is often displayed on boards; a price to buy and another to sell. As you would have observed, always the buy rate is higher than the sell rate. The logic is no different here when you are buying digital gold.
However, you need to be careful about the difference between the buy and sell price, the difference that you see today may or may not be the same when you are redeeming your units in cash. The difference between the buy and sell price is also the cost you would incur on redeeming it for cash. The gap between buy and sell price of various service providers are different.
Would you want to buy an item that potentially has funded illegal mining or military groups or slavery indirectly? This is a question you should ask yourself when deciding on the service provider. Check for the provenance of the bullion that backs your investment.
All that you have to look for is, whether they give a declaration on their website that the provenance of bullion bars have been certified for following the OECD’s responsible sourcing guidelines. Which would mean bars that you have invested in are from refineries that are certified by London Bullion Market Association or Responsible Minerals Initiative or Responsible Jewellery Council or Dubai Multi Commodities Centre.
Process of vaulting gold
How does a vaulting agency and trustee protect the customers from fraud in quality of gold? One measure is to ensure that the service providers source only serial numbered bars from the importing agency or the refiners.
The digital gold service provider should have the systems and processes in place that are able to verify the serial number bars with the origin. This to a large extent can prevent frauds. Investors should seek such an explanation from the service provider.
The easiest way to manage this is sourcing bars with serial numbers from refiners certified for LBMA, or Dubai Good Delivery. With respect to Indian refineries (that are not LBMA), it is ideal to source only India Good Delivery (IGD) bars as the Bureau of Indian Standards track information related to IGD bars.
Fungibility of the gold
Being able to redeem the holdings 24/7 is the key advantage of digital gold. The ability to exchange it for jewelry at an empaneled store are some of the value added features, that being said one is to be cognizant of the applicable taxes.
Parking your investment safely should be on top most priority than the ease of purchasing the product. Currently most of the popular service providers carry a high level of credibility, with an unblemished pedigree when it comes to protecting investor money.
Nevertheless, it is worth the effort to do a one time check on the service provider you want to choose. Check with your peer and friends circle about the service provider. The checklist is ready here if you like to do the due diligence by yourself. However, there are service providers one would have hardly heard about. So take care of your money and invest wisely.