Rule of thumb: don’t buy digital gold from stockbrokers
Although exchanges have asked brokers to stop selling digital gold, you can still buy from wallets. But be careful and only buy in small quantities
On September 10, you will no longer be able to buy digital gold from your stockbrokers, as the market regulator has instructed exchanges not to let brokers sell this product. This comes at a time when demand for digital gold, especially from millennials, is increasing due to the start of the holiday season. Although experts advise caution, you can still buy digital gold from non-brokeraged platforms or wallets, subject to guidelines from the Reserve Bank of India (RBI).
The Securities and Exchange Board of India (Sebi) has reported that the sales of digital gold are in violation of Rule 8(3)(f) of the Securities Contracts (Regulations) Rules 1957. In fact, the ‘digital gold does not fall within the definition of securities as defined in the Securities Contract (Regulations) Rules 1957. The National Stock Exchange has directed 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 physical form. Three metal trading companies – Augmont Gold, MMTC-PAMP India (a joint venture between state-owned MMTC Ltd and Swiss company MKS PAMP) and Digital Gold India with its SafeGold brand – sell digital gold. These trading companies buy physical gold and keep it in a secure vault for the amount of digital gold sold on stock brokerage, non-brokerage and metal trading platforms. Investors can take physical delivery of the metal in the form of coins or bullion and can even sell the purchased gold digitally to the platform itself.
Digital gold is not regulated by any regulator and it is questioned whether the certificate issued by the entities is backed by physical gold. However, experts claim that metal trading firms keep an equivalent weight of physical gold in their vaults, which is secured by the IDBI trustee. Digital gold has gained popularity among millennials due to the ease of investing through mobile and online platforms and the cashback rewards offered by wallets. Sales increased during the Covid-induced lockdown period as investors could not visit jewelery stores and many found it convenient to invest in the metal in electronic form as there are no storage costs.
While stockbrokers will stop selling digital gold, wallets and platforms will continue to sell it. Broker-free platforms such as PhonePe and Google Pay that offer digital gold to its customers will not be affected by this decision. Indeed, Augmont Gold directly offers digital gold to its customers.
What should investors do?
People who have purchased digital gold from brokers can sell through their brokers or take physical delivery. After September 10, investors must deal directly with metal trading companies.
Gautam Kumar, co-founder and head of investment and research at Pennywise, says those who have purchased gold from stockbrokers should not panic because every time they buy digital gold, they automatically become a member of the gold supplier/manufacturer. “If you want to keep your investments, you will need to contact the product manufacturer directly after the deadline. You can even exit your investments through your broker,” he says and adds that those who are skeptical of digital gold regulation but want to buy from wallets can accumulate smaller amounts.
Chirag Mehta, Senior Fund Manager, Alternative Investment, Quantum Mutual Fund, said more secure and regulated avenues should be sought to avoid any regulatory surprises in the future. “ETFs and gold funds of funds are good choices. As well as being regulated, they are backed by physical 24k gold, price and tax efficient, liquid and available at lower denominations,” he says.
Investors should look to gold sovereign bonds as they pay annual interest and are tax efficient. However, they suffer from low secondary market liquidity, which leads to pricing inefficiencies.
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