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Gold has been a sign of wealth conservation and a safe bet against business instability for ages. However, technological advancements have transformed financial markets, and hence, investors now have diverse opportunities to invest in gold other than purchasing physical bars or coins.
There are digital gold and gold ETFs, which represent new investment options that offer both ease and flexibility, as well as the possibility of earning impressive returns. However, which one is more attractive?
This article will go into the depths of digital gold and gold ETFs to compare their merits and demerits so that you can make an informed decision when choosing where to invest.
Also read: Gold vs Equities- Which is the right investment option?
Understanding digital gold
What is digital gold?
A modern way to invest in physical gold is through digital gold. It is identical to ordinary gold and is available for purchase online. The seller stores it in a secure vault on the buyer’s behalf. As little as ₹1 can be used to purchase or sell 24-karat Hallmark gold.
Digital gold benefits
- Easy accessibility: An easy reach of gold for investment, especially to those who don’t get it via regular markets.
- Fractional ownership: Purchasing smaller sizes means there is no necessity to buy a whole bar or ounce.
- Convenience: Manage investments online or through mobile applications that give you room for flexibility.
- Liquidity: Convert your holdings into cash quickly when necessary.
- Transparency: Transparent pricing and transaction records enhance investor confidence.
Drawbacks
- Lack of physical possession: It is not like traditional gold, where investors hold it physically. Security is a reason for some people opting for physical assets.
- Market volatility: Just as with any other digital form of money, the value of digital gold fluctuates with changes in the market. Volatility can lead to possible losses.
- Counterparty risk: Investors are exposed to risks as they put trust in platform integrity. Safeguarding investments by ensuring security measures are implemented matters.
- Storage and security concerns: However, no physical storage is required but digital security counts. Holdings could be affected by cyber threats or platform failures.
- Regulatory risks: Changes in regulations impact on investor confidence. Accessibility and value might be affected.
Understanding gold ETF
What is gold ETF?
Gold ETFs are investment funds that mirror fluctuations in local gold prices. They allow investors to indirectly invest in gold without physically owning the metal. The investment firm utilises your funds to purchase physical gold bars. Since they are listed on stock exchanges, trading in them is governed by strict regulations, making them safe investments.
One unit of gold ETF is required as a minimum investment, which translates into one gram of the purest form of gold with only hallmarks. Being listed, these kinds of ETFs are easily traded on a stock market and have a strong liquidity position.
Gold ETF benefits
- Convenience: Investment becomes a more manageable task without the hassles of owning physical gold. No need to access suppliers or fret about the depository.
- Buy at spot price: Gold ETFs provide an opportunity to buy close to spot prices. The cost of buying physical gold includes premiums.
- Low costs: The annual management fees are reasonable (about 0.15-0.5%). It is a cheaper alternative to buying physical gold.
- Liquidity: Making decisions about selling ETF holdings does not cause market disruptions. Easily trade from home during working hours in exchange.
Drawbacks
- Counterparty risk: Gold ETFs have counterparty risk since they remain within the financial system. For example, such shares do not depend upon gold bullion but instead rely on the trustworthiness of fund managers, raising questions regarding their actions and possible intervention by governments during emergencies.
- Not fully backed by physical gold: Some gold ETFs hold gold indirectly through derivatives, which adds risk. Thus, vault control may not always be direct, and settlements can be made with fiat money rather than actual metal when the shortage becomes acute.
- Liquidity challenges: Sometimes, these managers do not hold as much as they should, relying on derivative contracts complicating exposure issues. It is always uncertain how one can get physical gold out of an ETF during times of crisis.
Digital gold vs gold ETF
| Digital gold | Gold ETF |
| Digital acquisition of physical gold | Real gold investments made through an exchange-traded fund |
| Direct ownership of physical gold | Ownership of units representing physical gold |
| Stored by the seller in secure vaults | Stored by the ETF provider in secure vaults |
| No annual expense ratio, but storage costs may apply | Annual expense ratio charged by the ETF |
| Less regulated; depends on the platform | Regulated by SEBI (Securities and Exchange Board of India) |
| Easy to buy and sell online | Requires a demat and trading account for transactions |
You may also like: SGBs: A smarter way to invest in gold
Bottomline
The investment decision between digital gold and gold ETFs is based on the investment objectives, risk tolerance and preferences of the individual investor. Those who wish to possess physical bullion directly while enjoying flexible online dealings might consider purchasing digital gold assets.
On the other hand, people who want a regulated investment vehicle with low annual expenses and that offers liquidity for transactions on stock exchanges will invest in gold exchange-traded funds (ETF).
Further reading: Goods and service tax on gold – everything you need to know!
FAQs
Government bonds backed by gold, such as Sovereign Gold Bonds (SGBs), are secure and profitable on a long-term basis because they pay interest after every period. Digital gold is flexible and accessible, meaning investors can make small, frequent investments without storage considerations. However, digital gold has high liquidity and is more convenient for small-scale or short-term investors than gold bonds, which are more stable with possibly higher returns due to interest.
With regards to accessibility, flexibility, and lower storage risks than physical gold, digital gold can serve one well in the long run as an investment. However, it does not have the option of paying interests or government support such as sovereign gold bonds (SGBs). Moreover, platform fees make digital gold expensive after some time. As with other long-term investment options, however, it needs must be weighed against these considerations when deciding on a suitable asset mix for diversification purposes.
Digital gold differs from fixed deposits (FDs) in terms of use for investment objectives. It also serves well for capital appreciation since it may give higher returns while acting as an inflation hedge. Nonetheless, market exposure accompanies such risk; thus, there are no guaranteed returns here. Contrarily, FDs provide stable returns with minimal risk; therefore, they are best suited to conservative investors looking to preserve capital. Every investor has their preference depending on how much risk he/she is willing to take and the financial goals set.
Gold ETFs generate higher returns while serving as bullion instruments in case of inflation due to their direct relationship with the price of gold. Furthermore, ETFs provide liquidity since they are traded freely on stock markets. Contrarily, FDs are among those types that assure profitability and are suitable for people who don’t take significant risks when investing their resources. It all depends on how much risk you can tolerate, along with your objectives about where you want your money to go.
Yes, you can generally change digital gold into physical gold through some platforms or services. Many providers of digital gold offer the possibility of converting your digital holdings into physical gold bars or coins. Usually, this occurs after making an order on the platform, paying any applicable making charges or fees and arranging for delivery/pickup of the physical form. Always go through the terms and conditions of your digital gold provider to know the specific conversion procedures and costs involved.