Is digital gold leasing a good option?

With gold prices rising by above 30 per cent in the past year, the interest in gold investing has picked up significantly. With the lack of primary issues of the sovereign gold bond(SGB) and secondary market liquidity too being limited, investors are looking for other means of investing in gold financially. One such option being considered is digital gold and gold leasing. 

Digital gold has gained popularity since one can buy, sell and hold small amounts of gold digitally. The gold is stored in insured vaults and monitored by a trustee company. The gold can be sold at any time and delivery could be in the form of gold (digital gold being redeemed in physical form) or cash credit to a bank account. 

Most digital gold apps offer leasing of digital gold held by customers to jewellers, verified by the platforms, at 3-6 per cent per annum, in addition to the appreciation in gold prices. The interest is paid in grams of gold. Investors can choose to un-lease the gold and get back equivalent amount in form of gold coins or cash.   Investors are attracted by the 14-16 per cent returns shown by these apps, with seemingly no risk. However, there is no such thing as high returns without risk. 

Firstly, digital gold and gold leasing are not regulated by SEBI or RBI. The lack of regulation implies no standardised reporting or grievance redressal and this can pose significant risks to the invested amount. Further, there is no information on the auditing of the gold stored in the vaults or held by jewellers.  

Investors must note that the capital and returns on digital gold and gold leasing are not guaranteed. While the lease amount to jewellers is secured by a bank guarantee equivalent to 100 per cdnt of the leased amount, in case of rise in gold prices or default, the customer’s payout will be limited to the amount covered by the guarantee and enforcing the bank guarantee can take time. With no legal recourse available for investors,  the bank guarantee is not reason enough to assume security of the investment. 

Digital gold can only be stored for 5 years and will incur storage charges after that or will have to be liquidated. Digital gold works out to be a higher cost option since it attracts 3 per cent GST and the buy sell spreads (digital gold buying price is at a premium over the actual market price of gold and the selling price is  lower than the  market price of gold) can impact returns negatively.  Even with the additional 3-4 per cent per annum leasing income, digital gold leasing may not really provide higher returns over other gold investments. Taxes will make a further dent to the returns as interest earned from gold leasing is taxed at slab and sale of digital gold attracts capital gains tax.  

Gold leasing may promise high returns but is fraught with risk. Investors wanting to invest into gold can consider gold ETFs, as they are regulated, transparent, do not incur buy sell spreads  and do not carry credit risk of the jeweller.  Moreover, platforms merely facilitate these investments and there is no recourse available for investors to the platform in case of defaults or delays. Taxation on Gold ETFs is also favourable for the investor.