Should You Prefer Physical Gold Or Digital Gold?

Physical Gold vs Digital Gold

Physical Gold vs Digital Gold

Many people think that Indians are crazy about gold. And why not? We’re always ready to buy gold. Whether it is a religious ceremony, a festival, a wedding gift, or even a birthday gift, for that matter, we buy gold and we gift gold. Gold is one of those investments that every Indian household is confident about, no matter which generation is in question.

Indian Kings and their families would have food in utensils made of gold! Queens had palanquins made of gold! In fact, people donate gold to Indian temples!

We feel that it is the only asset that does not lose value and our families have passed on gold from one generation to another. We believe that all the gold that has ever been mined exists in some form or the other, even today. This is due to its unique and indestructible nature.

Owning more gold is a status symbol here. In fact, it is estimated that cumulatively, Indian households own a huge stash of somewhere between 25,000 to 30,000 tonnes of gold! It has a market value of over $1.12 trillion and is mostly held in physical form. In fact, we have auspicious days like Akshaya Tritya and DhanTeras to buy gold.

With so much importance that is given to the yellow metal and various means of investing in it, we thought that we should compare physical gold and digital gold.

What Is Physical Gold?

This is the kind of gold that people have been investing in for ages. It is in the form of jewellery, bullions, coins, jewellery and more. It is tangible and can be stored at a person’s home or in a bank locker, hence one has to incur storage and carrying costs. Usually, it is in the form of jewellery and is for consumption. This can be bought from retail outlets as well as from certain websites.

What Is Digital Gold?

It is an alternative to physical gold. We can buy it from multiple apps and websites. We do not hold it in physical form, instead, it is added to safe vaults in our name. Every time we buy, more gold is added to our vault and every time we sell, gold is removed from our vault. When we redeem it, the balance is handed over to us in physical form.

We can invest in units of digital gold and each unit is backed by 24K 99.9% purity gold, with hardly any charges. In fact, you can buy this form of gold, just like you would buy groceries, say ₹100 worth of gold per day! However, in India, it is offered only by certain companies like Augmont Limited, MMTC-PAMP and SafeGold brand of Digital Gold India Pvt. Ltd.

What Are The Benefits Of Investing In Physical Gold?

There are multiple reasons why people have increasingly invested in physical gold and passed it on from one generation to another.

  • Liquidity: The intrinsic value of gold is never lost. It is highly liquid and has always been in demand.
  • Inflationproof: It is inflation-proof since one can buy it on a given day and recover the charges in the future when they sell it. Usually, it is possible to sell it at a higher price.
  • Collateral: Loans are easily available if one pledges their gold.
  • Depreciation: It does not depreciate, unlike other assets.
  • Legacy: It can be passed on from one generation to another, without any loss in value. Unique pieces of jewellery, zari on clothing and other gold articles are an example of this.
  • Passive income: Under the Gold Monetization Scheme, investors can earn up to 2.5% interest on the amount of gold that they’re holding with their bank.
  • Tax planning: It is very easy for investors to remember when they had bought the gold, therefore they can plan to sell their gold according to the applicable STCG or LTCG, whichever will be beneficial for them.

What Are The Benefits Of Investing In Digital Gold?

  • Small investments: Investors can invest as low as ₹1 if they wish to buy digital gold. This way they. This helps the economically weaker section to invest easily.
  • Restrictions: There are no restrictions or limits on purchases.
  • Theft: The responsibility of keeping the gold safe is on the seller..
  • Purity: The gold is of 24 karat purity.
  • Collateral: Just like physical gold, even digital gold can be collateral for loans.
  • Tracking: Investors can easily track their investments and gain insights with the help of apps and websites.
  • Real-time prices: Investors get access to real-time rates which can help them to make purchases making use of price movements.
  • Diversification and hedging: It is a good investment for portfolio diversification and hedging.
  • Transparency: There is complete transparency in this transaction as the purchase and sale happen online at market prices and there is no making charge involved, phew!
  • Redemption: One can choose to receive cash or physical gold on redemption.

What Are The Disadvantages Of Investing In Physical Gold?

  • The minimum amount of investment required is huge.
  • Making charges adds to the cost of gold.
  • The risk of theft is high.
  • It is good for consumption, especially as jewellery, but it is not that good for investment.
  • The resale value differs from dealer to dealer.
  • Storage costs, especially in bank lockers can be very high, in the long run.
  • There are restrictions on the amount of physical gold that can be held with people. Excess holdings can lead to penal action.
  • For purchases above ₹30 lakhs, buyers have to pay wealth tax.

What Are The Disadvantages Of Digital Gold?

  • The digital gold market does not have a regulating authority to secure the interest of consumers.
  • Trading firms charge 2% to 3% for insurance, storage costs and management fees.
  • It does not offer passive income to investors.
  • When digital gold is bought, the investor pays 3% GST, but when it is sold, this amount cannot be recovered from the next buyer.
  • It is difficult to remember when a particular amount of gold was bought, therefore when the investor sells it, he or she cannot plan it easily. If it is held for less than 3 years, STCG will be charged according to the investor’s tax slab and if it is held for more than 3 years, LTCG will be charged at 20% with the benefit of indexation.

What Are The Other Forms Of Gold?

1. Gold ETFs

Just like any stock on the stock exchange, ETFs or Exchange traded funds are listed. They can be bought and sold through a normal trading account. They work in a similar manner as mutual funds, however they are close ended. This means that there is a time limit before which they cannot be sold. Further, every purchase has to be backed by a sale, since there is no fresh issue like the ones which happen in mutual funds. They are backed by actual physical gold which is kept with a gold custodian bank, making them very safe to hold.

2. RBI Gold Denominated Bonds

They were launched a couple of years ago and became a popular mode of investment. They are backed by gold and are fully guaranteed by the government of India. They get listed on the exchange after six months of their issue and can be redeemed with the issuer. They are periodically issued by the RBI in an interval of 5 to 6 months. They can be held in Demat accounts or as certificates. They are tax-efficient and pay an interest of upto 2.5%.

Comparison of Both Type of Gold

Basis of comparisonPhysical GoldDigital Gold
PurityThis may differ from place to place.Purity is guaranteed.
Uniformity of pricesPrices differ from place to placePrices are generally uniform.
InvestmentGenerally, it requires a large amount.Small amounts can be invested systematically.
Cost20% to 30% of the gold’s value is spent as making charges.3% GST has to be paid apart from 2% to 3% management charges.
StorageThe gold is stored with the buyer, at home, or in a bank’s locker.The seller maintains safe vaults for storage.
Theft or lossThere are very high chances of theft or loss.There is no chance of theft or loss.
LiquidityIt can be sold easily at a retail outlet.It can be sold easily on the platform from which it was bought.

In Closing

Buying digital gold or physical gold depends on the needs of the investor. If the investor wants to buy gold as an ornament, it goes without saying that he or she will have to invest in physical gold, but if the investor is looking forward to investing in gold, digital gold is preferable, as it is a hassle-free method of buying gold.

The investor must keep in mind that there is a limit on the amount of physical gold that can be held by a person, at the same time there is a limit on the maximum number of years during which the gold can be held in digital form. The investor can choose other forms of digital investments like sovereign gold bonds, gold ETFs, gold mutual funds and more.

Physical gold is good for consumption but is not advised for investment purposes. Gold in any form, physical or digital, should form 10% to 20% of an individual’s portfolio, as a general rule. It helps in diversification and provides liquidity with no credit risk.

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About Aditi Singh 342 Articles
Aditi Singh is an independent content creator and money finance advisor for 5 years. She is recently added with Investment Pedia. Internet users are always welcome to put comments on her contributions.

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