Alternative Investment

Looking to invest in gold? Know how lucrative it is in an unregulated environment in India

As almost no family function or festival in India is celebrated without gold, traditionally the yellow metal – especially gold jewellery – is treated as the most valuable asset in India.

The mode of investment in gold, however, is changing over the years, as keeping physical gold safe involves expenditures – like hiring lockers, buying insurance, etc – and investment options like digital gold have emerged as safer and convenient ways of investment.

Gaurav Mathur, Founder & MD, SafeGold describes the pros and cons of gold as an alternative investment option in India:

Digital gold as an alternate investment option

Looking at data for the last 20-30 years, portfolios that have an allocation of 5-10 per cent in gold have outperformed in terms of both returns and volatility. India is one of the largest markets in the world for physical gold and this is the primary investment for a large part of the population. Digital gold is an ideal investment for consumers who eventually want the option of getting delivery of physical gold and have a 1-3 year (or longer) outlook. Customers who want to speculate on short-term price movements should use futures and options or similar financial products.

Relation between inflation and gold prices

While the common belief is that high inflation drives gold prices, the data tells us that it is real interest rates (nominal interest rate – inflation) that have the most significant bearing on gold prices. For example, a market like Turkey where inflation is soaring and nominal interest rates are flat has seen a soaring price of gold in the Turkish Lira. However, in the US, where interest rates have been raised sharply in response to elevated inflation levels, gold prices have been muted due to expectations of a rising real interest rate.

Operating in an unregularised ecosystem

While there is no formal regulatory framework (gold is not regularised by the RBI) for digital gold, leading players use an independent trustee and custodian to protect customer interests – similar to the structure followed by regulated financial products. As the popularity of the product increases, the industry is proactively engaging with the authorities to develop a regulatory framework for digital gold and related products.

Regulatory hurdles for the token system in India

The broader digital asset industry suffers from regulatory ambiguity. It is clear that there is significant customer demand for such products which will compel authorities to eventually develop an appropriate regulatory framework. Various statements from the government indicate that they are waiting for a common global regulatory ecosystem to develop for digital assets and based on that, Indian regulators will develop a framework for India.

Analytics on the consumer patterns

According to SafeGold data, the average ticket size is Rs 900 for digital gold and an estimated 100 million consumers have purchased digital gold over the past 5 years. An increasing number of customers are opting for regular small ticket purchases which are exchanged for physical coins or jewellery (through partner jewellers) after an average of 18 months.

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