Golden thoughts

The evolution of payment apps in India over the last few years has been very interesting. They have evolved from being a mere function to a stand-alone service and now it has transitioned to a mini e-commerce experience. This transition is very similar to the one messaging apps went through in South East Asia.

The change in outlook is not surprising, given the obsessive compulsion businesses have shown to Daily Active Users and Monthly Active Users. If data is the new oil, customer attention is then oil rig.

This bring us back to the payment apps and the latest angle they’ve been working on over the last few years — selling gold. This segment is now taking off despite the high rates due to the Covid lockdowns. During the Diwali weekend for example, the sale of digital gold increased 86% YoY. I’m not sure how much of that is convenience at the time of Covid and how much is market acceptance of this product.

It’s no mystery that India is obsessed with gold. It has traditionally been considered one of the safest form of investments along with buying land and a fixed deposit.

The government’s outlook to this gold obsession though has changed a lot over time. In the late 60s the government made it a nearly criminal to hold more than a defined amount of gold in the form of coins or biscuits. Over time as the economy opened up the gold demand shot up again, but it was still a process with several layers of taxes, charges and overheads heaped in. Gold bonds were much more attractive for investors provided one could put in a lumps-sum for a longer term.

Gold prices has been rising steadily since demonetisation but this growth has now tapered with expectations that it might reduce a little later this year.

The 2010s saw the rise of the first gold ETF in India, a commodity-based fund and now we have several of them. These again catered to the investors who wanted to back up their investments with a commodity, but there was still nothing to cater to the traditional buyer attracted to the physicality of gold as a form of investment, even with the concerns around keep it secure.

Source: FinCash

It is under this lens that we need to see Digital Gold. Unlike the other forms we had till now — Gold Bond and ETF — this catered more towards people who needed a way to get the actual gold delivered and not merely trade on it. The closest thing I can think of to Digital Gold is a Bitcoin exchange. Especially the fact that I can invest in fractions and not restricted to a minimum investment of one gram. This invested value is then retained in a wallet for me till I’m comfortable moving this balance offline.

The process is simple, you buy the gold you need in grams or milligrams or for an amount. It is then added to your wallet. Corresponding quantity of gold is maintained securely by the provider and this is audited by a trustee company. The gold you purchased can be sold when you want to or you can even request it to be delivered to you in the form of coins or bars.

This sounds great in one look till you start looking at the costs and risks involved. Here’s what the cost of buying 10 grams of gold comes to as of today.

Please note, this is a basic analysis by a novice. If you see any data or factual discrepancy, please leave a comment below.

Cost typeGold BondGold ETFDigital GoldPhysical gold
Gold price~ ₹51,170
Dependent on the prices
available when tranche is open
~ ₹44,999.00₹53,278.80₹52,170.00
Additional earning2.5%NANANA
Taxes and chargesCommission: 1%Brokerage: 0.5%
Maintenance: 1%
GST: 3%GST: 3%
Sale / Delivery expensesNABrokerage: 0.5%Making charges: 4-5%
Shipping fee as applicable
Making charges: 5%
Other charges as applicable
Shipping fee as applicable
Markdown when sellingNANASpread: 3%
GST: 3%
GST: 3%
TaxationOnly on interest gained.
No Long-term capital tax
Long-term capital taxLong term capital gain,
plus wealth tax
Long term capital gain,
plus wealth tax

Purely from a cost perspective the sovereign bond looks vey attractive, but you’re still dependent on a bond being available when you have liquidity available. Gold ETF too looks interesting as long as you’re not looking for physical delivery of the gold. It’s also the easiest one to liquidate from what I can see.

If you look at it purely from the simplicity of buying, then nothing trumps Digital Gold as it is now available on all the major UPI payment apps apart from being available directly on their own websites. The costs involved however will give anyone pause, especially if you’re looking to sell it in short term.

The other cost of convenience with digital gold is the lack of a regulatory oversight. The gold sold by these services are currently audited by a trustee firm which then insures the gold. It is not clear what guarantee this insurance gives on the actual returns to an investor if something were to go wrong. This is over and above the market risks that are associated with all the gold based investment options mentioned above.

This being the reality why are payment apps still offering something like this to customers and why are people still buying it? It comes down to availability of an API that can be hooked into the app and the much simpler onboarding process compared to any other form of buying gold.

After looking at all the options available, this is the flow I have finally ended up with. I hope it helps you too.

What do you think? Leave a Reply