My Money: Going bold with digital gold, silver

India’s infatuation with gold has only grown stronger over the years, and now, even the silver consumer market in the country stands as one of the largest and most vibrant globally. Amid a surge in gold prices for most part of 2024 and a fall in the recent past, the investment landscape has experienced a notable shift. An increasing number of Indians are choosing digital gold and silver over physical counterparts. This trend is fuelled by factors such as convenience, cost-effectiveness and technological advancements.

“The Indian gold jewellery market was valued at approximately $85.52 billion in 2023, demonstrating an average quarterly growth rate of 6.4 per cent over the past decade (2014-2024). This remarkable growth is fuelled by India’s deep cultural affinity for gold, which is seen as a symbol of wealth and prosperity,” says Riya Singh, research analyst, commodities and currency, Emkay Global.

Investing in silver

• In the past three years, there’s been a deficit (demand exceeding supply) for silver, which supported the prices.
• Silver has a strong demand outlook. There is a boost in manufacturing and industrial activity in China.
• There is potential for pick up in green tech.

Gold as an asset

• Gold is an important asset class during times of heightened volatility and should be considered for strategic portfolio allocation, including sovereign gold bonds and gold ETFs.

Even the Reserve Bank of India has significantly increased its gold reserves, touching a record high of 841 tonnes.

Traditionally, festivals such as Diwali, occasions like Akshaya Tritiya and the wedding season drive a surge in gold purchases. The silver market, though smaller, also plays a crucial role in India’s economy. In the 2023 fiscal year, trade numbers indicated that silver jewellery accounted for about 5 per cent of the country’s gems and jewellery exports.

India’s gold consumption in the April-June quarter this year fell 5 per cent to 149.7 metric tonnes. According to the World Gold Council, the demand for gold from India could stand at 700-750 metric tonnes in 2024, the lowest in four years. During 2023, gold demand in India was at 745.7 tonnes, down 3 per cent year-on-year.

However, though the jewellery demand fell by 17 per cent, the investment demand rose by 46 per cent.

Compared to gold, silver’s industrial applications in electronics and solar panels sustain its steady demand. According to a report by the Silver Institute, silver demand is projected to grow by 2 per cent in 2024, with consumption estimated to reach 1.2-1.4 billion ounces (34,019 to 39,689 tonnes).

Digital options

Recent trends show that investors are preferring commodity funds such as gold ETFs (Exchange Traded Funds), sovereign gold bonds (SGBs) and gold mutual funds, which primarily invest in gold ETFs, over physical gold. Investors can gain from the price movements of gold and silver without the hassle of physical storage and insurance worries through commodity funds.

“According to the World Gold Council, 13 per cent of urban Indian investors have ventured into digital gold. Today, the market has seen significant improvements in digital gold platforms and simplified investment procedures, with approximately 60 lakh active gold accounts,” says Riya Singh.

The growth may seem modest in absolute terms, but it is primarily driven by young, tech-savvy investors aged 18 to 35. During the 2020 lockdown, the market for digital gold expanded to nearly 5 tonnes, compared to an average of about 2 tonnes in previous years, according to Emkay Global.

As global market uncertainty continues to rise, digital gold remains an attractive option for investors seeking a reliable hedge against volatility. This segment is expected to keep drawing interest, experts say.

For example, investment in gold ETFs has gained significant traction due to their liquidity and the ability to eliminate concerns related to storage security, high and non-uniform making charges, and purity issues. Gold ETFs provide a cost-effective alternative to physical gold.

According to the World Gold Council, as of June 2024, the total Assets Under Management (AUM) among 17 listed ETFs stood at US $4,033 million, marking a growth of approximately 28 per cent compared to the previous year.

This trend reflects the increasing interest in gold ETFs.

Similarly, SGBs, introduced by the Government of India, offer a secure and profitable alternative to physical gold. The issue price for the last tranche (in February this year) was set at ~6,263 per unit. The SGBs issued in previous tranches can be bought or sold in the secondary market through stock exchanges such as NSE and BSE.

The demand for SGBs had been steadily rising owing to the attractive interest rates and tax benefits till the Budget speech in July. Recent reports indicate that the government may have a relook at the bond scheme owing to the heavy payouts.

Impact of import duty cut

Investors in digital gold cried foul after the recent Budget announcement slashing the import duty on gold from 15 per cent to 6. Due to this, prices of gold ETFs and SGBs also crashed. Investors felt short-changed as the worth of their investments eroded overnight.

According to Riya Singh, the recent decline in gold prices has created uncertainty, leading many investors to question whether this is the right time to invest in physical or digital gold and silver. Traditionally, she says, gold has been regarded as a safe-haven asset, offering a hedge against inflation and economic instability. However, recent policy changes have introduced new dynamics in the market.

“On the one hand, the reduction in import duty makes gold more affordable, potentially boosting demand in the long term. The World Gold Council anticipates that these changes could add at least 50 tonnes to the gold demand in the second half of 2024. On the other hand, the immediate impact has been negative for those holding gold ETFs and SGBs, as their prices have dropped alongside physical gold prices,” adds Singh.

Financial planners believe that investors should have at least 10 per cent allocation in gold, and say that the latest fall in prices presents an opportunity for those who do not have an exposure to gold to buy.

According to them, given the current market conditions, the decision to invest in physical or digital gold and silver depends on one’s investment horizon and risk tolerance. For long-term investors, the current dip in prices could present a buying opportunity. Historically, gold prices have demonstrated resilience and the potential for recovery over time. Additionally, the reduced import duty could lead to increased demand and higher prices in the future, benefiting those who invest now.

For those considering digital gold, such as gold ETFs and SGBs, it is essential to weigh the benefits of liquidity and ease of transaction against recent volatility.

Digital gold offers the advantage of not having to worry about storage and security, which are significant concerns with physical gold. Furthermore, digital gold serves as an effective tool for hedging against market volatility, making it an attractive option for investors seeking stability amid uncertain times.

According to Palka Arora Chopra, director of Master Capital Services Ltd, “Persistent global inflation, which continues to exceed central banks’ comfort levels, coupled with the ongoing uncertainty about interest rate cuts, has increased gold’s attractiveness as a safe haven and hedge against portfolio risk, drawing many investors to add gold to their portfolios via ETFs and SGBs.”

She says that gold ETFs are a good option as they offer liquidity and the ease of trading and have no maturity period. SGBs are attractive because of their additional interest benefit, apart from being linked to the gold price. The entire capital gains are tax-free if you hold till maturity.

“Despite the stability in international gold prices, India has seen a reset due to the customs duty component. For long-term investors, we recommend holding on to current investments and making new ones in gold, aligning with your asset allocation strategy. Gold and silver are valuable for diversification as the returns often move opposite to those of equities. While tax implications are significant, they shouldn’t alter the fundamental approach to a diversified portfolio. Consider investing in gold funds as part of your asset allocation, aiming for a 10-20 per cent exposure to gold. This can be achieved through direct investment in gold funds or via multi-asset funds that combine gold with equity and debt investments,” says Manish Kothari, CEO and co-founder, ZFunds, a mutual fund distribution start-up.

The returns

According to experts, the future of gold ETFs and silver ETFs looks promising. While gold is a safe haven, silver’s increasing industrial application in 5G technology, electric vehicles and solar panels make it a unique investment opportunity.

Gold ETFs saw the highest growth last year, with a 54 per cent increase. In June 2024, investors poured ~726 crore into gold ETFs, and in May, net inflows were recorded at ~827.43 crore, according to the monthly data released by the Association of Mutual Funds in India.