In a recent explainer, Alok Jain, founder of Weekend Investing, broke down the true costs and hidden risks behind various ways of investing in gold — from physical bullion and exchange-traded funds (ETFs) to the increasingly popular but opaque world of digital gold.
Core appeal of gold
Jain began by stressing that gold’s prime characteristic is its lack of counterparty risk — meaning the asset’s value doesn’t depend on any third party’s solvency. “He who holds the gold owns it,” he said. “Every other asset, whether a stock, real estate, or a fixed deposit, depends on a counterparty being in good shape.”
Even central banks are aware of this, Jain noted, citing how India repatriated over 200 tonnes of its gold from the Bank of England amid growing concerns about external custody. “When you don’t hold your own gold, there’s always a confiscation risk,” he said, referencing how Russia’s reserves were frozen in 2022.
Gold ETFs
While Gold ETFs offer a convenient and regulated way to invest, Jain cautioned that they are still part of a “financialized” ecosystem — where ownership is indirect. ETFs are supposed to be backed by physical gold in custody, but legal documents often allow investment in “gold equivalents,” such as futures or contracts with miners.
“Nothing usually goes wrong in normal times,” he said. “But when markets are stressed, you may find that your ETF doesn’t have 100% physical gold backing.”
Digital gold dilemma
Jain was especially critical of digital gold, calling it a completely unregulated and opaque space. These platforms allow users to buy even ₹10 worth of gold instantly through apps, but prices vary widely between providers.
A FinPrint report cited by Jain found that three digital gold platforms showed different buy-sell prices on the same dates in October — leading to losses ranging from 2% to 3.6%, even when benchmark IBJA rates showed a profit. “That shouldn’t happen in an asset that’s supposed to simply track gold,” he said.
Digital gold platforms are not regulated by SEBI or RBI, and investors cannot transfer their holdings across platforms — meaning they must sell back to the same provider at whatever rate is offered. Add 3% GST on purchases and spreads of up to 5% between buy and sell prices, and the hidden costs become significant.
Is physical gold still the safest?
Despite its inconvenience and storage challenges, Jain said physical gold remains the safest store of value. It’s tangible, has universal liquidity, and carries zero counterparty risk — crucial in times of financial stress.
ETFs and gold mutual funds, on the other hand, offer regulated exposure with better liquidity and lower costs, though investors should consider long-term expense ratios. “The 3% GST on physical gold may seem high, but over 10 years, ETF costs can exceed that,” Jain pointed out.
A balanced portfolio
Jain reminded investors that gold is not a get-rich-quick asset but a long-term hedge against financial instability. Its cycles are typically longer than those of equities — spanning 8 to 12 years — making it suitable for diversification rather than speculation.
He advised that 5–15% of an investment portfolio be allocated to gold, preferably in physical or SEBI-regulated ETF formats, for long-term protection. “Convenience often comes at the cost of safety,” Jain said. “Gold’s purpose is to protect wealth when everything else fails — not to gamble on digital prices.”
Why regulation matters
With growing investor interest in digital gold through fintech apps and payment wallets, experts believe regulatory oversight is urgently needed. SEBI currently supervises gold ETFs, but digital gold remains outside any formal regulatory framework. Jain emphasized that in the absence of clear rules on storage, pricing, and insurance, retail investors risk losing confidence in digital products. “It’s time regulators step in,” he said. “A transparent structure will not only protect investors but also help India modernize gold investment without compromising safety.”
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