Gold EGR – Can it really take off in India and is it better than gold ETFs?

The recent announcement by NSE about the official launch of Electronic Gold Receipts (EGRs) is well-timed. But the big question is; whether gold EGRs can also take off like gold ETFs, or would it remain a non-starter for a much longer period?

Why the timing is right for the launch of EGRs?

In the last couple of years, a lot of demand for gold ETFs came from the SEBI warnings on digital gold and the government stopping fresh issue of sovereign gold bonds (SGBs). Digital gold had been proliferating due to its simplicity and convenience, largely marketed by digital payment apps. SGBs were a great product because they were launched when the gold rally had started. In addition, the 2.5% interest on SGBs and the capital gains tax exemption after 8 years were added attractions. It was a huge cost for the government, but that is a different matter. The gap opens space for gold EGRs.

So, what exactly are gold EGRs?

Gold EGRs are exactly like holding physical gold, but in digital form. For example, when you hold gold EGRs weighing 100 grams, that is backed by standardized 100 grams of gold in accredited SEBI vaults. Unlike digital gold, this is regulated business and so the risk to investors is low. The advantage that gold EGRs offer is that, unlike gold ETFs, these gold EGRs can also be converted back to physical gold. The process of conversion is seamless, and so EGRs actually offer you a choice between physical gold and demat gold, in a fungible manner. The big question is the absence of liquidity at this point and whether the NSE would also take steps, like market making, to help build liquidity.

What are the costs entailed in gold EGRs?

While comparing the costs of gold EGRs versus gold ETFs, one must look at a combination of parameters. Typically, the costs in gold EGRs will be fixed in nature, which is why the gold EGR product is normally targeted at large bullion traders and jewellers. That is where the volumes can justify the cost. For small investors, the costs of avalling and conversion have to be borne by the customer, apart from exchange related charges. In addition, the storage charges for gold will depend on how long the vault holds the gold on your behalf. One must really simulate how the returns work out after all these costs are factored. It is not like a gold ETF, where the total expense ratio (TER) takes care of everything.

Will retail investors buy the gold EGR story?

These are early days for gold EGRs, but several factors will come into play. Firstly, a lot will depend on liquidity. If liquidity is weak and spreads are high, then the product is a non-starter. Secondly, we need more simulation on the all-in cost to the investor and the break-even point for retail investors in gold EGRs. For now, gold EGRs look better tuned to big bullion traders and jewellers. Regarding buying gold EGRs in lieu of physical gold, most families still prefer to buy the physical gold directly rather than converting at a later date. However, the biggest boost for gold EGRs will be if banks are willing to accept these gold EGRs as collateral for gold loans. That can really help gold EGRs to take off!