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Novice investors should know the risks of digital gold before adding it to their portfolios

Commentaries & Views

Ongoing market uncertainty against the backdrop of broader macroeconomic problems has seen a growing number of novice investors diversify their portfolios with commodities to hedge the eye-watering rise of inflation.

This however is nothing new, as a previous research study from 2016 showed that nearly 16% of surveyed Millennials - those aged between 18 and 35 at the time of the study, would buy physical gold bars and coins to hedge inflation risks and broader market decline.

On top of this, the study found that a further 6% of respondents said they would opt for gold-backed financial products and investment vehicles such as Exchange Traded Funds (ETFs).

Fast-forward a few years, and you see that this trend among younger and novice investors hasn’t changed much.

According to a report by The Royal Mint, the oldest producer and official maker of British coins in the United Kingdom, found that gold investments were largely driven by Generation Z and Millennial customers in 2022.

The report indicated that Gen Z customers - those born between 1997 and 2013 - boosted purchases by 38% and Millennials by 29%. Overall, The Royal Mint saw a 26% annual increase in the volume of overall gold investments made throughout the entire year, while gold bar investments jumped by 33.5% during the same time.

This comes at a time when broader economic and market uncertainties continue to plague investors, both young and old.

As gold-back investment vehicles help stabilize investors’ portfolios - to some extent - and in an era where digital technologies have helped reshape the economy; digital gold seems to deliver an answer for many novice investors, yet this doesn’t come without initial risks.

What is digital gold?

Considering the rise in popularity of digital assets, including assets such as cryptocurrencies, Non-Fungible Tokens (NFTs), and publicly-traded blockchain company shares, investing in digital commodities has enabled newcomers to build a more diverse investment portfolio.

Whereas many areas of the democratized economy and market have gone digital in recent years, digital gold creates a method through which investors can invest in the yellow metal, without physically owning any bars or coins per se.

The process typically includes investors making several payments, throughout a designated tenure, and choosing different digital gold investment options. This enables investors to increase or decrease their portion, depending on their risk appetite at any time or from anywhere in the world.

Why does digital gold matter?

Digital gold can give novice investors access to different pockets of the commodity market, such as gold ETFs, gold mutual funds, gold futures contracts, and sovereign gold options.

Before this, buying gold seemed to be only accessible to a small handful of wealthy investors and well-connected individuals that understood the mechanics of the broader commodity market.

However, by combining traditional wealth investment vehicles with the power of new-age technology and several digital tools, a growing number of investors can now access the commodity market, without increasing their risk of exposure.

With digital gold, these investors can establish a more diversified portfolio, while at the same time not owning any physical pieces of gold. Making this a possibility has ensured that although many investors do not have a physical stake in the yellow metal they invest in, they can see valuable returns over the long term.

Looking at it from a new-age perspective, it becomes clear that the rise in digital investors, traders, and the platforms through which they access digital gold could support the idea that new investors tend to stem from a younger generational background.

In a survey by MagnifyMoney of 1,500 Gen Z and Millennial investors in January 2020, results indicate that roughly 6 in 10 respondents are active members of investment communities or forums online. On top of this, research showed that close to half of them used social media for investing research.

Leading risks of trading digital gold

With the growing number of novice investors coming to the foreground in recent years, following the advent of online investing and trading platforms, alongside mobile applications, access to investment opportunities such as digital gold has become an increasingly attractive portfolio diversification investment vehicle.

While accessibility and convenience triumphs in the bigger scheme of things, there are however several leading risk factors novice and seasoned professionals need to take into consideration.

Limited regulation

While the broader commodities market is fairly regulated by The Commodity Futures Trading Commission (CFTC), there is however a limited regulatory framework considering digital gold.

Those that are appointed with the purchase typically have limited access and knowledge of the physical quality these products pertain to, and even more concerning the companies that they purchase it through.

While it is possible to use trusted and well-known brokers through which you can purchase digital gold, there is no set standard through which you could measure the quality of digital gold investments.

The lack of regulatory infrastructure could make it harder for new investors that diversify their portfolios, and while it’s possible to introduce new policies that could regulate the industry better, these efforts often take longer to implement.

Increased risk of scams

Nowadays, cyber scams and threats have become a common occurrence among digital traders and investors following the sudden increase in online investment activity.

The Federal Trade Commission reported that more than 95,000 people reported investment scams initiated on social media platforms in 2021, an eighteen-fold increase over 2017 reported incidents.

Overall, these incidents totaled more than $770 million in losses, with those aged 18 to 39 years being twice as likely than their older counterparts to report losing money in online scams.

Although the digital world has enabled many more would-be investors and traders can access global commodity and equity markets, it does however put them in the line of running scam risks and being exposed to an increased number of bad actors unknowingly.

Additional fees and charges

There’s a good chance investment platforms and brokers take a small commission percentage of any earnings. In some cases, these operators would only request a small cut of the return as a base for usage fees and other costs.

What this means is that investors end up paying a percentage of their earnings to their robo advisors or the platform through which they are investing. And while this is a common practice, it can however become a burden for novice investors who still have little financial leverage in their portfolios to work with.

In the end, what most investors are paying for is the convenience of having these services easily accessible through digital channels. On top of that, some of the costs, which can come in the form of annual subscription fees, or commissions can be directly linked to other expenses such as securing the gold, transfers, maintenance of online portals, and other consultation fees.

Whatever platform you end up buying through, ensure that you are well aware of the fees you need to pay to secure your digital gold, and how much commission or charges are being paid out of your pocket for additional services you don’t necessarily see.

Lack of physical ownership

Unlike buying real gold bullion or coins, purchasing digital gold only means that you have a stake in a gold asset, without physically owning it. While the digital trial exists that does support the fact you may own a piece of gold, or gold asset, there isn’t necessarily physical proof that the gold is within your ownership.

Although it’s not necessarily a requirement to have physical gold in your belonging to prove that you are the sole owner, at the end of the day, you are simply investing money in a company, entrusting they will in return offer you a stake in their gold assets.

It’s a strange concept, but because there is no physical gold or coin within your ownership could create an air of skepticism for some investors.

Limited investment period

Some digital gold investments can only be made for a limited period, whereafter they would need to be delivered and sold to the trustee, whereby the money will then be transferred into the investors’ account.

The typical tenure for buying digital gold can range from anything between 8 and 15 years, thereafter the investor would need to decide whether they want to reinvest their share or receive the money made from the sale.

This investment option can be a bit more rigorous, as this could mean that depending on the price the gold is sold at, you would receive a portion of the sale, as additional commissions and fees would first be deducted.

This ultimately means that the digital gold you purchased would never physically belong to you, and after the investment period comes to an end, the digital assets are returned to the trustee.

Should you buy digital gold?

In conclusion, purchasing digital gold can be a viable investment choice for modern-day investors who seek to diversify their portfolio with additional commodity options.

The key takeaway is that digital gold serves as a reasonable substitute for digital-native investors who are receptive to fresh investment prospects but do face some risks.

Investing in digital gold has the potential to provide the returns you desire for your portfolio, but it may be more prudent to view it as only a fraction of a well-rounded investment portfolio in the long run.

Therefore, if you're considering adding digital gold to your portfolio, it's crucial to evaluate its potential benefits and risks carefully.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.