Home >Opinion >Views >The long-term promise of digital gold’s new aura

India’s glitter fixation has always been evident in the country’s appetite for gold. It is widely seen to hold eternal value, a perception strong enough to brush aside the classic caution that an investment’s past record may be no indication of its future performance. The past, in this case, stretches aeons back. But something truly remarkable happened over the course of our covid-constrained festive season. The shiny metal’s allure got digitized like never before. Stuck at home, people turned to digital gold in large numbers. What they bought was not the real thing, but a tradable stream of 0s and 1s that represent gold for exchange purposes. Walmart-owned PhonePe reported an over six-fold jump—though on a modest base—in the volume of e-gold sold on its online platform in the three weeks from Dussehra to Diwali over the equivalent period last year. Its rival Paytm saw sales leap 86% during the festive week, which featured a special day marked on the traditional calendar for such acquisitions. Apart from big-city buyers, those in smaller urban centres joined the e-gold rush, too. Some investors were reported to have weighed it against Bitcoin before going for it. Who would have thought a blockchain-conjured “currency" would vie with gold someday?

Perhaps the attraction of gold transcends the form of its existence. What often bothers economists about all this is that gold yields no regular return, a fact that tends to get glossed over. The money that goes into this metal (and its electronic avatars) does not get deployed for any productive purpose in our economy. Its market value may rise over time, yes, just as it may decline, but it generates no earnings whatsoever. In that sense, it is not really an asset. If investors unable to buy actual gold are ready to make digital purchases instead, one could argue, they might as well widen their consideration set to actual assets available at the click of a button. Not that gold is useless. So long as it functions as a store of value, it is a good device for portfolio diversification. Its promise of capital gains rarely gets belied, at least not over long periods of time. Broadly speaking, its price tends to track economic uncertainty, soaring in times of crisis, especially if monetary authorities across the world respond by creating a lot of extra cash—as they have done in response to the siege laid on commercial activity by the covid pandemic. Gold is truly scarce, unlike fiat money. Despite the gold standard being dumped half a century ago, central banks have not liquidated their holdings by much. They use it as back-up. Since the Great Recession a little over a decade ago, the Reserve Bank of India (RBI) has amassed over 300 tonnes of the metal and seen its worth grow faster than that of other reserves. It now has about 670 tonnes of it.

What is good for RBI, buyers would say, must be good for the rest of us. But our central bank owns actual bullion, bought well in time. The festive e-gold boom came several months after the metal began its easy-money-led ascent. This being so, it may be safe to assume that it was powered by tradition to a large extent. This suggests an impressively broad-based adoption of “demat" holdings in India. If the trend survives covid curbs, it could set the stage for deeper market penetration by sophisticated instruments of investment. Perhaps the government could create a retail market on the internet for its sovereign bonds. Money lent to the Centre is put to some use at least.

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