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Here’s how you can lease out digital gold to jewellers

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Last week, digital gold provider SafeGold launched a gold leasing option for its users. This option allows users to lease out their property (digital gold, in this case) to a lessee for a fixed term, in return for regular payments.

Customers of SafeGold can commit a minimum of 0.5 gram, and up to 20 gram, of their holding to the lessees, mainly small and medium jewellers listed on the platform. The lease tenure is for 46-176 days and offers a yield of 5-6% per annum. The yield is calculated on a daily basis and deposited in the form of gold grams in the customer’s SafeGold account at the end of every month. The full principal along with the final month’s yield is credited in the customer’s SafeGold account at the end of the lease tenure.

Currently, this leasing option is only available online, on the SafeGold website, and not offered through its distributors. Customers don’t have to pay any fee for this transaction. The yield earned from leasing out digital gold is taxed as income from other sources, which is at slab rate, said Nitesh Buddhadev, founder, Nimit Consultancy.

How is the gold insured?

SafeGold takes a bank guarantee of 110% of the total gold value from the jeweller before they are given physical possession of the gold, said Gaurav Mathur, founder and managing director of SafeGold.

The collateral is to be topped up by the jeweller as per the daily price movement of gold, failing which SafeGold will exercise the bank guarantee, buy gold corresponding to the amount leased out by the customers and credit it back in their digital gold account.

“When the collateral falls below 105% due to an increase in gold price and remains so for three consecutive days, we will exercise the bank guarantee. Other instances where we enforce the bank guarantee is if the jeweller doesn’t make yield payment in any month, doesn’t return the gold after the lease ends, or shuts shop,” said Mathur.

While this may minimise your credit risk, it doesn’t guarantee your return or even full repayment of the principal.

Know the risks

Digital gold is unregulated, and so is the gold leasing offering. This means that you won’t have any legal recourse in case you suffer any losses. However, since the collateral covers up to 110% of the principal, a major loss can only occur if the prices were to rise sharply within a short span of 1-2 days.

Mathur says, “In a dire event like Russia launching a nuclear war on Ukraine, gold prices may jump 20-30% overnight and the collateral may fall short by 10-20%. In such an event, there’s a chance that the jeweller can default in pledging more collateral and the user will face the risk of getting the principal back.”

SafeGold has in its risk declaration stated that, despite a collateral-based insurance in place, the “company does not guarantee your capital or any returns, and there is no recourse available on the company to you” in the event of a default by the jeweller.

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