These days, you may have come across social media posts and videos with claims of ‘up to 16% p.a. gain’ gold schemes. Many are dazzled by this ‘16%’ number. Who is making these claims? What is the product?
Well, sometime early this year, fintech app Gullak officially launched ‘Gullak Gold+’ offering. Gullak allows its users to lease their gold to jewellers and thus earn returns. Here’s a lowdown of the offering.
About Gullak Gold+
The start-up behind Gullak (or a piggy bank) app is Finterscale Technology Private Limited, which was founded in 2022.
Gold+ is a leasing program facilitated by Gullak along with Augmont (a gold refinery). Gold+ enables the users to be able to lease their gold through the Gullak app.
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According to Gullak, the gold metal is leased to the ‘most reputed, trustworthy and legacy holding’ jewellers in the country. We have not been able to verify this claim. Jewellers provide security in the form of bank/corporate guarantee to protect the investment. These jewellers pay interest in grams of gold, and that is being passed on to the users.
To use Gullak Gold+, you have to be over the age of 18 years, have a valid PAN and an active bank account. Minimum quantity required to participate in Gold+ is 0.5 gram, and the maximum quantity is 250 grams.
Gold+ in its default form doesn’t come with any lock-in. Users can simply un-lease (takes 1-2 days) their gold from the Gold+ programme, and withdraw the amount in equivalent INR value or get the gold delivered in the form of coins/bars. A jeweller can choose to pay back all the gold and close out a lease earlier.
A gold metal lease does not assure the customer of any return in INR terms, only a yield in grams of gold. The return is paid out in grams of gold. The interest is calculated daily and accrued to Gullak account. This gets deposited into the Gullak account at the end of every month.
Typically, gold leasing yields are between 3 and 6 per cent. Gold+ offers 4 per cent p.a. plan (minimum gold required is 0.5 gm) and 5 per cent p.a. plan (minimum gold required is 10 gms).
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Safety, regulation
Gullak says the invested amount in the form of lease to the jewellers is secured by bank guarantees/corporate guarantees. These guarantees are equivalent to 100 per cent of the total gold quantity leased to the jeweller. These guarantees get invoked in case a jeweller fails to pay the principal amount of the user.
But you have to understand a few things. In the gold leasing industry, usually, a jeweller who leases customer’s gold will provide a bank guarantee or similar collateral equivalent to at least 100 per cent of the INR value of the leased gold. Additional collateral is posted in the event of rising gold prices.
However, if the gold prices shoot up suddenly, it is possible that the jeweller can default on repayments and the recovery of customer gold will be limited to the amount covered by the guarantee/collateral. Enforcing a bank guarantee can take time and recovery may not be within the contracted time frame.
Digital gold is treated as a capital asset (i.e. the same as physical gold), on which short-term or long-term capital tax is applicable, depending on the holding tenure. Customers entering into the lease should obtain tax advice independently on this product to ascertain its treatment as a capital asset or individual income.
Our take
Gold is an asset that has deep sentimental value in households. Also, gold is a safe-haven whenever broader financial assets are in doldrums. But like any other market-determined asset class, gold will have its ups and downs.
The ‘16 per cent return’ claim made on the Gullak app is based on ‘11 per cent historical returns’ of gold and ‘5 per cent’ return from gold leasing. Treat it as a marketing ploy only. Serious investors must understand that gold does not give 11 per cent every year. For instance, the 3-year CAGR rise in the domestic price of gold (up to June 30, 2023) was only 6.04 per cent.
Also read: Three quirks of gold ETFs
More importantly, note that both digital gold and gold metal leasing are not regulated in India. This means customers do not have any regulatory recourse in the event that they suffer any losses. Also, nobody can guarantee a customer’s capital or any return.
Hence, you should avoid investing in such gold leasing products, and stick to gold ETFs and sovereign gold bonds.