You can lease your digital gold to jewelers for a 5-6% return, but know the risks

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

SafeGold customers can entrust a minimum of 0.5 grams, and up to 20 grams, of their assets to tenants, primarily small and medium-sized jewelers listed on the platform. The term of the lease is 46 to 176 days and offers a return of 5 to 6% per year. The return is calculated daily and deposited as grams of gold into the client’s SafeGold account at the end of each month. The total principal plus the last month’s return is credited to the client’s SafeGold account at the end of the lease term.

Currently, this rental option is only available online, on the SafeGold website, and is not offered by its distributors. Customers do not have to pay any fees for this transaction. The return from digital gold rental is taxed as income from other sources, which is at the slab rate, said Nitesh Buddhadev, founder of Nimit Consultancy.

How is gold insured?

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

The guarantee must be completed by the jeweler according to the daily evolution of the price of gold, failing which SafeGold will exercise the bank guarantee, buy gold corresponding to the amount rented by the customers and credit it to their account digital gold.

“When the guarantee falls below 105% due to an increase in the price of gold and the rest for three consecutive days, we will exercise the bank guarantee. Other cases where we apply the bank guarantee are if the jeweler does not make a performance payment in a month, does not return the gold after the end of the lease or closes its store,” Mathur said.

While this may minimize your credit risk, it does not guarantee your return or even full principal repayment.

Know the risks

Digital gold is unregulated, as is the leasing supply of gold. This means that you will have no legal recourse in the event that you suffer losses. However, since the collateral covers up to 110% of the principal, a significant loss can only occur if prices were to rise sharply within a short period of 1-2 days.

Mathur says, “In an event as severe as Russia launching a nuclear war against Ukraine, gold prices can jump 20-30% overnight and collateral can be 10-20% lower. In such a case, there is a chance that the jeweler may default by promising more collateral and the user will run the risk of recovering the principal. »

SafeGold said in its risk statement that, despite having collateral-based insurance in place, the “Company does not guarantee your capital or any return, and there is no recourse available to the Company against you” in the event failure of the jeweler.

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