Royal Mint launches Digital Gold to Compete with the Gold Sovereign

Gold bars and coins are an ancient asset that has stood the test of time. The world is increasingly digitising which begs the question, what is gold's role in this modern world? With the explosion of popularity in digital assets in recent years, many companies are now offering an opportunity to purchase digital gold which is even being offered by the British Royal Mint which is manufacturer of the world famous gold sovereign coins.

Many investors believe this is a sure sign that the digital gold trend has credibility and will become more popular as time comes to pass. Some may wonder which asset is best, digital gold or traditional gold bullion bars, coins and gold sovereigns? The modern day gold sovereign has been in existence since 1817, with some designs trading multiples above their intrinsic gold valuations. The Royal Mint has began to raise their premiums on coins such as the gold sovereign, especially for sovereigns with a proof finish, making the investments a little higher risk for buyers.

Digital gold is convenient as small amounts can be invested at the click of a button. The Royal Mint has a minimum spend requirement of just £25 which, when compared to the live prices of gold sovereign coins on the Auronum website, shows that investors will need to commit £385 for a gold sovereign coin. This is a significant amount compared to the digital gold requirement. With lower capitalised investors unable to commit large sums on a regular basis, the digital gold option looks very appealing.

One of the main benefits to gold bullion bar and gold sovereign coins is that there is no counterparty risk. This means that if you own a pile of gold sovereigns, they are your asset and the asset is not dependant on another person or entity making good on their promise to pay you when you want to sell the asset. Comparing this to digital gold, however, shows that investments such as gold sovereigns hold the advantage as investors that purchase digital gold are exposed to counterparty default risk.  

There is also a danger that the issuing company may exploit their monopoly on the investor's digital gold investment. They could, after purchase, raise their fee to sell the gold or increase their charges for being custodian of the digital gold. The investor cannot sleeve their holdings to another company which means they are at the mercy of the company that they originally purchased their gold position from.

If a company is founded and begins to offer digital gold to investors and then goes out of business after several years, they can default on the obligation to allow the investor to sell their digital gold which renders the digital gold as worthless. If, however, an investor buys a selection of gold sovereigns from a bullion company such as Auronum, if the company goes bust several years after selling the gold sovereign to the investor then the investor can sell their gold sovereigns to other companies or investors. There is no counter party risk.

The advantage that digital gold has over gold bars and gold sovereigns is that if an investor would like to purchase some bars or sovereigns, they have to go out to source the stock. If demand is very high due to an economic event causing gold prices to rise then an investor may struggle to find gold available to buy at the time and price point that they would like to purchase it at. Digital gold, however, is always available to purchase because its supply is much less limited.

When appraising the two assets, other factors become an important consideration. There are no costs to hold gold sovereigns at one's residence. The same cannot be said for digital gold because most companies charge a fee to maintain your position. The Royal Mint charge 0.5% of the value of your digital gold holdings plus a 20% value added tax charge. This can erode the value of one's assets over time and becomes a higher burden the more than an investor chooses to invest in digital gold.

As with most investments, tax is a big consideration too. Profits on digital gold are subject to capital gains tax in the UK. Meaning that investors will be legally required to declare profits and pax 20% to the government above a given threshold. Gold sovereigns are exempt from this tax and given that the physical gold coins are stored outside the financial system, it is much harder for the authorities to audit a gold sovereign investor's asset. Therefore, the gold sovereign has tax benefits over the digital gold peer.

No doubt that digital gold will be popular with the new age investors due to its convenience and modern appeal, but higher capitalised seasoned gold investors are unlikely to switch their gold sovereigns for a digital version due to the tax disadvantages, maintenance fees and the introduction of third-party counterparty risk. These factors all combine to make it less likely that gold sovereign coins will be replaced by some innovative digital version anytime soon.