An interesting way of investing in gold is by buying digital gold currencies, also known as e-gold. This is a form of digital money whose value is based on gold. The price of gold determines their exchange rates - the price at which they can be bought or sold. Digital gold currencies are not issued by governments and are therefore considered private currencies.
Just like the American dollar before 1933, these currencies are exchangeable for gold. They can be exchanged for the gold owned by their issuer, which can be in allocated or unallocated form. The value of one unit usually corresponds to 1g or 1 oz. of gold. Digital gold currencies can be considered pooled accounts. However, apart from investment functions, they can be used to settle payments.
Their proponents consider digital gold currencies as the only fully global currencies, independent of politicians or interest rates. They are fully backed by gold, so just like gold they protect against inflation, devaluation or economic turmoil.
One of the major advantages of investing in digital currencies is the fact that it can be done from virtually anywhere in the world – a computer with an internet connection is all that is needed. It is also a relatively cheap way of getting exposure to gold. They are characterized by low bid-ask spreads and low gold storage fees. They do not involve any management fees, unlike many mutual funds or ETFs.
Another advantage of digital currencies is that they can be used to make even small investments in gold. The lowest unit of a given gold currency usually corresponds to 1g of gold. What is more, digital gold money can always be exchanged for gold or its equivalent in another currency. The price of a gold currency, or its exchange rate, can be considered very transparent and easy to understand – it is just the price of gold.
Buying digital money involves some risks. There is the risk that its issuer might not be properly managed, which might ultimately lead to its bankruptcy and the loss of clients’ money. Firms issuing these currencies are not banks, so they are not subject to the regulations that banks are. On the one hand this may be considered a threat, but on the other it gives them some freedom and flexibility. In 2002 the Global Digital Currency Association (GDCA) was established. The GDCA is a nonprofit organization aiming to regulate the activity of digital currencies issuers. Unfortunately not all firms are members and GDCA does not have any real power.
There is also a data security risk. Digital currencies are only a digital record, so theoretically the failure of an issuer’s computer systems or hacking may lead to the loss of investors’ money. Their security is fully dependent on the security of the issuer’s computers, which fortunately are usually very well protected. On the other hand, the personal computers of digital currencies users usually have a lower level of security. A computer that is infected with a virus may enable hackers to get access to a user’s account and thus to their money.
Digital gold currencies have also some disadvantages. One of the most serious ones is the fact that many of the issuing firms neither disclose the amount of gold they have nor use external audit firms. This may mean that the gold owned by the issuer in reality does not even exist.
Digital gold currencies are issued by a number of independent firms. The most popular ones are:
- Gold Exchange