Government-backed Schemes which are not supported by real assets - have you invested in them?

 5^th February 2022

Government-backed Schemes which are not supported by real assets.

Dear Fellow Investors,

Namaste! Reading our last post on World Government running Ponzi schemes, I have received many messages for appreciation. Readers have liked the way we explained the coming scenario. When things are government-guaranteed – normally they are assumed to be 100% secure. This is 100% true in THEORY. India is a Democratic Country and we have seen NOTE BANDI in 2016! So, all things which are government-backed should be taken with a pinch of salt. Anything can happen as there are hidden forces behind each Government of the World.  `

Government-backed Gold Bond Scheme. We shared the detailed view on 30^th May 2021 in our post - the Indian Government is shorting Gold since 2015. Untold secret of Sovereign Gold Bond. If you have invested in the same or if you are planning to invest – please read our findings.

Do you know that Government is shorting Gold?

The word is SHORTING Gold does not mean Selling Gold. I am sure many would have assumed that Government is SELLING GOLD by reading the title.

Shorting is something you SELL when you don’t have those things with you. Selling is something – you sell when you have those things with you.

The government is Selling GOLD BONDS to the RESIDENT INVESTORS since 2015. The starting price was Rs.2680 per gram at that time. For the latest issue starting tomorrow, it is 4889/- per gram.

These Bonds are not backed up by physical GOLD purchases by the Government. They are backed by a government guarantee to pay you equal to GOLD value plus 2.5% interest per annum of your holding period.

So, from the Government's perspective – by changing the name of RBI BONDS to GOLD BONDS – they reduced the borrowing cost to 2.5% per annum instead of 7% or more in RBI BOND at that time.

The investors in the first series are making close to 13% profit year over year as gold prices have moved up from Rs.2600 per gram to Rs.4900 per gram now. But Government’s cost is FIXED at 2.5% per annum only. Why?

Because Government is going to issue new bonds at the market price at the time of maturity of the series and pay to the bondholders of the old series at the time of maturity people who want their money back. Many would buy new bonds also.

From 2015 – RBI has come out with 3-6 gold bond series each year. It means they are shorting Gold at various prices starting from Rs.2680 per gram. They have sold bonds from Rs.2680 to Rs.5300 in the last 6 years. Their average shorting price may be Rs.4000-Rs.4200.

How RBI can show a super profit in its accounting books due to this?

Small investors are not aware of the power of SHORTING in the market. They know only buying side investing. Assume that the gold prices go back to Rs.3500 per gram in coming time, RBI average shorting is at say Rs.4000 - Rs.4200 per gram, they will end up making a huge profit without paying any MARGIN money.

As per SEBI, all investors are supposed to keep MARGIN with their brokers to buy the shares nowadays. If you have no MARGIN, you need to PLEDGE your shares for the same. In short, without MARGIN – we are not allowed to buy or sell the stocks.

But RBI is SHORTING GOLD without paying any margin. They have all chances of hitting jackpot someday.

How RBI will make SUPER PROFIT, even without the GOLD price going down?

Say Gold prices are not going down. RBI has no problem. It has to pay just 2.5% interest to the bondholders. Compared to 7% of RBI bonds, they have reduced their borrowing cost to less than half. So, they are making a 4.5% profit each year.

As per the RBI balance sheet as of 31^st March 2021, they have sold Rs.25702 Crs bonds since inception in 2015. At 4.5% per annum, RBI has saved Rs.1156 Crs in years 20-21 alone in the interest payments. Can you see the incremental dividend they are giving to governments?

At the time of maturity, they have to issue new bond series and pay to the old guys. So, no risk of LOSS. In the normal course, if an individual or a corporate would have started this kind of scheme – it would have been known as PONZI SCHEME.

All the Governments world over are running their show in DEFICIT only. So, to assume they will pay you by earning money is a DREAM. They will borrow new and pay old.

USA experience post-1929: -

After the great depression – the USA banned buying physical gold by their residents and they pegged DOLLAR to GOLD parity. It means they can convert their GOLD to DOLLAR at any time.

Gold Bond is one such promise only. Investors who are buying in BOLD BONDS in tons are buying a promise of our government that they can convert their gold bonds into physical gold by selling gold bonds and buying physical gold.

In 1971, the USA president removed this parity of dollar with Gold and we know what happened to the USA resident who believed in the power of DOLLAR to buy GOLD V/s. those who actually hold the gold.

In 2016, Indian Residents have witnessed NOTE BANDI, and we know the hardship people had gone through for their own money. If the Gold prices hit the roof to say Rs.1 lakh per 10 Grams, the government will have huge losses to pay to the bondholders. At such time, the future Government may say that they will pay only interest and not the capital gains. This can be detrimental to your future generations if you hold Bonds.

So, think long term.

My view is for investors who are buying Gold Bond to convert them into Gold Jewellery for marriage someday.

When you sell the Gold Bond between 3 years of holding to 5 years of holding – you will have to pay Long Term Capital Gains Tax at the prevailing rates. The current rate is 20%. If you sell before 3 years, you will pay short-term capital gains tax.

So, when you sell them and buy Gold Jewellery before 5 years of holding, you will have to pay 20% more money for the Gold plus making charges to your jewelry maker.

Interest is added to your income for TAX consideration. So, if you are paying 30% tax, you are paying 0.75% per annum interest on 2.5% you are getting per annum.

Does this make sense?

What about investors who are buying BOND for investments?

Gold Bond is a DERIVATIVE instrument. It is not backed up by physical gold. I am a BUFFETT follower in word and deeds. If I like GOLD as an asset class – I will simply Buy PHYSICAL GOLD and SLEEP PEACEFULLY.

All normal Indian residents would be having Gold Jewellery from 1 gram to 100 grams. He is already storing it somewhere. Maybe in a bank locker. If you keep another Gold in the same locker – you are not incurring a new gold storage cost.

If you are high net worth guy keeping crores in BANK accounts – banks are giving you LOCKER services FREE of cost. So, for them also there is no separate GOLD STORAGE cost.

What’s more, when I convert my physical gold into Jewelry at the time of marriage in my family, I am saving my capital gains tax.

Way back in November 2015 we had written our first post on GOLD BOND. You can copy-paste the below link and read that also. Our view on GOLD BOND from day one is the SAME.

https://bestofhiteshparikh.blogspot.com/2015/11/our-view-on-sovereign-gold-bond.html

What NEXT?

Read about Mr. Charles Ponzie and Mr.Bernie Madoff in the financial history.

Investment is not only about generating ALPHA, it's about protecting your capital first and generating ALPHA later. If you don’t protect it, you will end up working till you die.

Happy Vasant Panchami.

Follow me on Twitter @hiteshmparikh / WhatsApp - +91-9869425399.

Learn a Lesson. Live with Passion & Invest with Reason.

Hitesh Parikh.