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India's Latest Gold Investment Scam

Written By Geoffrey Pike

Posted September 23, 2015

indiagoldschemeWhile gold is always big news in India, the big news last week was the government’s approval of a Gold Bond Scheme (GBS) and a Gold Monetization Scheme (GMS). I find it amusing that these two plans are being referred to as “schemes”.

The English use of the word “scheme” with the negative connotation is accurately describing the government programs, which is not typically the case. Perhaps American politicians are more skilled in coming up with names of Patriot Acts and Freedom Acts, or maybe their translators are better.

These two gold schemes in India are an attempt by the Indian government to reduce gold imports. The Indian government cannot stand for a trade deficit where people purchase gold from outside the country. Don’t the people know that they are better off with their fiat money?

Indians will be able to deposit their gold holdings into commercial banks and earn interest on the holdings. They will also be able to purchase gold-backed bonds instead of purchasing the actual metal.

So Indians can get the benefit of holding gold, the favored national investment, while at the same time earning interest, except for the fact that they won’t actually be “holding” the gold. The government and/ or banking system will be holding the gold.

As with any government program, there is no such thing as a free lunch. First, where is the Indian government going to get the money to pay the interest to the gold “holders”? This money has to come from somewhere, and we know that governments don’t actually make money except by creating it out of thin air or by extracting it from the population.

In other words, the Indian people get to see the gold flowing into the country reduced by having their currency devalued more and having a higher tax burden. Meanwhile, they will be turning over their gold for protection to the government and the banking system. What could possibly go wrong here?

Aside from the basics of the whole thing, the government is already adding restrictions, requirements, and new levels of bureaucracy.

More Red Tape

While every big government of the world is heavily burdensome on business and free enterprise, the Indian government is notorious for its red tape.

I remember a special report done by John Stossel a long time ago where he determined how long it would take to start a business in three different places. He picked Hong Kong, the United States, and India.

You could get a small business going in Hong Kong in a day, at least in terms of overcoming government regulation. The U.S. was worse than Hong Kong in getting the necessary business permits. But worst of all was India, where it was almost impossible. If you could even get a business off the ground, it probably meant bribing a lot of government officials.

India continues to live up to its reputation of massive red tape. The gold monetization scheme being implemented will reportedly impose income taxes on deposits where the source is not named. So investors basically have to divulge all of their financial history or be further taxed.

The tax penalties will reportedly apply to certain amounts of gold, which vary between married women, unmarried women, and men.

I really hope for the sake of the Indian people that they do not fall for these two government programs – rightly called schemes.

While India has some semblance of common law due to English influence, the respect for property rights is really quite low. There is an anti-capitalist mentality and creating wealth is just not as widely respected as it is in the U.S. and some other places.

(If you think class warfare is bad in the U.S., try going to some other parts of the world.)

While the overall population is somewhat to blame in the fact that they consent to these policies, the Indian people are quite astute in their appreciation for gold. While it is a mix of culture and financial planning, Indians understand the benefits of owning and actually holding gold.

If gold investors want to try to earn some extra interest on their gold, then they will ultimately pay the price for trusting the government. Not only are they giving up their privacy, they are putting their faith in the state, which is really in contradiction with the whole idea of owning gold.

When the gold price skyrockets one day – whether it is next year or 10 years from now – the gold investors in these government schemes are going to find out if they can redeem their gold or the money it is supposed to represent.

When the investors get back a bunch of worthless rupees, they can thank their government for closing the trade deficit.