Fading confidence sparks gold fever

Ha Noi Gold, Silver and Gemstone Company’s staff check gold bars that are becoming more valuable by the day. — VNS Photo Truong Vi

Please, bewitching gold and anxious citizens, let’s get together and talk… right now!

I can’t help but wonder if any of our financial managers muttered such a plea as the precious metal’s dazzling dance hypnotised the domestic market and drove people in long queues crazy outside gold shops from North to South earlier this month.

Unfortunately, I fear, that if they had done so they would have been talking into their hands.

Not only the young but even the old fell victim to the gold fever. It’s a scene you are unlikely to see anywhere else under the sun.

On the morning of November 9, dealers changed prices by the minute till gold hit VND38.8 million, about US$1,847, per tael ( one tael equals to 37.5g or 1.2 troy ounces). In doing so, it had risen 7.61 per cent just in three hours against the previous day.

The world price was then $1,410.6 per ounce.

It meant the domestic price was almost VND3 million higher than the global price, although the difference is usually just VND500,000.

Some gold shops closed and posted “Out of stock” notices on their doors and many people panicked.

Ultimately, the State Bank of Viet Nam for the third time this year announced that it would allow a quota of gold to be imported and the price fell to VND36 million in just two hours.

“It’s very clear that psychology is ruling the market,” said National Economics University Professor Nguyen Khac Quoc Bao in a classic understatement.

The gold price in Viet Nam has increased by 30 per cent since the beginning of the year.

But why?

Excluding the usual speculation, one likely explanation is that the widespread use of gold as an alternative currency or as an assets shelter is flagging not only a weaker currency but tighter money and an unstable macro-economy.

Inflation, rampant credit growth and the trade deficit have all fostered distrust of the dong.

Inflation accelerated to almost 10 per cent year on year and the trade deficit widened to $1.1 billion in October from just $395 million in August, General Statistics Office figures show.

The gold market has now three times mimicked the gold fever of November last year.

When global prices rise, key domestic traders increase their price and complain about a shortage of supply.

Then, when the domestic price sets a record high, the State Bank removes import quotas and the price immediately plunges – even before more gold arrives.

State Bank Governor Nguyen Van Giau concedes that people are worried about inflation and their deprecating currency but denies the decision to allow the importation of more gold was based on any other criteria than prevailing market conditions.

Gold is not the only remedy for shortcomings – such as the trade deficit and inflation – that affect prices, he warns.

The central bank ha-s reset the dollar-peg lower five times since 2008 and this has nominally devalued the currency more than 11 per cent.

But based on the Consumer Price Index, the dong has, in reality, lost 38.6 per cent: 22.97 per cent in 2008; 6.88 per cent in 2009; and 8.75 per cent in first ten months this year.

“The weakness of the dong is undeniable and this gives people an understandable reason to buy gold to protect their assets,” says Central Institute for Economic Management deputy director Vo Tri Thanh.

The National Financial Supervisory Commission estimates that Vietnamese are holding 1,000 tonnes of gold worth about $45 billion.

But just 91 tonnes of the precious metal is kept at commercial banks, the remainder is most likely “under the mattress.”

One-hundred-member Viet Nam Gold Traders Association Chairman Dinh Nho Bang says: “Although we’ve seen economic growth, it still seems fragile.

“If the macro-economy was stable, people would love their domestic currency. “We have to sacrifice economic growth to curb inflation and close the trade gap to create stability or, in other words, gain people’s confidence.”

What to do?

The central bank’s gold quota alone will not regain confidence.

National Monetary Policy Consulting Council member Tran Hoang Ngan suggests the central bank issue bonds to borrow gold from commercial banks to sell to traders at the global price.

Otherwise, it could issue Government-support gold paper bills to commercial banks.

“These measures can be introduced immediately,” he said.

“They would meet the strong demand for gold and save billions US dollars.”

“People have accepted a receipt from dealers and received their gold later in many previous bouts of gold fever.

“There would have no reason to distrust Government-supported gold paper bills.”

Viet Nam issued widely-used cheques for payment in 1994 and these were not replaced with cash until 2007.

National Economics University Professor Bao also suggests that the commercial banks should offer deposits guaranteed by the value of gold.

The deposits would prevent people from withdrawing their dong to buy actual gold, he says.

The Finance Ministry reduced the import tax for gold to zero from 1 per cent from last Friday in an effort to link the domestic price to the global price.

The link was broken when import restrictions were imposed in 2008 in an effort to reduce the trade deficit.

The State Bank of Viet Nam has, in turn, allowed the importation of more gold and broadened the dong-dollar peg in its attempts to restore people’s confidence in their own currency.

“The decisions were correct but it seems they are all the central bank can do at this time,” said Fullbright Economic Teaching Programme director Vu Thanh Tu Anh.

“With its limited independence and power and the current institutional and economic structure, it cannot solve the problem alone,” he says.

“It doesn’t matter how good the monetary policy, if it’s not coupled with a suitable fiscal policy.” — VNS

Tags: vietnam gold, Vietnam gold prices