Gold in Vietnam and the effects of the import ban

Vietnam’s central bank announced on Tuesday it would relax a gold import ban and allow in “reasonable volumes” to stabilise the domestic market as global gold prices XAU= hovered at record highs.

Vietnam’s central bank announced on Tuesday it would relax a gold import ban and allow in “reasonable volumes” to stabilise the domestic market as global gold prices XAU= hovered at record highs.

Here are some questions and answers about gold in Vietnam and the ban on imports.

How Are Vietnam’s Gold Imports Regulated?

Vietnam imports 95 percent of the gold it consumes and these imports are regulated by the State Bank of Vietnam. Gold businesses wanting to import the metal have to ask the central bank for a licence and quota. At times when the central bank is not granting licences, the official channel for imports is cut.

Why Are Gold Imports So Tightly Regulated?

The central bank stopped granting gold import licences in May 2008 in a move to contain the trade deficit, cool inflationary pressure and support efforts to stabilise the economy.

The trade deficit had hit a record high of $11.1 billion in the period from January to April 2008 and in April annual inflation had hit 21 percent.

The central bank has since eased the ban several times with limited quotas, letting businesses import as domestic prices have surged.

What’s The Link Between Gold And The Dong?

When a gap develops between gold prices onshore and those on the world market, speculators rush to buy dollars to smuggle gold in, which puts downward pressure on the dong VND=VN.

Surging gold prices make dong savings less attractive, which drives people to convert dong deposits into gold. This may intensify inflationary pressures.

In addition, Vietnamese tend to price property in gold. Higher gold prices push property prices up, which ultimately raises the prices of other goods.

In Vietnam’s immature markets, an increase in the gold price tends to raise expectations of yet more increases, the flip side of which is more downward pressure on the dong.

What Has Been The Effect Of The Gold Ban?

The gold import ban has allowed the central bank to restrict the amount of foreign exchange used for imports, but it has created a scarcity, or at least the perception of it, which has pushed domestic prices higher than world prices.

That creates arbitrage opportunities for gold smugglers and hurts the currency. In addition, gold businesses have complained that the limited supply of raw material is causing problems and hurting firms that make jewellery for export.

Why Is Gold So Popular In Vietnam?

Vietnam is one of the world’s leading gold importers, with 91 tonnes in 2006, 51 tonnes in 2007, and 90.5 tonnes in 2008, the central bank has said. The Vietnam Gold Business Association says Vietnamese may be holding 500 tonnes.

Vietnamese people, no strangers to hyper-inflation and instability over the years, have a long-standing tradition of keeping gold as a reserve.

Gold is also a common gift for weddings in the country of 86 million people. The chronic loss of value in the dong has strengthened perceptions that gold is a safe haven together with U.S. dollars.

Vietnamese hold more gold per dollar of income than anyone else in the world, underlining the lack of confidence in the local currency, the Asian Development Bank says.- Reuters

Tags: vietnam gold, Vietnam gold market, Vietnam gold prices