Gold price fluctuation and its impact on the economy

In response to the fluctuation of gold prices in 2010, various tough measures were introduced. However, there remain challenges as gold prices in the global market are still unstable.

Dr. Nguyen Thi Thanh Huong, a financial expert of the State Bank of Vietnam (SBV), attributes the fluctuation of gold prices to the instability of the financial market. In the domestic market, the high inflation is also one of the factors causing the rise in the prices of gold.

Price fluctuation and the management of gold floors

Over the past year, gold prices saw a sharp increase of VND10 million, from VND26.7 million/tael to VND36 million/tael at the end of 2010. Especially, the market experienced a fever of gold prices in February and November.

In February, gold prices surged by more than VND1 million to VND26.4 million/tael in only five days while November was considered a crazy month when gold reached VND38.2 million/tael on November 9, VND3 million higher than a day before.

To deal with the problem, the SBV immediately allowed businesses to import unlimited amount of gold and its decision proved correct when gold price reduce to VND37.2 million/tael in the afternoon.

Dr. Huong said the “up and down” trend of gold prices posed a real risk to those who bought gold for speculation.

In response to the fluctuation of gold prices which put pressure on the monetary market, the Government and the SBV introduced various measures, including closing gold floors and strengthening the management of gold mobilisation and credit institutions’ lending.

According to Dr. Huong, the transaction of gold on trading floors carries high risks for both investors and gold businesses as the information and trading mechanism are not transparent.

Efforts to stabilise the market

After the hike in prices in November, the market gradually stablised. Although gold price listed in the world market hit the record level of US$1,432/oz on December 7, in Vietnam it was traded at around VND36.5 million/tael. US dollar also fell to VND21,000 in the last days of 2010.

Along with the great fluctuation in gold prices, 2010 saw many tight measures implemented by the authorities to stabilise the gold market.

The circular No. 22 put the capital mobilisation and lending in gold by commercial banks under strict regulation. It was followed by a series of quota licensing for importing gold, and interventions to stablise the US dollar and zeroing the gold import tax while raising the gold export by 10 percent from January 2011.

However, gold prices in the world market continue to fluctuate and it is predicted that in the coming year, it will still suffer from the inflation and the fear that the US dollar will decrease in value.

In the last trading session on December 31 the gold price at the New York market jumped from US1,405/oz to US$1,419/oz.

In 2010, the gold price raised by 29 percent to a highest increase since 2007.

The main reason was a weak US dollar and the fact that the global economy has not yet recovered from the crisis.

Most traders said that the gold prices will break the US$1,500/oz level. Darrent Heathcote from Investec Australia in Sydney said that the prospect for gold price will look better next year. The demand for investment will push it up.

By the end of 2010, gold had underwent a decade of growing prices, starting from US$250/oz to the record high of US$1,431/oz.

Some observers said the fluctuation of gold price is only a prelude to new records as many countries have lost their trust in paper money.

The trend is supported by World Bank Chairman Robert Zoellick as he stated in Financial Times that it was the time to end the use of Dollar as the standard currency for other countries. The gold standard will help strengthen the global economy in the time of intense changes in foreign exchange rates and the US monetary policies.

Dr. Huong said that in the future, Vietnam should implement comprehensive measures to tackle the fluctuations in gold price and prevent its foreign currencies losses. – VOV

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