Hoarding of gold and dollar increases when economy shows signs of instability

Hoarding gold and US dollars is a habit of Vietnamese people. This habit becomes more prevalent when the economy shows signs of instability, the risk of dong devaluation increases, and investment channels such as property or stocks face various difficulties. The relatively high amount of gold and dollars hoarded, which is considered standing outside official circulation and not calculated, is the potential risk to the economy.

Keeping gold only for safety purposes, not for making profits
Le Xuan Nghia, vice Chair of the National Financial Supervision Committee recently said while balancing the inflow and outflow of foreign currencies of the entire economy, a surprising error was found. More than $5 billion have gone missing. This amount of money is not in circulation and not shown in any deposit or investment account.

In other countries, it is a big issue. However, it is normal in Vietnam, both people and the management authorities remain calm since it is too familiar. The purchase and hoarding have contributed to the scarcity and price increase of dollars on black market.

No official figures have been published, but experts and gold trading companies said the volume of gold held in the population, mainly in the form of storage assets, is estimated to reach about 700 to 800 tonnes. This is such a huge amount of financial source in the hands of individuals not being calculated and controlled.

Vietnam has very large and vibrant black market for dollar trading, although management agencies always say this is a small market, which contains unpredictable fluctuations often due to psychological factors and speculation. In fact, changes on free market are always the first indication for the difficulties of foreign exchange. Moves on free market are even closely observed and expected as a signal for changes in management policy.

Vietnam always imports gold with growing quantities. Gold imports were about 50 to 60 tonnes in some years, even 80 tonnes. Under the current prices, this import volume would cost billions of dollars each year, putting pressure on exchange rate and currency operation.

According to evaluation of an expert from the World Bank, the habit to store gold of Vietnamese people has greatly affected the volatility of gold price. This comes from the worries of the people and businesses about dong/dollar exchange rate.

Many people are hoarding dollars as they think it is an instrument to protect their property. People seem to find safe haven assets rather than making profits. Nevertheless, this has also caused many consequences devastating Vietnam’s economy.

The dozens of billions of dollars stored in people’ safes have caused a large amount of capital to almost be frozen. If they are transformed into investments, the investments are usually into real estate, and recently into stock market, causing insecure fevers to the market. This really is a huge waste.

Specialists from the Central Institute for Economic Management of Vietnam in an earlier report said Vietnam’s trade deficit is about $5billion. Thus, if the amount of capital stored in the population were released and put into circulation, that would help balance foreign exchange and the stress of dollar would be dissolved. Vietnam, basically, does not lack dollars.

Moreover, while Vietnam faces difficulties to borrow foreign capital for development investment, billions of dollars remain stored. Not to mention, the spending of billions of dollars to import gold also puts pressure on trade deficit and exchange rate. That is just a part of the consequences caused by the capital source out of circulation.

Nevertheless, the sudden injection of capital by transferring or investing in other assets could cause instability. Therefore, experts from the World Bank have warned that Vietnam should not let capital flow into the market without control.

For many times, the State Bank had to pump money to solve the tension or adjust the exchange rate to reduce the pressure when demand for dollar rose, and dollar price on free market quickly jumped up. However, that made foreign currency reserves to be affected, and instability to arise in management policy.

Conversely, when demand for gold hiked, gold price increased, people rushed to buy gold, causing an imbalance in supply and demand, the State Bank had to import gold. Importing gold then put pressure on exchange rate when businesses needed to collect dollars to buy gold.

This really is a pressure for the currency management agencies, but no thorough solutions seem to be found. The only solution is just trying to overcome the stressful moments.

Observing the recent fluctuations of gold price, experts from ADB said apart from the rise of global gold price, gold hoarding habit of Vietnamese people is found to be another reason.

The sharp rise of gold price in the recent time is due to speculation and dong devaluation, making people to further believe that gold is an effective storage tool and therefore they boost buying. Once demand for gold increased considerably, gold price was strongly pulled up by speculators.

The suspension of gold licensing has caused gold scarcity in the domestic, creating more opportunities for speculators to manipulate the market. Speculators converted dollars to buy gold, increasing the pressure to devaluate dong.

High increase of gold price has caused savings no longer attractive, depositors shifted from holding dong to holding gold.

In addition, this could lead the inflation pressure to increase, since gold price jumps up, price of property increases, prices of other goods thus also rise.

The habit to evaluate and pay goods by dollars and gold also causes keepers to always tend to transfer these assets to other short-term investments to maximise profits. That is when a large amount of capital is converted and put into circulation and management agencies cannot manage; that would then cause inflation and instability to the economy. This matter has made monetary policy to face various difficulties in operating and has little effect even when strong administrative measures are applied. – VNR500

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