Many challenges for gold bar auctions

The State Bank of Vietnam (SBV) is completing preparations to resume the auction of gold bars to increase supply to the market. A representative from SBV announced that a notice would be sent one day before the auction. After announcing the reserve price, credit institutions and gold trading enterprises will start filling in their bids. These units have 30 minutes to decide on the amount and price to bid. One hour after the close of the auction, the SBV will announce the results. Businesses will have to place a deposit to participate in the auction, no later than 5 PM on the day of receiving the notice.

The SBV licensed 26 entities, including commercial banks and gold trading companies to trade SJC gold bars. Of them, around 15 are eligible to participate in the gold bar auction. The gold offered at the auction is SJC gold bars.

The gold bar auction's goal is to intervene in a timely manner, addressing the significant difference between the domestic price of SJC gold bars and the world gold price, and ensuring that the Vietnam gold market will operate steadily, healthily, transparently, and efficiently in accordance with the Prime Minister's directives.

Nguyen Minh Tuan, CEO of AFA Capital, expects that the SBV will hold gold bar auctions to enhance supply on the market. However, the growing global gold price and rising domestic demand will have a substantial influence on this aim.

This is the first time in 11 years that the SBV will hold gold bar auctions. SBV held its first gold bar auction session on March 28, 2013, when the domestic price of SJC gold was approximately 4.2 million VND/tael more than the global gold price. In the same year, 76 gold bar auctions were held, with 1,819,900 taels won out of a total of 1,932,000 taels offered. On average, each session entailed auctioning between 5,000 and 20,000 taels of gold.

In a similar situation, on April 15, when the local gold price was more over 10 million VND/tael higher than the global gold price, the SBV indicated that it will enhance the supply of gold bars to the market through auctions this week.

The two time periods of gold auctions show a noticeable difference. During the years 2008-2012, the gold position of the whole banking system was short, particularly between 2008 and 2011, when banks mobilized and sold gold but were unable to purchase it again. As a result, banks had to buy gold to offset the short positions.

The gold price is currently in a completely other cycle, which is likewise beyond our control and is influenced by global factors. Furthermore, the USD index was low in 2013, hovering around 70 - 80 points, but it is now at 106 points and steadily rising. As a result, the SBV will encounter several obstacles when scheduling gold auctions.

In Nguyen Minh Tuan's views, the SBV has two alternatives for gold auctions: utilize reserve gold or import raw gold to be processed into SJC gold bars for auction. In the first situation, if reserve gold is utilized and the gold price rises, the SBV will incur a loss; if the gold price falls, the SBV will benefit.

However, the SBV's first goal is always to safeguard the value and liquidity of the national gold reserve. As a result, it is quite unlikely that the SBV will sell reserve gold, particularly at this time, when other central banks, such as People's Bank of China - PBC, are purchasing more.

In the second situation, when the SBV imports raw gold, it reduces Vietnam's foreign exchange reserves (now around 95 billion USD). This makes regulating the currency rate difficult, as the USD/VND exchange rate has climbed beyond 25,000 VND at commercial banks.

As a result, Mr. Tuan believes that the SBV must exercise extreme caution in gold auctions, particularly when the world gold price rises and local demand rises, both of which will have a substantial influence on the SBV's aims.