Price stability from supply increase and transparency in trading in gold market

Economic expert Prof.Dr. Tran Tho Dat, a member of the Prime Minister's Economic Advisory Group

The State Bank (SBV) has decided to return to gold bidding after 11 years. In your opinion, how does this decision affect the gold market?

First, we need to recognize the historical value of Decree 24/ND-CP on gold market management and anti-goldization. Furthermore, from 2012 to 2022, domestic gold prices basically closely followed and correlated with world gold prices. But from mid-2022 until now, there has been a high difference between the price of SJC gold and the world gold price, sometime, the country’s gold price reaches up to VND18 million VND/tael, while the price of gold rings and 9999 gold are similar to the world gold price.

The above issue clearly reflects the supply-demand relationship in the gold market as well as the psychology of consumers and investors. Gold is always considered a safe investment channel in the context of many uncertainties in the world market, so world gold is also on a rapid increase trend, affecting domestic gold price, especially in the first three months of the year. But domestically, SJC gold production was assigned to a company by the State Bank of Vietnam and since 2012, as far as I know, it is no longer produced. The State Bank also auctioned gold bars in 2013 but has stopped bidding since then. Therefore, the supply of SJC gold is fixed, SJC has a monopoly, so people understand SJC as national brand gold, the demand for this gold increases, leading to SJC gold prices widening the gap with world gold price.

The gold market is very sensitive to all information about market regulatory from management agencies. Recently, every time the Government or the State Bank interfere in the gold market, the gold price immediately decreases, but after that, when the management agencies do not take specific actions, the gold increases again to a higher level, accurately reflecting market supply and demand. Therefore, when the Government and the State Bank of Vietnam took more drastic actions, specializing by organizing gold auctions again to increase supply, the SJC gold price increased slowly and was significantly regulated. Currently, SJC gold price is increasingly narrowing the gap with world gold price, down to a difference of VND5-7 million per tael.

However, the number of gold reserves of the State Bank has not been announced. According to my predication, the amount of gold reserves by the State Bank is about 0.68% of Vietnam's total reserves, so if the State Bank organizes gold bar bidding, the reserve level will decrease about 0.5%. Thus, the supply to the market thanks to bidding will be about 23 tons, while according to statistics from the International Gold Business Association, transactions on the Vietnamese market are about 40 tons per year, so the supply of gold from bidding is not a big number, but it will create psychological stability as well as create pressure to minimize the difference between SJC gold price and world gold price.

The State Bank decided to increase supply but for the gold market it is still not enough. How do you evaluate this point of view?

The recent move of the State Bank clearly shows two viewpoints, one is to increase supply, and the other is not let gold bar be monopoly. I think that the State Bank will make improvements in this issue, it possibly changes the policy in the direction of letting some other reputable and capable gold brands recognized by by the authorities to trade in gold bars. Amending Decree 24 is necessary, because the anti-goldization goal has been achieved, administrative management measures should not be maintained in the current context.

Along with that, the gold market needs to be more transparent. The story of a series of small gold shops closing down after checking information about electronic invoices is an example. This means that gold trading and investment must also have invoices, thereby, the State will collect taxes, especially when gold transactions are often of great value, so transparency is even more necessary. Regarding the tax rate, there will have to be calculations to ensure harmonious interests between the State and gold traders.

You mentioned that there is still a lot of gold stored by the people. What is the solution to mobilize this amount of gold, sir?

The culture and psychology of Vietnamese people is to accumulate physical gold that can be passed from generation to generation, so there is information that the amount of gold stored by the people can be up to 400-500 tons. An investigation by the International Gold Association shows that Vietnamese people's preference for buying gold is higher than many countries. In fact, the mobilization of gold from the people has been raised many times and there are many different opinions. The mobilized amount of physical gold stored by the people will create a huge source of resources and capital for the economic development. However, this problem depends on many factors such as which agency is financially responsible upon the gold mobilization whether there is enough money to return to the people or not... This problem has too many parameters so it still is a difficult task. But in the long term, you can refer to experience in gold trading accounts at banks, but a full and comprehensive assessment is also needed.

Another problem is that if you follow the analysis from financial information channels, you will notice that gold is the least effective financial investment channel, so gold price increase is to increase competitiveness with other financial assets. Recent gold price developments have shown great risks because they have increased by 17-20% compared to the beginning of the year, so gold investors must be very cautious, especially speculative investment. Therefore, to reduce investment in gold, State policies need to make other financial investment methods more attractive, requiring increasing the value and confidence of people in Vietnamese dong and other financial asset investment channels.

Thank you Sir!