Seeking ways to stabilize the gold market in Vietnam

Gold is not meant for speculation

The local gold price is now about 75 million VND per tael, while the world gold price is 2,045.3 USD per ounce, a difference of around 14.5 million VND per tael. The difference between Vietnamese and worldwide gold prices is determined by the VND/USD exchange rate, liquidity, and domestic supply and demand.

The Prime Minister recently issued a directive to the State Bank of Vietnam (SBV) and relevant ministries about gold market management solutions, highlighting the need of avoiding a major price disparity between local and international gold prices. From a managerial standpoint, this will have a significant influence on public attitude.

The gold market is not suitable for speculating as an investment. Gold, particularly SJC gold bars, is a defensive asset that investors should retain in their portfolios (between 5 and 10%) to defend against unanticipated occurrences or geopolitical disasters overseas. Extreme care is recommended if considered as a speculative asset.

In light of recent news regarding the SBV revising and supplementing Decree 24/2012 on gold market management, it's important to look back at the circumstances before the decree was adopted. At the period, Vietnamese banks encountered gold reserve concerns as they made loans, sold gold for VND, and conducted business.

A serious difficulty developed in 2011 when the gold price rapidly increased, placing Vietnamese banks in a negative gold condition. As a result, Decree 24 in 2012 sought to manage the whole gold situation, assuring control through gold auctions to replenish banking system gold reserves.

Decree 24 has greatly addressed the economy's goldization, stabilizing the market, particularly the currency and financial markets in Vietnam. Mr. Tuan feels that serious consideration is essential when considering modifying Decree 24. If gold is still viewed as a commodity or an investment asset, the subject of how to handle it must be thoroughly examined.

Finding a Solution for the Market

In reality, the value of gold is not only a financial asset but also extensively used in various production sectors, naturally leading to its growth.

In addition to the Prime Minister's recent direction, the SBV's Deputy Governor adds that the SBV would not allow major price discrepancies between local and international gold prices, or between SJC gold and other sorts of gold. Concentrating public demand on a single sort of gold can lead to speculation or mass purchase, which can have an impact on public attitude.

As a result, although reconsidering Decree 24 is sensible, it is critical to manage the economy's goldization. If the narrative reverts to considering gold as a unique type of money, with individuals able to deposit gold for interest or borrow gold to acquire assets as previously, severe issues may arise. As a result, the VND's value may not be as stable as it is now, an issue that government officials are actively addressing.

The SBV recently published Decision 02/QD-NHNN, which amends and supplements some aspects of Decision 1623, dated August 23, 2012, on coordinating and controlling the manufacturing of SJC gold bars. Some elements are concerned with production organization, such as giving a list of supervisory officers for SJC gold bar processing and mold management.

Gold grains are melted and fashioned into bars to make SJC gold bars. Controlling the molds, particularly those held by SJC and under SBV control, is so critical. The SBV is now working on two projects: planning essential steps to improve the supply of SJC gold bars to the market and managing demand.

Individuals are not prohibited from keeping and possessing gold, but government authorities will oversee speculation to prevent anyone from profiting from gold price hikes. Foreign exchange reserves in a country like Vietnam must also be handled intelligently, rather than importing gold without contributing to profitable enterprise.

Addressing the fundamental flaws in the gold market will be impossible as long as gold is treated as a special type of currency. The greater the degree of control, the greater the public demand during global economic swings or when interest rates in the Vietnamese market are low, causing individuals to speculate in this asset.

If gold is seen as a commodity, we may examine an exchange model that does not include CFD (contract for difference) trading in which gold price differentials are exchanged without actual gold delivery. A national physical gold trading floor might be one option. When there is a great demand for actual gold, we can import gold to sell to the public. When the gold price in Vietnam exceeds the world market, we may export gold via this platform, assuring interconnection.

In practice, gold import and export operations in Vietnam are conducted on a regular basis using the methods outlined in Decree 24. Mr. Tuan believes that even if we adopt formalistic adjustments or laws, the unique concerns of the gold market may not be rectified.