The death of gold

With the authorities imposing strict regulations, the future of gold looks gloomier than ever

Khac Giang Nguyen
July 11, 2013

With the authorities imposing strict regulations, the future of gold looks gloomier than ever

By Khac Giang Nguyen
Late April was not a good time for the State Bank of Vietnam (SBV). Thanh Nien, one of the most prestigious newspapers in Vietnam, published an article accusing the SBV of allegedly “laundering gold by policies” – a big blow in a country where government agencies are mostly exempt from criticism. The SBV reacted furiously, threatening the newspaper with legal action on the grounds of “propaganda against state policy” and forcing its editors to apologise and remove the article from the newspaper’s website.

The death of gold
25%: The amount demand for gold plummeted following the SBV’s efforts to “restabilise” the gold market

However, killing an article is not enough to calm an unhappy public, with the Vietnamese gold market having suffered tremendous turbulence in recent years.
Like many Asian countries, Vietnam has had a long association with gold. Cameron Alexander, senior Southeast Asia analyst from Thomson Reuters GFMS, has estimated that Vietnam’s gold ownership per capita is one of the highest in the world, while Vietnamese economists estimate that the domestic population owns no less than $40 billion worth of gold, more than a third of the country’s GDP.
This fetishism of gold intensified when Vietnam slipped into economic recession in 2008, with investors choosing gold as a safe option at a time of high inflation and a collapsing stock market. From 2008-2011, gold was widely traded even in the banking system, where it could be kept in savings accounts and received interest rates as high as 4% per year.
Many commercial banks took this chance to gather a huge amount of gold from the population, sell it for Vietnamese dong, and then lend the money to capital-hungry enterprises at the annual lending rates of more than 25%.
Fearing the ‘goldisation’ of the economy – in which gold can practically replace the domestic currency – the SBV decided to take radical action. It banned all economic transactions using gold as payment, ordered commercial banks to cease gold-related credit activities, and set itself as the only legal gold supplier in Vietnam. Gold bars from Saigon Jewellery (SJC), a state-owned company, were established as the sole national gold bar brand, which implicitly illegalised other smaller brands.
Additionally, banks and enterprises are not permitted to conduct the import-export of gold, nor open gold accounts in overseas banks. According to Roman Baudzus, a gold expert at Gold Money, the SBV has effectively instituted a “de facto nationalisation” of gold.
At the time, SBV governor Nguyen Van Binh declared that the ultra-strict regulation would “re-stabilise” the chaotic gold market, close the gap between domestic and international gold prices to a desirable $20, and, more importantly, withdraw gold from monetary circulation.
At least one of these initiatives has been a resounding failure. The gap between domestic and international gold prices has widened massively since then, from almost identical in 2011, to about $220 in May 2013 – 11 times higher than the target of $20.
Responding to widespread criticism, including claims that the price gap will be harmful to the financial market in the long term, the SBV said in a press release that gold is intrinsically “money” and needs to be strictly controlled.
“After the June 30 deadline [when commercial banks pay back all gold deposits to their customers], the market will be saturated and we can expect the domestic gold price will be closer to the international one,” SBV vice-governor Le Minh Hung said.
The SBV is not alone in its hostile stance against gold. “The final target is to end the goldisation and stabilise the economy; therefore, other factors should not be the primary concern,” said Nguyen Duc Thanh, director of the Vietnam Centre for Economic and Policy Research, suggesting that closing the price gap is not necessary.
Bui Kien Thanh, a veteran financial expert who has worked for the Central Bank of South Vietnam, US Federal Reserve and AIG, praised the SBV for its radical policies against gold, saying that gold bars are “perfect tools for corruption and money laundering”.
Whether the SBV’s strategies are right or wrong, it looks unlikely that gold will regain its dominant position in Vietnam’s financial market. Within one year, domestic gold demand plummeted 25% from 100 tonnes in 2011 to 77 tonnes in 2012, according to the World Gold Council. Thomson Reuters GFMS, even more pessimistically, forecast a 45% decrease in demand in the second half of 2012 alone.
Stricter regulation has effectively ruled out 9,500 of 12,000 gold bar retailers nationwide. If the SBV’s aim is to deactivate gold as an investment channel, they are on the right track. Thomson Reuters analyst Cameron Alexander commented in a written analysis that, although 24-carat gold jewellery could be used as a quasi-investment tool to replace gold bars, the opportunity for gold investment in Vietnam “has been largely closed”.
However, the death of gold has resulted in the resurrection of other investment channels. With gold strictly regulated, investors have flooded in to cheer up Vietnam’s gloomy stock market. According to CafeF Research, VNindex, the country’s stock market indicator, has increased 27% in the first half of 2013 – one of the best performances in Asia.
The macroeconomic environment is also becoming more stable: Vietnam’s infamous inflation rate has cooled dramatically to 6.6% year-on-year from a disastrous 20.8% in 2011. The exchange rate has remained almost unchanged at about VND21,000 to the dollar for nearly two years, thanks in part to the sharp decline in demand for foreign currencies to import gold. All this has given the SBV more room to inject money into the economic recovery process. On May 13, the SBV reduced its key policy rates (refinancing, discounted rate and overnight rate) by one percentage point, in an attempt to boost credit growth. This move was quickly followed by a $1.4 billion loan programme to revive the property market.
Vietnam’s economic prospects have certainly been much improved. In its Emerging Market Index, released in March 2013, HSBC cited Vietnam as one of the countries with the strongest manufacturing expectations along with Saudi Arabia, Indonesia, Mexico and the United Arab Emirates.
Amid continuing global economic peril, these are impressive achievements. Some might say they are worth their weight in gold.
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