Gold - Keeping a tight rein on untamed horse

SGI

“As precious as gold” has long been a common idiom in Vietnam, which indicates the pivotal role of gold in the society and has certain effects on the socio-economic development.

At a gold shop.

At a gold shop.

Since Vietnam officially made significant economic reforms and opened its door to the world, gold has several times caused some social disorder, creating major headaches for monetary policy makers. And for a long time, management of the gold market has been like taming a tough wild horse.

The past glitter of gold

From the international investment point of view, gold is considered a safe haven asset in wakes of global financial uncertainty. From economic crises to natural disasters or wars, people have always resorted to gold as a way to guarantee their assets. That is the reason why gold has been so important for Vietnamese people.

Vietnam used to depend heavily on farming, and wars from time to time made people to move a lot, causing them to consider gold as the ultimate asset that can guarantees their work achievements and avoid risks.

The habit or even the custom of trying to save up for gold tael by tael has been firmly rooted in the lives of Vietnamese people from generation to generation. Gradually, fluctuations of gold prices have become an instrument that shows economic values. A glance at gold prices can help people understand the purchasing power of the Vietnamese dong (VND), price levels, expected inflation and even the situation of foreign exchange. And all these elements certainly have impacts on interest rates. Therefore, management of the monetary policy was actually management of the gold market.

The story of the gold market was made more complex in 2006 when gold trading floors were established, which is basically a kind of derivative transaction based on the fluctuations of gold prices. However, because there is no connection between transactions on the gold floors and those on the material gold market, the gold trading floors are sometimes nothing more than places of gambling. Worse still, people at that time got extremely puzzled about such concepts as “gold prices on the floors”, “material gold prices”, “domestic gold prices”, “international gold prices” commonly used in financial news every day.

As a result, almost all the financial and monetary system depended totally on the gold market, which was in the hands of speculators. The equation of the monetary policy, which is already complicated with multiple variables of stability of prices, stability of interest rates and, above all, stability of foreign exchange rates, became more complex with the variable of gold prices.

Gold was almost like a kind of currency circulated in the market, together with VND and USD, and even threatening and overshadowing the Vietnamese dong in management of the monetary policy. That was why during the period of 2006 till late 2009, the fluctuations of gold prices, both domestic and international gold prices, were always the first element that attracted the attention of everyone, from the street vendors to policy makers.

Decree 24 as effective “rods”

Realizing the bad influences of the gold trading floors, in December, 2009, the Government banned the gold trading floors. Then in April, 2012, Decree 24 was issued providing for management of gold trading activities, basically changing the role of the gold market in the Vietnamese economy.

The main goal of Decree 24 was to bring the gold market back to the nature of a normal commodity market, removing gold from its role as a currency. Additionally, other regulations were introduced to rearrange and restructure the activities of import and export of gold bars, and ban the trading of gold in accounts or using gold as a means of payment. The State Bank of Vietnam (SBV) stopped the activities of raising funds and giving loans in the form of gold in the network of commercial banks.

SBV did not give licenses for imports of gold materials for production of jewelry or handicraft items, helping save large amounts of foreign currencies, previously spent on import of gold. It also cut the connection of the domestic and international gold markets, making it almost impossible for international gold prices to put pressure on domestic gold prices and limiting the pressure on the USD/VND exchange rates. The trading based on the differences of domestic and international gold prices could not be carried out, almost putting an end to speculation of gold. Decree 24 functioned as the rods that made the gold market more obedient.

The general impact is that people do not have any motivation for keeping gold, which is both a waste of money due to no chance of depositing it in banks and a lot of risk when keeping at home. Meanwhile, they have opened several other channels for savings and investments such as securities, derivative securities, trading, start-ups and especially estate property, which has made it very costly to keep material gold and wait for profits.

This has created a positive effect on raising large amounts of unused capitals from people which was previously kept in households in the form of gold, and now such amounts have been put in investments, production and trading, and it has helped the economy to save large amounts of finances. Continuous increases in foreign currency reserves over the past few years have certainly been in close connection with the fact that large amounts of material gold as unused capitals among people have been put into use in the market.

Gold market stays calm

The above-mentioned reasons were challenged on Feb, 24 when the domestic gold price soared from more than VND 46 million per tael to almost VND 50 million in that afternoon, a record hike in 10 years. What thing other than speculation created such a sharp rise?

Speculation of gold was just the glitter in the past. Unpleasant experiences, positive effects of Decree 24 and other efforts from the concerned officials to keep a tight rein on the “untamed horse” of gold price over the years have helped keep the domestic gold market calm.
A domestic gold market with no connection with the international one could be nothing more than an excuse for a domestic rise, based on the international gold price of more than 1,600 USD/ounce. What was notable was that the difference of buying and selling prices was just approximately VND 2 million even during the rise, indicating that there was no liquidity at all. Therefore, it was not because the demand was greater than suppy. It was just an act of speculators who wanted to see the reaction of the market after nearly 10 years of stability created by Decree 24.

This is easy to understand because there have been a few news articles analyzing the trend of an increase in gold price when international speculators have become concerned about the possible uncertainty of the global economies due to the Covid-19 epidemic getting more and more serious, and the tension between the US and Iran.

The domestic gold speculators want to know reactions of the people, investors and policy officials against fluctuations of the gold price in the market; and they want to see if they have any chance of making profits by creating waves and surfing the gold prices. The gold price hike did not happen naturally after news of a serious spread of the Covid-19 virus in the Republic of Korea.

Interestingly enough, the reactions of the market did not come as expected by the gold speculators. People have become more cautious, calm and even indifferent to the fluctuation, as if the gold market were not their playground. There was no scene of hustling at stores, and the competent agency did not need to give any warning or take any action. Just overnight, the gold price plunged back by more than VND 3 mn, returning to its previous price. SBV stayed still and did not have to waste a single cent to intervene to keep the market in control.

“As precious as gold” is now just an idiom that reflects the habit and custom of the Vietnamese people in the past. Speculation of gold was just the glitter in the past. Unpleasant experiences, positive effects of Decree 24 and other efforts from the concerned officials to keep a tight rein on the “untamed horse” of gold price over the years have helped keep the domestic gold market calm. Now, everyone can sleep soundly no matter what happens to the gold price in the international markets.

Translated by Nguyễn Gia

Asso. Prof.- Dr. NGUYỄN KHẮC QUỐC BẢO, Dean of Finance Dept., University of Economics HCMC

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