It is difficult for the gold market to develop sustainably if the State management agencies continue to apply non-market measures
Specific Policies For Specific Market
By Quang Minh
Reality shows that people tend to buy and keep gold when the local currency is depreciated It is difficult for the gold market to develop sustainably if the State management agencies continue to apply non-market measures
In developed countries, few people hold on to gold due to its low liquidity and complicated transaction procedures, and only professional investors make transactions in large quantity. In Vietnam, on the other hand, in line with the current legislation, gold trading is quite favorable, except for material gold import and export and gold bar production, which are strictly controlled by the State Bank. Jewelry gold trading and fashioning are conditional business, but they do not require a certificate. A registration at a local Department of Planning and Investment is enough for organizations and individuals to conduct this business.
While the world gold market is developing professionally, with new forms such as physical gold trading, exchange-traded funds (ETFs), investments through accounts, gold derivatives or stocks of gold mining companies, gold trading in Vietnam just began in 2008. Transactions in the local market are mostly buying and selling of physical gold, and mobilizing in the forms of issuing valuable papers and lending gold for fashioning and trading in jewelry. Vietnam’s imported gold market is small but its price is usually higher than world prices.
Reality shows that people switch to holding gold when the local currency is depreciated. In the first few months of 2011, in the context of escalating inflation and devaluation of the dong, people tended to buy gold to preserve their properties. In addition, the increasing trend of world gold price, lackluster stock market and risky real estate market made gold an attractive and safe investment channel.
Aiming at stabilizing the macro-economy, there are suggestions to prohibit the trading of gold bars. Immediately, the financial market is shaken; gold prices fluctuate sharply. People and investors have no clue what is behind this “shock.” Does the rumor that the gold held by the public amounting to 500 tons, which is a big but idle capital source, give rise to the need to prohibit gold speculation? However, it is forecast that the gold market would not slow down as the State is unable to gain full control and transactions would continue under the supply-demand principle.
The fact that the Government is concentrating on gold bar trading through some commercial banks when the gold market management mechanism has not been completed will enable the development of an unofficial market. Management agencies should learn from the lesson of the exchange rate between Vietnam dong and U.S. dollar. If policies continue to be inconsistent with the market mechanism, the economy will not develop sustainably but may face the risk of instability. In developed countries, when the gold market fluctuates, the governments often make timely decisions to control the situation by pumping money from the central banks to buy gold. This seems impossible for Vietnam because of the State’s tight budget.
The ask-give mechanism as in licensing gold import for each specific case in order to protect national interest and prevent foreign currency bleeding is no longer appropriate in the current situation. This management method cannot control hard currency drain and may even stimulate gold smuggling. Instead, the State should impose certain taxes on gold speculators. High taxes will reduce profits, and the gold market will correct itself and become more transparent.
On the other hand, the State should have policies to gradually put the gold market in order, provide sufficient and timely information for the market, and respect people’s right to own gold. The current regulations on gold trading (Decree 174/1999 and Decree 63/3003) are no longer appropriate. The Government requested the State Bank to devise a new decree on gold trading in 2009, which is expected to be promulgated in the second quarter of 2011. Unfortunately, there has not yet been any meeting held to collect public opinions on the draft.
Hopefully in the future, the management agencies would concentrate on promoting the development of new market mechanism rather than issuing short-term policies such as banning gold bar trading. When people are confident in the Government’s transparent policies, the gold market will develop sustainably. In the long run, the gold and financial markets will only be stable if inflation is controlled and public confidence in the local currency is high.