Gold market regulation debate begins

Vietnam’s gold market in desperate need of long-term regulatory control.

Who speculates, who manipulates?

By the end of July, prior to the latest dose of gold fever, the gold market had been gloomy, with a director of a prestigious gold firm in Hanoi complaining that speculation and manipulation had affected profits.

He explained that major companies and business groups buy and sell gold in large quantities based on volatile price fluctuations. They buy at prices higher than those gold firms can afford and sell at prices lower than those applied by gold firms, narrowing the gold trading band to VND50,000-VND100,000 ($2.4-$4.8) per tael and simultaneously cutting into gold firms' profits.

In order to deal with the situation, several members of the Vietnam Gold Business Association have proposed that the government impose a gold trading band.

However, when gold prices soared on the world market in early August, with a major 18 per cent hike from a month earlier and a whopping 38 per cent increase from a year previous, gold companies no longer complained about decreases in profits but moaned over the disparity between gold supply and demand and daily changes in gold prices.

At the time, domestic gold prices rose to VND2 million ($96) per tael higher than global market prices and gold trading bands were extended to VND700,000-VND1 million ($34-$48) per tael. The band widened to around ten times more than just a month earlier.

The State Bank of Vietnam (SBV) had constantly issued several warnings to gold investors to prevent them from being trapped by brokers who were trying to create a false scarcity in supply to drive up selling prices.

At the moment, no major companies or groups have appeared to have made moves in the market, with individual investors alone rushing to enter the market with an expectation to earn some money. Some gold companies have even suspended transactions for a certain time when gold prices temporarily decreased.

In a government meeting on September 1, SBV Governor Nguyen Van Binh refused to answer reporter questions related to exposing gold speculators and manipulators or what methods should be adopted to curb their influence.

Binh only attributed the recent soar in domestic gold prices to the country’s heavy dependence on gold imports.

“Gold illegal imports and speculation happen when domestic gold prices are from VND400,000 ($19.1) higher than global prices,” Binh noted.

This means that gold speculators are quite clearly operating in Vietnam but no one has dared to name them, especially since gold companies are longer voicing their complaints.

Gold price graphs indicate that it is gold companies who speculated and manipulated the market in order to drive up domestic gold prices for their own profits.

Market tools needed

Even though Vietnam is not a gold producer, it has been consistently reporting a trade surplus in the precious metal for several years.

The trade surplus was recorded at around 30 tonnes in the first seven months of this year, with the figures of 66 tonnes in 2010 and 75 tonnes in 2009 respectively.

The SBV estimates that Vietnamese people are retaining between 300 tonnes and 500 tonnes of gold as savings. The World Gold Council estimates the figure at around 500 tonnes.

The trade surplus occurred when domestic gold prices were lower than the world market in the first seven months of this year.

Gold exports started to decrease when the Ministry of Finance issued a circular that imposed an export tax rate of 10 per cent on gold with quality of less than 99.99 per cent.

When gold prices increased sharply in the domestic market, the SBV allowed the import of from 5 to 10 tonnes of gold in order to boost gold supply and ease prices. The move has helped cool the market, bringing domestic prices to only VND400,000 ($19.1) per tael higher than the world rates.

However, experts are worried about the lack of regulation in the domestic gold market as the country had imported only 7 tonnes of gold that represented just one quarter of the country’s gold exports since the beginning of this year. This means that implied scarcities in gold supply were false.

SBV Governor Nguyen Van Giau has proposed the government to allow the purchase of gold from people’s saving via commercial banks.

In the meantime, gold expert Tran Trong Quoc Khanh suggested floating domestic gold prices and removing gold import-export quotas in order to ensure effective gold reserves, prevent speculation and impacts to the forex rate, and encourage the fostering of public confidence.

The Vietnam Association of Financial Investors has, however, proposed the SBV to abolish gold bar trading in order to prevent idle money being pumped into the precious metal in a bid to foster sustainable macro economy.