Shining a light on the gold price conundrum

In an interview with VIR, Vietnam Gold Business Association deputy chairman Huynh Trung Khanh shines light on how to balance bullion supply and demand in the home market.

Did a scarce supply lead to a widening gap in domestic and world market gold prices in the past months or has monopoly status in gold business management made local bullion prices more expensive than the world marketplace?

Soaring gold prices in the domestic market came on the back of escalating global bullion prices. However, over-concentration into the SJC gold brand has chiefly attributed to current big gap of VND2.5-3 million ($120-$144) per tael between domestic and world market prices.

Besides, state regulations allowing only  the SJC brand gold in circulation versus scarce supply has piled pressure on bullion prices. Therefore, to narrow the gap in domestic and world market gold prices, the best way would be enriching the supply to fill up the demand, especially when banks have surging demands for gold to balance their gold position.

Could the gold bar business restriction under Decree 24/2012/ND-CP have further impact on the gold market?

In my view, restricting the gold bar business would not be a smart move since market demand is real and people have a mounting demand for hoarding gold in the face of economic vulnerabilities domestically and globally.

The State Bank’s prime target in restricting gold business is to resume order in the bullion market. However, in the long haul, reining in the bullion market through administrative orders is extremely hard.

In light of Decree 24, gold bar trading is a conditional business and licences are only honoured on businesses which are up to the bar. In reality, some small gold shops have turned to district people’s committees to register for metal ware business, but in fact they ‘silently’ trade in gold bars which could hardly be controlled by competent state agencies.

Let’s look into regional countries like China. In the past China also came up with restricting gold bar business like Vietnam, but shortly after that China re-opened the gold market and they currently stimulate people to hoard gold. Hence, Vietnam should not tread in China’s footsteps in respect to gold bar business.

Should Vietnam mull importing gold to balance demand?

We should not import gold if the foreign currency supply incurs shortfall. However, if gold is regarded as a kind of hard currency, then importing gold will not cause any trouble as in fact smuggling is inevitable when a big gap exists in the domestic and world market gold prices.

Besides, as the deadline for banks to stop mobilising gold (November 25, 2012) draws nearer, banks would race in buying gold to balance their gold position, leading to surging demands for gold.

What is the best way to mobilise the community’s huge gold resources for economic development?

In the long term, it is important to further mobilise gold from the community, but we need to work out measures to ensure effective usage of that source. Commercial banks worldwide, but not only central banks, keep mobilising gold. However, in Vietnam’s case, banks’ gold business must be controlled by the State Bank to ensure banks raising gold and using that gold properly.

Should we issue gold certificates to raise gold from the community?

Hoarding gold is the Vietnamese’s long-lasting habit. Hence, gaining people’s trust is a factor of foremost importance to mobilise gold from the community. In my view, issuing gold certificates to raise gold from people would hardly be feasible in the initial period.