Gold Frenzy

Vietnamese always view gold as the best asset to be kept and recent gold fevers substantiate the superiority of gold as a secure asset. Lines of people queuing to purchase the precious metal sometimes caused temporarily short supply, which pushed domestic prices significantly higher than world rates. In the context of rising inflation, weakened confidence in local currency, high interest rates and unprofitable investment in other channels, the bullion is in its prime. Gold fevers are causing harmful corollaries to the economy, forcing policymakers to make interventions.

 

Gold traders and speculators have gained substantial margins on soaring bullion prices in the past two months, with many fresh records broken. Meanwhile, the gold frenzies negatively impact macroeconomic stability and intensify inflation pressure. The bear stock market has a lower possibility of recovery because cash flows are being channelled into gold. Many depositors enjoying an annual interest rate of 17 - 18 percent also regret to have missed the chance to hunt for bargains in bullion trading. Trying not to be further laggards, many of them have decided to withdraw money from banks to bet on gold. At the peak of recent fevers, well-known gold shops like SJC, PNJ, Bao Tin Minh Chau and Phu Quy have served about 10,000 customers a day. According to incomplete data, trillions of Vietnamese dong has been pumped into the precious metal since the start of August.

 

Many commercial banks revealed that many customers have withdrawn prematurely, or pledged their savings for cash, to buy into gold although its prices had topped VND49 million per tael, far exceeding the world rate. The heat of gold has melted down savings at banks, forcing them to struggle to keep money from flowing out of the system.

 

A banker said, to keep big savings, his bank has to negotiate to hike the interest rate, but many still withdraw their money from his bank on hopes of making wider margins on gold. While the real estate market is frozen, stock prices sink and inflation escalates; gold takes the fancy of all investors, making it difficult to prevent money running out of banks into gold, although the State Bank of Vietnam (SBV) repeatedly warned of high risks in gold hoarding at this time. Mr Dam The Thai, Deputy Director of Ho Chi Minh City Housing Development Commercial Joint Stock Bank (HDBank) commented: “The decline in dong deposits in recent weeks is partly due to the heat of gold.”

 

Once capital mobilisation slows down, banks will be forced to raise rates to gather capital and this will put the target of lowering interest rates even farther away. Businesses are struggling to get through grave capital shortages and production stagnation because of growing stockpiles and high rates, while capital flows are caught in the gold frenzy.

 

Newly appointed SBV Governor Nguyen Van Binh admitted in a press briefing on August 23 that if gold fevers stubbornly persist and catch the broader attention and participation of the public, a significant amount of money will be set in gold, which will threaten forex stability and complicate macroeconomic management. However, the Governor confirmed that everything is now still under control because the balance of payments (BOP) is forecast to have a surplus of US$2.5-4.5 billion as a result of smaller trade deficit, and bigger foreign reserves.

 

He noted that in addition to immediate measures to stabilise the market like importing gold to ease tensions, the central bank is also considering a master plan, including the possibility that it will stand for the State to mobilise gold from the public. Gold importation to cool down local fevers is not a long-term solution. Governor Nguyen Van Binh expressed his high hopes on the master market solution, where legal frameworks for market management and gold mobilisation to support socioeconomic development are included. He said: Why do we not let the SBV stand for the State to mobilise that gold? The people will have a safe place to put their gold while the State can cash in on it to increase forex reserves. When necessary, it can convert gold bars into cash to fund businesses or intervene into the market.

 

In the past, the SBV used to prohibit commercial banks from mobilising, lending and swapping gold into cash to lend. Commercial banks used to develop this profession and they mobilised up to 50 to 60 percent of gold kept by the people in their prime time. Vietnamese people are estimated to hold 300 - 500 tonnes of gold. Governor Binh said the SBV may mobilise some 130 tonnes, an equivalent to US$10 billion (current price). He hoped this master plan will help protect the interests of the people, stabilise the market and generate national resources.

 

The USD/VND exchange rate has been valorised for months before the gold frenzy in mid-August. The exchange rate was quoted at lower than the daily cap fixed by the central bank, or the SBV. But, the gold fever raised concerns over the continued stability of the foreign exchange rate. First of all, the central bank has allowed gold traders to import 5 tonnes of gold, perhaps 10 tonnes if necessary, to calm the market. This move has sent the USD/VND exchange rate to daily limits in many consecutive days. The USD market has also heated up after months of dullness caused by tightened management policy. The USD/VND exchange rate on the free market, commonly known as “black market”, is being quoted at 21,000, higher than the officially quoted rate. Returned pressures from the black market caused some banks to sell the dollars above the limit by adding service charges.

 

A banker said gold traders will need more greenbacks to import gold, thus intensifying exchange rate tensions. Moreover, companies will need dollars to settle payments and foreign companies need dollars to take home profits at the end of the year.

 

As often as not, payments in foreign currencies, particularly US dollars, increase in the last months of a year and early months of the next. This year, with the gold fever, the exchange rate is under more weight.

Besides, many loans in foreign currencies will reach maturity during this sensitive period and this is a heavy burden on the forex rate. Foreign currency-denominated credits climbed 23 percent in the first six months, putting pressure on the forex rates in the last months of the year. In the coming months, inflation is forecast to slow down and interest rates will be reduced. The Dong will depreciate and foreign exchange rate will rise as a result.

 

The rise in USD/VND exchange rate is rooted in the trade deficit for many years. The trade gap seems to be narrowed this year, thanks to gold export turnover in the past months. However, this source of income is unstable. Vietnam exports gold at low prices while importing it at higher prices. These factors, coupled with rising demand for imports, make the last months of the year a sensitive period for the forex rate.