Bullion Trading: Policy Upshots

Some goldsmiths and specialists said that the State Bank of Vietnam (SBV) should ease conditions to give its blessing to qualified gold trading companies to use equipment to produce SJC-branded gold bars.

 

The recent shutting down of seven gold producing companies at the request of the State Bank has caused serious damage to many businesses. According to preliminary estimations, hundreds of workers face unemployment or job changes. Worse, new companies will incur further losses because they have to invest in equipment and branding. Some companies and specialists said that the State Bank should ease conditions and give its blessing to qualified gold trading companies to use equipment to produce SJC-branded gold bars. However, to date, this option is still left open.

 

Mr Nguyen Thanh Truc, President of Agribank Jewellery Company (AJC), said, “My company’s gold bar producing equipment has been left unused for months. Without clear guidance, we have not made plans for our upcoming use of equipment and machinery. They are unsuitable for crafting jewellery because of the visual fineness requirements of customers. In waiting for the final decision, we temporarily send our workers who have been trained to produce gold bars to jewellery classes. We can also shift to outsource gold production for SJC, but we are not sure whether the State Bank will allow us. If this is the case, what is the mechanism? For us to produce gold bullion, we only need to purchase moulds which cost some US$4,000 each.”

 

His proposal sounds reasonable and easy for deployment in terms of conversions and techniques but this is a difficult problem for the central bank because it is not easy to control bullion production. Although gold is stamped, marked and inserted with serial numbers, it is hard to control whether a producer makes an extra volume of the precious metal.

 

Unused equipment and worker layoffs are visible damages when the central bank ends gold bar trademarks. In reality though, the intangible losses are much larger.

Specifically, some banks lack gold bullion to settle mature deposits for their customers.

 

Mr Truc said, “The Vietnam Bank for Agriculture and Rural Development (Agribank) has mobilised AAA-branded gold since 2004 and has a current balance of 2-3 tonnes of gold.

 

To ensure liquidity, we have sent a written request to the central bank to manufacture AAA gold for deposit payments but we have not received the answers yet.”

In case the company is disallowed to produce gold bars, it will have to take SJC bullion to pay customers. As a result, it will incur a price differentiation.

Also, needless to say, policy risks are considerable given changeable gold management policies and volatile gold prices. In 2008, some companies mobilised gold-guaranteed savings. At that time, a tael of gold was priced VND19 million and a customer was given a 10-tael gold certificate if he/she deposited VND190 million. After one year, if the gold priced climbed to VND30 million per tael, the bank would settle interest values plus 10 taels of gold or VND300 million. To prevent inflation-caused price hikes, the bank had to purchase gold on margin overseas. Unfortunately, in 2010, the State Bank banned gold trading on margin. This sent the bank’s risk prevention instrument to the end. Indeed, many banks suffered huge losses when gold prices escalated.

 

Recently, the central bank plans to send a scheme on public gold mobilisation to the Government to serve socioeconomic development in the second quarter of 2012. This is not only the expectation of the central bank, but also of the people. However, this requires prudent steps because many corollaries are endangered from gold policy changes.