Gold Fever- The Grief of Vietnamese Banks

The last fevers were all due to lack of liquidity. When the gold price in the international market surged, investors, people and commercial banks flocked to buy gold, causing demand to outweigh supply, pushing the local price far higher than the international price and resulting in turmoil in the money market. The fever, according to commercial banks themselves, is due to excessive short selling activities.

 

From late 2010, noticing that the gold bars were becoming a major factor causing the exchange rate fluctuation and the active involvement of commercial banks in the gold market, the State Bank of Vietnam (SBV) has issued Circular no. 22/2010/TT-NHNN. The gist of the Circular is the restriction on credit agencies to attract gold deposit only in terms of bank notes. Banks are neither allowed to lend money to aid the production and sale of gold bar nor exchange gold deposit for VND and cash equivalents. The gold deposit which was turned into cash before October 29, 2010 should be settled latest by June 30, 2011. Banks are also not allowed to attract or lend capital backed by gold etc.

The above Circular was followed by Decree no. 24/2012/NĐ-CP and Circular no. 11/2011/TT-NHNN with similar content as Circular no. 22. The only noticeable difference is the expansion of regulation oversight, in which credit agencies are strictly prohibited from lending gold effective from May 1, 2012.

 

Nevertheless, it seems that regulations set forth by SBV are not strictly enforced when commercial banks still play an active role in the gold market. In contrast with the rule to curb attracting and lending gold, commercial banks continue to attract gold as deposit, the act of which is disguised by the different terms used by the banks

So what do the banks benefit from the competition to attract gold with high interest rates?

 

The answer lies in the difference between the VND and gold deposit rate. The banks have made a fortune converting the gold deposit into VND. In late 2011, SBV stipulated that the interest rate on demand deposit and less-than-a-month deposit could not be higher than 6 percent per year and interest rate on deposits of more than a month could not be higher than 14 percent a year, respectively. However, the inter-bank interest rate went beyond the 30 percent-a-year mark on November 7, 2011. The SBV admitted that the inter-bank rate reached 36.58 percent a year, up 16.18 percent compared to November 3, 2011. These rates were pervasive even though the interest rate on gold deposit was only 1-1.5 percent a year.

 

The tremendous upside potential has made commercial banks purposefully ignore the SBV’s regulation when the state bank first attempted to stabilise the gold market in May 1, 2012. The SBV later postponed the deadline to November 25, 2012

 

A significant amount of gold was sold by commercial banks when the gold price was at its low in order to obtain cash for the more profitable interbank market. They had expected the gold price to stay in the downward trend and so were caught off-guard when the gold price took a sudden reversal. Accordingly, the gold price has increased by more than VND 5 million per tael in the span of one year, causing many banks to suffer huge losses.

 

The recent gold fever not only resulted in losses in profit for many commercial banks and caused grievance for banks as short sellers, but also turned banks into the culprits of the gold fever. Many commercial banks have sold a little too much gold compared to the -20 percent regulation. This ratio at several banks even went as low as -30 or -35 percent.

 

Although the deadline to completely withdraw from the gold market has been pushed back to November 25, many banks still stuck to their operational models and kept the gold balance at a dangerous level. Once again, SBV had to intervene by issuing a document dated August 23 which says, “In order to ensure the safety of the banking system, the SBV Governor has carefully considered different alternatives and came to the conclusion to allow lending and borrowing gold among some credit agencies” so that the liquidity pressure in some commercial banks can be relieved.

 

This was before the fever. The rush in the international gold price then followed, coupled with the November 25 deadline, has forced commercial banks to buy back gold to return to the depositors, resulting in an excess of demand over supply and a wider gap between the local and international price.

 

At the moment, the gold fever has somewhat lost its steam due to a decrease in the international gold price, which results in more selling orders in the open market. However, it is less than a month before the November 25 deadline when banks have to leave the gold game. Will they then buy enough gold to return to people? And if the international gold price increases, will there be another fever?

 

Until now, regulation authorities have firmly stuck to the November 25 deadline, because if this deadline is again pushed back, banks will not take the deadline seriously, which leads to policies losing its inherent enforcement power.

 

There is a possibility that banks which are short of gold will be put under the radar. On one hand these banks will be provided with short-term capital, but on the other hand they will be required to purchase enough gold to return the depositors. Banks will get enough short-term capital to compensate for the lack of liquidity, but afterwards they have to keep on purchasing more gold to even out what was previously sold until they completely settle their debts.

After banks withdraw from the gold market and will buy enough gold by then, the gap between the local and international gold price will be narrowed. Therefore, at the moment, many investors choose to “say goodbye” to gold, though temporarily.