Implications of Gold Monopoly

At the National Assembly, Governor Nguyen Van Binh said that: Gold is not an essential good, not serving people's welfare. However, because of its huge influence, the Government and SBV were forced to officially import gold to stabilise its price and keep its equal to the world price. The gold market is said to have been loosely managed. The SBV imported gold to make gold bars, after that gold bars are considered to be normal goods. There are over 12,000 gold trading shops throughout the country, businesses are able to trade gold easily if their business licenses have the phrase “gold trading”.

 

After “Decree number 24”, the State-monopolised gold market has changed most fundamentally. Along with that comes Decree number 95 on administrative sanction in gold trading business, including additional sanctions such as artefact confiscation. The most visible fact in the market is that the gap between domestic prices and world ones becomes broader and broader. Since April, 2012, despite stable foreign exchange rates, gaps between domestic prices and world ones have gradually increased to VND1-3 million/tael. The gap reached its peak of VND4 million/tael.

 

The Governor Binh affirmed to the National Assembly: “Earlier the gaps would bring great benefits for smugglers. Nevertheless, they have currently not affected the macro-economy. Gold is not included in the CPI basket of goods, and gold price increase does not cause inflation, as is alleged.”

 

Decree number 24 also aspired to “anti-goldenisation”, so that gold that is “dead” in the population will be invested for economic development. However, there is problem in the very word “goldenisation”. Previously, there were many goods, especially real estate, that were priced by gold, however, the situation has completely terminated in social life. The concept of “goldenisation” occurs only if gold becomes a measure of payment. But recently, the amount of traded and stored gold among people becomes larger and larger, people consider gold as measure of savings. They trade and store gold to prevent inflation and accumulate assets.

 

Administrative measures cannot mobilize the large gold reserve in the population. In the context of a volatile macro-economy, continuously increasing inflation, devaluated and unexchangable Dong, people have many doubts and therefore it is hard to stop them from buying gold. Only when the trust of Dong is improved, when people believe that their assets will not be eroded by inflation, and invested assets will bring benefits, will stored gold will become a resource for economic development.

 

Recently, SBV has bought 60 tonnes of gold over 5 months after Decree number 24 came into effect, the average comes out over 10 tonnes a month. However, it would be wrong to assume that gold was exchanged equivalently into approximately USD three billion to serve the economy.

 

Credit institutions buy gold from people and return it to them at the end of the mobilisation period. This shows that gold was not exchanged into money to serve economic development.

 

SJC is chosen to be the national gold brand because its share accounts for over 90 percent of the domestic gold market, according to the explanation of SBV. Then there was a long period of instability, likely the difficulties of other gold brands, exchanges of consumers, fake or low quality gold.

 

Non - SJC gold brands have to suffer from policy risk, people turn their backs on these brands, in fact, gold prices of non - SJC brands are over VND3 million higher than that of SJC, while gold prices of SJC is about VND3 million higher than exchanged world gold prices (equivalently about 100 - 150USD/oz). Who will benefit from these price gaps? In fact, huge benefits go to interest groups.

 

The market also sees chaos caused by replicas of SJC, which did not occur when other gold brands also had their shares in the market.

 

Another problem is that SBV does not have effective policies to deal with gold fevers, causing great damage to the people. When fevers happen, G5+1 group could sell gold to stabilise the price, but because they are not allowed to import gold, the banking system suffers losses, domestic gold price increases, and the target of maintaining the gaps of under VND400,000/teal, as said by the Governor, has never been achieved.

 

In a short term, the exchange of gold of other brands into SJC gold is overloaded, especially with the usual price gap of VND 3 million/teal between SJC and non - SJC. Gold production and conversion take time, therefore the market turns back to the times of quota delivering and “ask - give” mechanism for license. These things have caused damaged to people, credit institutions and the State.

 

Back to the question of who will benefit from the large price gaps between domestic and the world ones. Obviously, those who are part of the monopoly benefit. The damage is to people who buy gold at high prices.

Small gold trading businesses are also hurt. Previously, the SBV gave licenses for 8 banks and gold companies. Each unit spent tens of billions of VND to invest in machines, equipment which became worthless. The network of small gold trading businesses came from the essential market demand, they were natural suppliers based on the law of supply and demand. Currently, these businesses have become illegal, operating unstably because of policy risk, although they were established and operated under the Law on Enterprises.

 

Many economic experts said that the way SBV promoted SJC as the national gold brand while it lacked measures to manage this brand, is the reason that SJC can corner the market and cause a lot of instability in the market recently.

 

Answering questions in the National Assembly, Governor Nguyen Van Binh revealed the ability of SBV of issuing a specific gold brand, after standardising gold brands in the market for only one brand (SJC), as well as standardising the gold trading network. Concerns among people holding SJC gold over other new uncertainties in the gold market still remain.