Tightening Gold Market: Risk of Underground Market Reappearance

According to the Government's Decree 24 on gold business, only addresses licensed by the State Bank of Vietnam (SBV) are allowed to trade gold bars from January 10, 2013.

 

Qualified gold traders are required to have a charted capital of at least VND100 billion, have at least two years' gold trading experience, pay tax from gold trading for two consecutive years, and have branches in at least three provinces and cities. Only 14 companies and 17 credit institutions with a total of 2,400 gold jewelleries are licensed to buy and sell bullions.

 

Thus, about 5,600 gold shops without licences will be only allowed to trade golden jewelleries. Not only that, the State Bank of Vietnam also intends to tighten golden jewellery business in the coming time. What are the gains and losses in these regulations?

 

The Decree 24 allows the SBV to pursue the exclusive right of gold bar production to prevent speculation and stabilise the bullion market. To accomplish this goal, it will sooner or later entitle units responsible for manufacturing, importing, distributing, buying or selling the precious metal.

 

Clearly, the first effect of this policy is the broken correlation of domestic gold market with the world gold market. Domestic gold prices will not link with the world movements and will stay at a higher rate than the world rates in the months to come.

 

The SBV explained that the price difference, estimated at VND3-5 million per tael, will not affect the exchange rate and there is thus no need to interlink gold prices [with the world]. Nonetheless, this isolation will cause unpredictable movement of domestic gold prices, or traders cannot anticipate price trends from market signals.

 

Business loss will easily happen to traders without exact information on authorities’ steps in quota, production time and production methods for each period. As a result, some 4,000 small gold retail shops, or more than 30 per cent of the total, must abandon before they are licensed to play in the new game.

 

Whether 5,600 units with licences to trade golden jewelleries, not gold bullions, can survive in the current gold market? And, what will happen when there are only some 2,400 gold trading points in the country, with more than a half located in Ho Chi Minh City and Hanoi, and seven northern provinces do not have any trading points?

 

It is obvious that where there is a demand, there is a supply. With Vietnamese people’s high demand and habit of hoarding gold, there will be supply sources for them. And, there will be two ways to ‘rip the fence’.

 

The first way is that gold trading companies will make up gold bars in form of golden jewellery to sell to the people as they are now doing. The second path way is an underground market will be established for buying and selling gold, either in the form of JSC bullion or jewellery.

 

Because the gold market, especially in rural areas, has so far mostly relied on trust, the existence of an underground market will operate in a sustainable manner in parallel with the mainstream market. In other words, the existence of the underground market will significantly disable the regulations on gold bar business locations of the SBV. Smugglers will definitely come back when the underground market is re-established.

 

But the above corollaries are just the beginning for the gold industry. To achieve the exclusive right of gold bar trading, the SBV will sooner or later have to rely on State-run credit institutions.

 

That is why largely State-owned Vietinbank and BIDV involved in this market which they are little interested in the past. Once the SBV relies on State-owned credit institutions to stabilise the gold market, private companies will yield to State-run players in terms of accessing regulatory policies and unlikely have chance to develop in an environment lack of competition.

 

Sooner or later, some private gold units will have to narrow or leave gold bar business to give the market for State-run credit institutions.

 

If the SBV continues with tightened gold market control measures on golden jewellery business, 5,600 traders of golden jewelleries can hardly compete with 2,400 branches of major gold trading companies.

 

With the advantage of large scale, major players can implement regulations on origin and invoice at a lower cost. Small-scale units will have to accept to leave the industry.

 

Even, private gold jewellery companies can difficultly compete with State-owned enterprises although they have good products because they do not have gold bar trading advantage which accounts for a significant proportion of revenue in gold trading business.

 

Thus, the SBV’s current control measures to the gold market will immediately help the SBV maintain gold prices or regulate the supply and demand of gold as it wants but it will cause private businesses unit to suffer losses and exit the market.

 

The leave of private gold companies, both small and large, will hinder Vietnam’s gold business from developing and reaching out the world market. This must be taken into account when authorities need to keep in mind when they pursue the objective of strictly controlling this market.