The Risks of Gold

In early February, domestic gold price was much higher than the world rate. The difference was recorded more than VND5 million per tael. However, the domestic gold price nosedived regardless of world price movements. As of February 28, the difference was just VND2.5 million per tael and gap-narrowing trend also tended to continue, causing massive sell-outs by investors.

 

SJC gold was bought at VND42.65 million per tael in the afternoon of February 28, a decrease of VND750,000 from the day earlier, and sold at VND43.020 million per tael. Shocking decline occurred in some straight days, especially after the Saigon Jewellery Company (SJC) signed a contract to produce gold bars for the State Bank of Vietnam (SBV) on February 26. Compared with the early morning on February 27, gold lost up to VND1.7 million per tael. Domestic gold bar price tends to increase more slowly and decrease more rapidly than world rates. Even when international rates climbed strongly, domestic rates still dived, leading a significant narrowing of price gap. The difference between domestic and world rates fell to VND2.5 million, a decrease of VND2.9 million from the record of VND5.4 million on February 21.

 

Domestic gold price declined sharply in recent days but it did not originate from world impacts. World gold prices were very volatile. On February 20, precious metal prices dropped most in more than seven months on strengthened US dollars. Gold price slid nearly US$40, or 2.4 per cent, from US$1,604 to US$1,565 per ounce. And, this steep slump widened the gap between domestic and international rates to a record VND5.4 million per tael.

 

Previously, the upward movement of world prices was an excuse for domestic prices to go up but when world rates went down, domestic prices slid more slowly or pegged for a certain time before responding. On February 27 when domestic prices dived steeply, world prices skidded just US$19, or VND500,000, per ounce. On February 28, world prices were almost unchanged, domestic quotes shed VND600,000 - 700,000 per tael.

 

Gold price volatility was attributed to policy impacts and speculators’ responses. Apart from the announced intervention of management authority, the decline was caused by strong sales. And, the biggest cause was attributed to the gold processing contract signed between Saigon Jewellery Company and the State Bank of Vietnam (SBV). An SJC representative said the company was committed to process 30 tonnes of gold within 10 days to increase supply for the market and quickly narrow the gap with the world.

 

General Director Nguyen Quang Huy of the SBV Foreign Exchange Management Department said the SBV’s market participation would bring domestic prices closer to the world rates before June 30.

 

Rapid and steep declines caused many investors to suffer huge losses. They rushed to sell on fears of continued slumps. Speculators also sold out on fears of policy impacts.

 

Many investors decided to sell their gold because they feared that prices should further plummet on the SBV’s measures to narrow gold price difference with the world.

Risks remain potential because the difference with the world rates is now at VND2.5 million per tael. Increased supply is the most important solution to narrow the gap with world prices. The SBV’s contract signing with SJC on February 26 delivered a message that the agency was willing to mould gold to sell to the market.

 

SJC President Le Hung Dung confirmed that SJC is preparing to produce bullion bars at the instruction of the SBV. He said gold bar production will be resumed in two weeks or one month. Then, SJC gold supply will be added a huge volume and the price difference with the world market will be narrowed quickly.

 

The domestic gold market is holding a great opportunity to develop more healthily. Close prices to world rates will help reduce the manipulation of interest groups.