Pressure on the international gold price is extremely high due to trust funds bartering away gold, while demand in major markets is not high. Gold prices are declining to the bottom within the last 4 years, but the Vietnam gold market maintains its unreasonably high price.
Pressure of bargaining away gold
Those who put their faith in the solid value of gold have to pay a pyrrhic price. Gold price has plunged sharply and shows no signs of recovery. In the last week of October, the price of gold in New York fell by 4.9 percent, setting the price of US$1,171.6/oz. In the transactions on 30th October, gold price even dropped to US$1,160.5 / oz. Spot gold prices in the Asian market was at about US$1,167 / oz on 4th November. The price of gold has hit the bottom since July, 2010.
Gold price also showed a downward trend in the long term. The price of gold rose by 70 percent in the period from December 2008 to June 2011 because US Federal Reserve System (FED) pumped money into the economy and maintained the dollar interest rate in the range of 0-0.25 percent in order to stimulate the economic growth. Last year, gold prices dropped significantly by 28 percent, the most considerable level in three decades. Within 2 years, gold has lost about one-third of its value.
An increase of value of USD, leading to the unexpected economic recovery, is considered as a bane of gold. The prosperity of the US economy has reduced the appeal of gold as a safe investment channel, simultaneously pushing the value of dollar to the peak in compared with other currencies during 4 years, creating more pressure for gold prices. FED recently announced that the economy was prosperous enough to end the quantitative easing programme QE3.
The quantitative easing programme QE3 did not cause the inflationary pressure as estimated. From late 2008 until the end of the recent QE3, FED has pumped into the market by US$4 trillion but the global inflation did not increase as expected. Thus, the role of gold in curbing inflation faded.
International investors have reduced confidence in the prospects of gold. The trust funds enhanced selling gold. Particularly in October, investors withdrew US$1.3 billion from trust funds to invest in precious metals, mainly gold. Thus, holdings of gold in ETFs globally have fallen to its lowest level in 5 years. Investment Trust Fund which holds the largest amount of gold is SPDR Gold Trust which owned only 741.2 tonnes, the lowest level in nearly six years.
Additional factors which are weakening gold prices is the sharp decline of oil prices, leading to less possibility of inflation and thus increasing the pressure on the gold price. Therefore, the price of gold is at risk of falling to below US$1,000 / oz for the first time in five years, according to some international organizations.
Customers show no interests in gold
What is worth noting in the decrease in gold price this time was that even major gold markets also did not show much interest. As usually when gold prices fall sharply, Chinese people flock to buy gold and this buying power helps create a supportive force for gold price. But the time was different as Chinese people did not have similar reactions. According to the China Gold Association, in the first 9 months of this year, the country's gold demand fell one-fifth compared to the same period last year.
India was the largest gold consumer in the world before the Chinese surpassed last year. Gold prices were much cheaper, but "Gold demand in India has not increased. Gold prices fell deeply but the quantity of gold bought by the Indian did not increase", according to the India Gems and Jewelry Trade Federation.
Low gold demand in major markets refers to a continuing gold price decrease in the market. They are waiting for a sharp gold price decline before purchasing.
Domestic gold price VND5.4 million / tael higher than the world’s
The gap between the domestic gold price and the world one is being extended. World gold price was approximately VND30 million / tael, about VND5.4 million / tael lower than SJC retail price. At least, since the beginning of 2014 until now, this is the first time the price of gold in the country created such a big difference compared to the international price of gold.
Gold prices fell sharply but gold trading continued bleak. The big difference between the two prices is considered a risk for gold buyers at this time.
However, this is the opportunity for gold sellers if taking advantages of the high price. SBV may consider reorganising bullion auctions to not only increase budget revenues, but also narrow the gap between domestic and world prices. A market intervention at this time would cause greater impacts and demonstrate a clear role in regulating the market of managers.
Bao Chau
Vietnamese
