What are effective solutions for managing the gold market?
It is undoubted that the surge of gold price in the country partly results from continuous rise of gold price in the world market but there still exist some other reasons behind the situation.
People buy gold for luck on the God of Wealth Day (the 10th of the first lunar month)__Photo: Tran Viet/VNA

The domestic gold market has undergone a chaotic situation over the last few weeks. From early March, gold prices repeatedly reached new highs. On March 12, the price of gold bars produced by the Saigon Jewelry Company Ltd. (SJC) hit the all-time high record of VND 82.5 million per tael while the price of 24K pure gold rings surpassed VND 70 million per tael, exceeding the global rate by a large margin.

It is undoubted that the surge of gold price in the country partly results from continuous rise of gold price in the world market but there still exist some other reasons behind the situation.

At the current time, the State holds the monopoly in production of gold bars. Under Government Decree 24/2012/ND-CP on gold business activities, which came into force on May 25, 2012, the State, via the State Bank of Vietnam (SBV), exercises the monopoly in production of gold bars, export of material gold and import of material gold for production of gold bars. In furtherance of Decree 24, the central bank decided to outsource the production of gold bars to the SJC, the company that held more than 90 percent of the gold bar market at that time. Despite the fact that Decree 24 empowers the SBV to license the import of material gold, since it came into effect, no licenses have been issued, resulting in persistent low supply. This has led to fluctuations in domestic gold prices, a significant price disparity between SJC-branded gold and other gold brands, and potential instability in the financial market.

Prime Minister Pham Minh Chinh has recently requested the SBV to scrutinize Decree 24 and propose solutions for managing the gold market to the cabinet in the first quarter of 2024. It is not the first time the Government has revealed its intention to revise Decree 24. However, it remains unclear about how the decree will be amended. 

In a talk with the newswire, Dr. Nguyen Tri Hieu, an independent finance-banking expert, on the one hand, acknowledged the role of Decree 24 in putting an end to the “goldization” of the economy, the phrase used to describe the tendency to keep and use gold as a type of currency, and, on the other hand, stressed the need to change a number of viewpoints in Decree 24.

Firstly, it is necessary to change the role of the SBV in export of material gold and import of material gold for production of gold bars.

“Decree 24 stipulates that the SBV is the only unit that can export material gold and import material gold for production of gold bars. That role should be withdrawn. The central bank should only play the role of a market regulator rather than a market participant,” Hieu said.

Secondly, the SJC’s monopoly in gold bar production should be eliminated so as to make the gold market become more competitive. When buyers have many options, the difference between SJC gold bar price and international gold price will be narrowed.

Thirdly, while setting no requirement on gold ring traders, Decree 24 imposes strict conditions on those who deal in gold bars, such as having a charter capital of at least VND 100 billion, having paid a tax amount of at least VND 500 million per year for two consecutive years, having at least three branches in three different localities, etc. These regulations should also be reviewed and revised.

Meanwhile, according to lawyer Truong Thanh Duc from ANVI Law Firm, the crux of the problem is whether gold is treated as a commodity or foreign exchange. If gold is considered foreign exchange, it must be tightly managed. On the contrary, if it is regarded as an ordinary commodity, some regulations can be relaxed.

Though the deadline for the SBV to submit the amendments to Decree 24 to the Government has expired, the central bank has yet to release any draft amendments to the Decree and, for the time being, opinions remain divergent on some issues among economic experts.

Quota-based import of material gold

After hitting its peak on March 12, the gold price dropped sharply after it was reported that the SBV would probably eliminate gold monopoly and allow some businesses to import material gold.

The grant of monopoly in production of gold bars to the SJC has long been considered the “culprit” of the limited supply of material gold in the market. According to Dinh Nho Bang, Vice President and General Secretary of the Vietnam Gold Trader Association (VGTA), the solution to this problem is to allow businesses to import material gold for producing gold jewelry and concurrently abolish the gold monopoly mechanism. The SBV might consider the imposition of quotas as a tool for management of the import of gold material.

However, the Dau tu (Investment) newspaper cited an insider source to reveal that this solution has yet to be selected by the SBV for submission to the Government. Despite the fact that this solution is recommended by not a few experts, there remain concerns about its possible impacts on the economy.

Those who support this solution argued that application of a quota-based import mechanism to gold material would neither affect exchange rates and the macroeconomy nor lead to goldization of the economy.

Sharing his viewpoint with correspondents from the Dau tu, Shaokai Fan, Head of Asia-Pacific (excl. China) and Global Head of Central Banks, World Gold Council, said even though Vietnam is strictly managing the import of gold via official channels, the country’s demand for gold is still very great and somehow satisfied by either official or unofficial supply sources. Hence, allowing gold import would help reduce the difference in gold price between the domestic and world markets, guarantee the rights of investors and avoid loss of tax revenues.

However, some other experts believe that given Vietnam’s foreign exchange reserves are not abundant, the use of a large amount of foreign currency to import gold is unnecessary and poses risks to the economy.

Dr. Nguyen Huu Huan from the University of Economics Ho Chi Minh City said licensing gold import might lead to an imbalance in the overall balance of payment. It is not to mention its impacts on foreign-currency sources for import of other goods and assurance of the economy’s external solvency.

Perhaps, this is the reason why the SBV remains cautious about the plan to allow gold import. According to experts, in case the central bank grants gold import quotas to some businesses, it must also introduce appropriate mechanisms to promote the development of the gold jewelry industry, thereby boosting export of gold jewelry products to balance foreign-currency sources.

Establishment of gold exchanges

In addition to licensing the import of physical gold, there is another way to meet the domestic gold demand, i.e., to develop non-physical gold products, of which establishment of gold exchanges and issuance of gold certificates are most mentioned.

Nevertheless, it seems that the idea of establishing gold exchanges is not widely backed up.

Dr. Can Van Luc, BIDV chief economist, worried that the appearance of gold exchanges would stimulate people to invest in gold bars, thus going against the policy of anti-goldization of the economy.

Meanwhile, Assoc. Prof., Dr. Dinh Trong Thinh, an economic expert, suggested that in the current context of technological development, authorities should consider appropriate forms of digital gold trading rather than establishing gold exchanges.

“Establishing gold exchanges will encourage gold investment, posing the risk of goldizing the economy. Import of gold at an appropriate level is necessary but must be based on the State Bank’s calculations on macroeconomic balances, prioritizing foreign currencies for import of raw materials and equipment in service of production and business, rather than investing in gold. In addition, it is a need to control illegally imported gold and require gold businesses to issue invoices upon each purchase and sale transaction. By doing so, the pressure on exchange rates and gold will decrease,” Thinh analyzed.- (VLLF)

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