How to stabilize the gold market?

VCN - Is the gold auction solution effective enough to stabilize the market, while many other factors need to be taken into account such as transparency, preventing price manipulation... In addition, it is also necessary to think about other monetary solutions including raising interest rates because a higher interest rate environment will cool both gold and exchange rates.
In the current situation, administrative measures become especially important to ensure transparency and prevent price manipulation. Illustration photo: H.Dịu
In the current situation, administrative measures become especially important to ensure transparency and prevent price manipulation. Illustration photo: H.Dịu

What make gold prices "dance"?

According to the Institute of Economic and Policy Research (VEPR), since 2021, world and domestic gold prices have fluctuated. Accordingly, over the past 10 years, world gold prices have increased about 140% and reached an all-time high of 2,431 USD/ounce (April 12, 2024).

Speaking at a regular press conference on socio-economic issues in Ho Chi Minh City on May 16, SJC General Director Le Thuy Hang proposed abolishing the monopoly on gold bars and said businesses would not benefit from this policy. Specifically, in 2012, SJC was chosen by the Government and the State Bank as the national gold bar brand, because they accounted for nearly 97% of transactions on the market. Also in this year, Decree 24/2012/ND-CP (Decree 24) on gold business activities was issued to control supply and prevent "goldization" of the economy. According to this Decree, SJC is not allowed to import or stamp gold bars. All stamping molds are handed over to the State Bank for management. This company can only stamp out dented gold. Gold bar monopoly does not bring benefits to SJC, instead, the business is even known for profiteering.

In Vietnam, in the last months of 2023 and early 2024, the gold price was even more "shocking" when it continuously set new peaks, the SJC gold price once peaked in April of 85 million VND/tael and in May it continued to exceed 92 million VND/tael. This is the ever highest price of the Vietnamese gold market. Gold price fluctuations are occurring consecutively and even in the steep uptrends with a large amplitude of price change with each price increase.

Notably, the difference between the domestic and the world gold price is sometimes up to 20 million VND/tael. The average increase in the first 4 months of 2024 was 20.75%. This fact has caused chaos, creating anxiety and instability in the market for a product that is considered quite "special" in Vietnam.

Looking at the history of gold prices, Dr. Nguyen Quoc Viet, Deputy Director of VEPR analyzed, it can be seen that there were many periods when there was no need to import gold, no need to break the monopoly of the SJC gold bar brand, and domestic gold price differences and international prices are still controlled and they were even almost completely similar. On the contrary, there was a period when gold imports were large but the gold price difference remained high.

Specifically, in the 2014-2015 period, domestic gold prices were 10%-20% higher than world gold prices even though 74 tons of gold were imported. This confirms the need to consider other options to reduce gold price differences, not simply sacrificing reserves to buy gold to sell.

On the contrary, in the period 2016-2019, the difference in domestic and world gold prices was almost zero. This was the period when Vietnam's economy had passed the difficult period, entering a cycle of stability and high growth.

From 2019 to 2020, the first world golden wave challenge appeared. Specifically, the world gold price rocketed by 55% which was equivalent with the domestic gold price. However, the gold price difference was still insignificant.

In the period 2021-2024, the "horse" price of gold began to lose control and at this time, interest rates were highly volatile. Accordingly, from August 2023 to the present, both domestic and world gold prices recorded upward trends, however, if observed closely, there have been 2 periods when domestic gold prices increased while world gold prices went sideways, widening the gold price gap to 32% and 26%. The reason is that the stock and real estate channels are both quiet, causing people to look for gold as a safe investment channel, leading to increasing demand for gold.

Up to now, the State Bank of Vietnam has organized 7 SJC gold bar auctions, of which 3 sessions had to be canceled. At the end of the latest bidding session on May 16, 11 members won 12,300 taels of gold. The total volume of gold won over the sessions was 27,200 taels, equivalent to more than 1.02 tons of gold.

Let the market self-regulate under State management

To regulate the gold market, the Government has continuously directed the State Bank (SBV) to implement solutions, including organizing 7 SJC gold bar auctions. But after the gold auctions, the difference between domestic and world gold prices and the "gold fever" still show no signs of stopping.

According to Prof.Dr. Hoang Van Cuong, Member of the National Assembly's Finance and Budget Committee, the bidding solution has not achieved the goal of cooling down the domestic gold price. In some ways, the bidding is also a factor pushing up gold prices. Therefore, considering the domestic market price as the reference price for auctions is not appropriate and even it is difficult to pull the domestic price down as targeted.

Agreeing with the above point of view, Dr. Nguyen Quoc Viet also said that the gold auction solution is not enough to stabilize the market because many other factors are needed such as transparency, preventing price manipulation... In addition, we also need to consider other monetary solutions, including raising interest rates because typically a higher interest rate environment can cool both gold and the exchange rate. In the current situation, administrative measures become especially important to ensure transparency and prevent price manipulation. Inspecting the gold market, requesting the use of invoices, investigating manipulation... will not cost foreign exchange reserves but can bring immediate high efficiency. In addition to administrative measures, monetary tools such as interest rates also play an important role in preventing asset bubbles, including gold.

To "cure" the price of gold, Prof.Dr. Hoang Van Cuong believes that gold should be considered a true storage and investment asset, allowing the market to self-regulate under the management of the State. “If we aim to lower gold prices, management agencies need to change the current gold bidding method. Accordingly, the State Bank needs to consider technical measure changes, lowering the bidding price, choosing the lowest buyer, and committing to sell to the market at the lowest price. The reference price should be determined by international prices, plus taxes and costs to create connectivity with the world," Prof. Dr. Hoang Van Cuong proposed.

According to Mr. Nguyen Minh Tuan, General Director of AFA Capital, when it comes to the concept of gold, policies usually need to determine whether gold is a special currency or just a commodity to give out control policy. If it is a commodity, there must be a solution to increase supply. "In fact, people consider gold as an investment product. If so, Vietnam can learn from other countries, for example China, where they have a gold depository center, have a reference price and carry out operating a centralized trading floor. This way of operating has stabilized the gold market and met the needs of investors. However, in the long term, it is necessary to view gold bars as an investment channel to manage with taxes and fees. The gold jewelry market is resolved through import tax and VAT," Mr. Tuan added.

Dr. Can Van Luc, BIDV Chief Economist and Director of BIDV Training and Research Institute:

Recently, the State Bank of Vietnam has both bid and surveyed the market. This is only a temporary solution so the State Bank needs to calculate a harmonious price between the parties and accept a lower floor price to increase the successful bidding rate.

In the long term, to increase supply, the Government should consider qualifying businesses to import gold in parallel with abolishing the import and export monopoly on gold bars. Inspection and supervision of policy profiteering also need to be strengthened. Managing the gold market is related to many ministries and branches which require clear roles and early amendments to Decree 24.

By Tuấn Phong/Minh Phuong

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