A common market for gold is expecting to create a very attractive investment channels for investors as well as attracting the involvement of bank and reputable jewellery corporations.
The story for raising gold investment among consumers was again mentioned during the Government requests Central Bank to research and provide solutions for raising gold fund to support economic and social development. However, the question of how to raise fund, risk management are still being left unanswered.
In current difficult situations of the economy, approximately 300- 500 tons of gold “stuck” in people safe is such a waste. Consequently, at the Resolution 01/NQ-CP on 3/1/2015 about the responsibilities and solutions for the economy – society and the Government expenditure in 2015, Governmentrequested Central Bank to process with the solutions to raise gold capital to support economic and social development when the market conditions are favorable. This is the second time (the first time was on the early of 2014) the Government has requested the Central bank to research solutions for this case. It has shown the urgency for the above project.
Why Vietnamese like to reserve gold?
Vietnam is the fourth largest gold consumption country in Asia after China, India and Thailand. Gold was used as a form of currency as well as way of saving, in some cases, gold was considered more value than the paper currency.
During the course of history, gold always has a special attraction to Vietnamese, was used so widely as investment and as way of replacing currency in large value trading. In recent years, gold was also used as solutions to fight against inflation and world economy recession.
The reason of the demand for gold in Vietnam stay at a high rate was due firstly to the cultural aspect. Many see gold as a trusted way of saving and still purchase even though the price was unstable.
Second, inflation has risen rapidly in previous years and resulted in more Vietnamese holding gold. The inflation rate was 18,13% in 2011, and it took Vietnam almost one year to reduce the rate to 6,81% in 2012 and below 7% in recent years. Holding gold as a safe bunker away from inflation and the effect of low buy demand was considered a workable way to protect assets.
Another reason was the lack of trust on the domestic currency. Many people has come to prefer gold and USD. In the end of 2008 until now, the Dong currency has lost 20% of its value due to the pressure from inflation and the weak domestic economy position in the world market.
Fund raising gold: which solution to choose from?
Establish a National gold exchange market
The demand for gold investment in Vietnam in recent years has increase rapidly and also proved to be an effective investment channel. It is the reason for the creation of many gold exchange markets. However, due to the unprofessional management, and many hidden risks for investors, the Government has decided to stop all operation of the gold exchange markets.
Because the lack of of investment channels through “exchange market”, many investors in Vietnam only invest in gold reserve. At the moment of volatile gold market, the domestic gold market has a very different price compare to the world gold price which serverly affected investors. Therefore, the author of this article believe that it is necessary to have a National Gold Exchange market to manage process, supervise the market as well as creating an effective and safe investment channel.
Many gold exchange markets developed so rapidly, and were not professional enough posed many unhidden risk for investors. TheeNational Gold Exchange market should be formed as State Owned One member Limited Liability Company with the special product of gold consumption. The creation for a common market is expected to create a good investment channel to investor as well as attract the participation of many banks and reputable jewellery corporations.
According to this model, this suggestion will create a system and policy to handle trading activities, payment system as well as reservation, logistics to ensure the quality of the gold. The issues of risk management, guarantee of market transparency will also be followed clearly and professionally. The National Gold exchange market will operate under the general relationship between the State, Bank, Corporation, individual investors, and will be tightly bind between the gold market and financial system. Consequently, the Gold Exchange market will raise a large amount of gold from the people, encourage economic development and limit the mental awareness of storing gold material.
This is only an initial suggestion, if the Government allow, the execution of this idea will need to have deliberate research & selecting process for such a model that fit with Vietnam current social – economy situation. There are many derivative tools that widely applied, such as hedging (buy and sell one another contracts); forward, options in the world market. Besides, there is also a risk assurance tool. In order to select the right tools to match with Vietnam conditions, many related parties will need to sit together and come up with a solution. Vietnam even though fall behind, will have advantages of referring to successful applied models. Technical issues will not be a problem, however coming up with a final fit-all solution will be crucial.
The price difference between domestic and foreign market is only around 1 – 2 USD / ounce in many countries have a Gold Exchange market. Meanwhile, bank agents can also exchange gold for foreign currency through this additional channel. Risks will be controlled, and bank will generate more profit to pay for gold-deposit saving rate to its customers. There will be a positive result in raising capital through gold deposit saving among the people and serve the goal of long term development of society and economy.
Stable macro economy.
The stability of macro economy will reduce the desire to hold gold among the people. When the VND become stable, the people will not desire for gold or foreign exchange as a safety.
With many fierce solutions given out since the end of 2011 till now, the work of control the gold market has basically achieve its gold. At the moment, the gold market has been re-structured in order, and the market has identify the legal rights and benefits of the people to be secured; the role of the State management of the gold market has been improved; the relationship of raise capital, lending by gold has all switch to a relationship of buy and sell gold.
The “goldenized” in the economy was step by step reduced and the usage of gold as a payment method has basically stopped. The attraction of gold bar from the lack of supply has noticly redeuced; the supply and demand of gold bar has become more balance, and part of gold saving fund has transfer to cash saving.
Despite the complicated development of the world gold market, the domestic market has been stable, situations where the people line up to buy gold has stopped; the volatile domestic gold price did not affect the stability of exchange rate, foreign exchange market and the macro economy
Convert the lending practice of gold to trading practice
The allowance of raising capital, lending gold and convert gold to cash in a way that it was not clearly managed has indirectly led to the “goldenize” conditions in the economy, increaseed speculation, holding, illegal importation of gold, which led to inflation, and become a great risk to many financial organizations and the gold lender.
The Central Bank has built a path to stop the practice of “goldenize” the economy in three stages: Stage 1: Create a legal framework to tightly control the gold market. Stage 2: End the practice of capital investment and lending gold of financial institutions. Stage 3: wholly convert the relationship of capital investment, lending gold to gold trading.
In 2012, the Central Bank proposed to the Government the Decree 24/2012/ND – CP on 03/04/2012 (Decree 24) to replace the Decree 174 in management of the gold market. The Decree 24 has created a legal framework to re-organize and re-structure the gold market.
After the promulgation of the Decree 24, the Central Bank has issued a series of documents to guide and execute which included the Circulation no 16/2012/TT-NHNN; The Decision 1623/QD-NHNN of organize and manage the production of gold bar from the Central Bank and the Decision 69/QD-NHNN which issued together with the Procedure to supervise the activities of manufacturing gold bar from the raw material which was not belonged to the Central Bank.
The Central Bank also issued the Circular number 38/2012/TT-NHNN to regulate the gold conditions of financial institutions; the Circular 11/2011/TT-NHNN requested financial institutions to stop the practice of raise capital and lending by gold. On 27/04/2012, the Central Bank issued the Circular 12/2012/TT-NHNN to edit and add extra temrs in Circular 11/2011/TT-NHNN to allow the financial institutions to issue short-term certificate in gold to pay back gold when the gold in debt and in stock was not sufficient to pay back customers’ request and extend the priod to fully stop issuing short-term gold certificate among financial institutions on 25/11/2012.
The year of 2011 was considered important “turning point” in the management of the gold market from the Central Bank which followed the goal and direction of the Government. Central Bank supported in planning and proposed to the Government on improving the legal framework; organizing execution and fully stopped raising capital and gold lending activities amond financial institutions and streamlined solutions to fully manage the gold market. As a consequence, the domestic gold market, especially the gold bar market in 2012 has changed noticeably.
In 2014 and the first 5 months of 2015, the Central Bank has continued to organize, structure the gold market, convert fully from gold capital and lending relationship to the gold trading relationship. This is one of the solutions to reduce the “goldenize” and gold reservation among the people.
In conclusion, the author believe that the most suitable solutions at the moment for Vietnam in order to attract the gold investment from the people will be to integrate, coordinate the three above suggestions, which are to create National Gold Exchange market, stable the macro economy and continue to convert the lending gold relationship to gold trading relationship in the near future.
Dr. Bui Quang Tin
From Tri Thuc Tre