Gold monopoly could pose long-term currency risk
Wed July 03 2024
After more than three weeks of gold sales under the new scheme at four state-owned commercial banks and Saigon Jewelry Company, on June 21, at a meeting in Hanoi between the governor of the State Bank of Vietnam and gold trading enterprises, many said the central bank’s decisive interventions had been effective.
Can Van Luc, a member of the National Financial and Monetary Policy Advisory Council, said that the main advantage of allowing only banks to sell gold was the enhanced ability of the government to regulate prices. “By centralising gold sales through banks, the government can mitigate sudden price fluctuations and protect the economy from global market volatility. This centralised control helps curb speculative activities and illegal gold smuggling, ensuring a more stable and predictable gold market,” said Luc.
Luc emphasised the stabilisation of the domestic gold market through regulation of sales via banks, asserting that the transparency of gold transactions is ensured, reducing the risk of illegal activities and fostering consumer and investor confidence.
“The stability of the market is crucial for economic confidence. When the gold market is stable, it reflects positively on the overall economic environment, encouraging investment and saving. Moreover, a controlled gold market can help manage inflationary pressures by preventing wild price swings that can disrupt economic planning and consumer behaviour,” Luc added.
However, he and other experts share the view that the current monopoly on gold sales could result in significant foreign currency outflows. “A monopoly on gold sales through banks, in the context of high domestic demand for gold, means the state would have to import gold from abroad. Hence, a large amount of foreign currency will inevitably flow out of the country’s reserves. The longer this policy is maintained, the more our foreign exchange reserves will deplete,” Luc said.
Phan Duc Hieu, a standing member of the National Assembly Economic Committee, emphasised that the depletion of foreign reserves could exert downward pressure.
“When substantial foreign currency flows out of the country to purchase gold abroad, the demand for VND decreases, leading to its depreciation. A weaker VND could result in higher import costs, fuelling inflation and reducing consumer purchasing power,” Hieu said.
“Moreover, as the local currency weakens, foreign investors may become wary of the exchange rate risk associated with their investments, leading to a decline in foreign direct investment and portfolio inflows. This could have a cascading effect on the entire economy, impacting growth and employment.”
Hieu added that if the current gold selling situation persists, economic distortions will be inevitable, suggesting that a balance between regulation and market freedom was essential for long-term stability.
“To address long-term risks while maintaining market stability, the government could gradually open the gold market to more participants while keeping strict supervision to prevent illegal activities. This would enhance competition and potentially lower domestic gold prices, reducing the incentive for foreign currency outflows,” Hieu said.
Financial expert Phan Le Thanh Long pointed to lessons from China’s gold price control efforts. “As a country with a culture quite similar to Vietnam, gold is also a popular investment channel for many Chinese people. To avoid economic shocks, the government has adopted a liberal approach, allowing multiple entities to participate in gold trading, thereby balancing market control with market freedom,” Long said.
“The Vietnamese government should encourage gold-backed financial products, such as gold savings accounts or gold exchange-traded funds, which can provide consumers with ways to invest in gold without needing to purchase physical gold. These products can help mobilise idle gold in the economy and reduce pressure on foreign currency reserves.”
Source: https://vir.com.vn/