The general gist emanating from Decree 24/2012 ND-CP signed into effect by the Government last Tuesday, April 3, is that gold trading management will be handled the same way as foreign exchange management has been. Individual and corporate ownership of gold is protected by law, and from now on, the agency accountable for gold market management will be the State Bank of Vietnam.
Vietnam is arguably the only country in the world to produce and trade gold bars as a kind of property. In other economies, gold is mostly used for jewelry production or investment purposes whereupon it is an item transacted on the financial market via derivative products. So far in Vietnam, no goods—whatever special they may be—have been used by the State in derivative transactions, gold included. Even on the stock market, derivative products are still scarce.
Once on the market up to 13 entities were entitled to mold gold bars with distinctive brand names. Commercial gold bars were then even more popular than jewelry gold. However, no agency was held responsible when the gold market suffered from a fever or stagnation. The newly introduced Decree 24 is expected to make a difference as it has officially assigned the central bank to the task of “managing gold trading activities” (Item 2, Article 4), and has stated that “the State exercises the monopoly on gold bar production and the import-export of gold bullions used to produce commercial gold bars” (Item 3, Article 4).
Getting back to these fundamental principles—be they so simple—is a long process in economic management mentality. One should also bear in mind that there has been ample lobbying for the content of such a gold management decree conducted by different interest groups throughout the past. Commercial gold bar production and gold bullion import-export had been once neglected or manipulated during sensitive time in which the economy was at stake but some individuals were beneficial. The Saigon Jewelry Company—SJC, the biggest gold bar trading company—is a State-owned enterprise. However, until around six months ago, anyone could bring gold bullion to SJC for fashioning it into commercial gold bars provided that they pay fees. In such a context, “unofficial” gold, illegally imported gold in particular, could be legalized without much effort.
During a Q&A session on the Vietnamese Government portal in February, the governor of the central bank for the first time clearly stated that not the entire SJC would become a State entity put under the central bank’s umbrella and would be directly managed by the central bank, but only SJC’s gold bar production arm would. As a result, only quota-controlled imported gold could be fashioned into gold bars. The outcome has been plainly visible: illegal gold import has drastically fallen. As it has been consumed by several gold fashioning entities, the volume is insignificant. Because big players in the field, such as SJC or PNJ, have easy access to licenses for importing gold bullion for fashioning gold jewelry, they have no motive to be involved with illegal gold import.
According to chapters 3 and 4 of the decree, conditions for trading gold bars and importing gold bullion are very strict. Notably, Item 2, Article 12, clearly states: “[gold] companies are not allowed to trade gold bars via their authorized agents.” This regulation has plugged the existing loopholes through which commercial banks could dodge the law as was once in the case of money exchange counters.
The future of gold mobilization
According to Point c, Item 3, Article 16, “The State Bank is entitled to mobilize gold as stipulated by the Prime Minister.” The decree will be in force as of May 25, and all banks have to terminate their gold mobilization by May 2. Gold mobilization was not mentioned in the draft of the circular dated April 4 on guiding the implementation of Decree 24 uploaded to the central bank’s website. In fact, gold mobilization has been halted for several months, and banks announced that they just kept gold on behalf of citizens. But what a strange “keeping” as the guard (banks) have to pay fees (as interest) to gold depositors! What’s more, currently, gold kept that way has not been included in banks’ total deposits.
To date, different scenarios for gold mobilization have been discussed. The central bank has also realized that it could not mobilize gold on its own and has to rely on credit institutions acting as its satellites. Of course, such organizations have to meet requirements to be eligible for gold mobilization. So far, five banks have engaged in the campaign for stabilizing the gold market. Will they be allowed to join the gold mobilization game?
It’s not a complicated task to mobilize gold as the Vietnamese are keeping up to 500 tons of gold, according to some experts, and they don’t want to keep gold at home. More importantly, the core of the issue lies with how to manage and utilize the mobilized gold so that it will help stabilize the market and is used as an effective capital channel. Item 2, Article 16 of Decree 24 allows the central bank to add gold bars to the national foreign exchange reserve. Yet the largest proportion of Vietnam’s foreign exchange reserve is deposited in foreign banks. If gold bars become part of the national foreign exchange reserve, will they be deposited overseas? If so, does the central bank have enough time to bring physical gold back to the country to intervene in the local market in case of necessity?
Furthermore, gold swap or foreign exchange swap is quite new to the central bank and, like it or not, such swap will come under scrutiny of international gold speculators.
Until the project to mobilize gold becomes feasible, the gap left by gold mobilization is too wide to be bridged. And if the situation in which “gold is kept by banks on behalf of citizens” lingers on, the gold market will possibly be distorted. As the foreign exchange market is now stable, it’s time for the central bank to accelerate the implementation of Decree 24.
In case of gold, belated responses in management may lead to unpredictable outcomes!
The Saigon Times Daily