Ensuring Tranquility in the Gold Market

The existing significant disparity between domestic and international gold prices has reached an unreasonable level, contributing to the escalation of gold smuggling. This not only results in a depletion of national foreign currency reserves but also gives rise to various economic and social consequences. Consequently, many experts argue that Decree 24/2012/ND-CP, governing gold business activities, has fulfilled its historical mission. However, it is crucial to approach this viewpoint with caution.

The proposed solution to address this issue is to permit qualified businesses to import gold, managed by the state, aiming to balance supply and demand and narrow the gap between domestic and international gold prices. While this appears to be a theoretically sound approach, the intricacies of the gold market suggest that it may not be a simple solution; in fact, it could potentially introduce significant challenges rather than resolving them.

Turkey's experience in managing its gold market, reminiscent of Vietnam's current efforts, could provide valuable lessons if Vietnam were to consider adopting a new approach, as suggested by various proposals to replace Decree 24.

In Turkey's history, the gold market was initially exclusively overseen by the country's central bank. Subsequently, market liberalization led to chaos, prompting the central bank to resume intervention by either restricting imports or allocating quotas, resulting in continued instability – a situation reminiscent of the current state in Vietnam.

Turkey shares with Vietnam the cultural practice of hoarding gold, ranking fourth globally in gold consumption. Similar to the proposals made by experts in Vietnam to replace Decree 24, Turkey also established a gold exchange and facilitated gold mobilization through gold credits.

Taking a closer look at Turkey's trajectory, before 1993, the Turkish Central Bank exclusively managed the gold market. However, responding to a perceived overestimation of the market's importance, the government gradually transitioned the regulation of the gold market to the private sector. The underlying motivation behind this proposal aligns with the argument for changing Decree 24 – to maintain the domestic gold price in sync with the world gold price.

Türkiye's approach to its gold market underwent a significant transformation, offering insights that Vietnam might find instructive as it contemplates revising Decree 24.

Following the initial exclusive management of the gold market by the Turkish Central Bank, Türkiye expanded its strategy by permitting businesses to import gold. In 1995, the Istanbul Gold Exchange members received government authorization to engage in gold imports. In April 2013, the consolidation of the Istanbul Gold Exchange, Istanbul Stock Exchange, and Options and Futures Exchange resulted in the establishment of Borsa Istanbul. Post-merger, the government granted the authorization for gold imports to members of the Precious Metals Market (PMM) on Borsa Istanbul. One notable regulation stipulates that PMM members must deliver imported gold to the Borsa Istanbul warehouse within three days of its arrival in Turkey.

Contrary to expectations, the stability in the Turkish gold market did not solely stem from liberalization reforms but was rather attributed to the country's consistent economic policies. However, a surge in Turkey's gold demand, accounting for 9% of the global total in 2020 – a substantial increase from the 4% recorded in the 2010-2020 period – occurred following major economic policy shifts in 2021. On September 20, 2021, Türkiye adopted a "non-traditional" monetary policy by lowering interest rates to combat inflation at the direction of President Erdogan, aiming to stimulate economic growth. This shift in economic policy significantly impacted the dynamics of Turkey's gold market.

Türkiye's recent economic policy changes, including reducing interest rates to combat inflation and stimulate the economy, led to explosive inflation, lira devaluation, and socio-economic instability. As a consequence, citizens turned to gold as a means of preserving their asset value, driving a surge in gold demand.

To address the rising demand for gold and the increasing disparity between domestic and international gold prices, Türkiye escalated its gold imports. However, this resulted in a loss of foreign currency, contributing to further devaluation of the domestic currency. In response, in mid-February 2023, Türkiye almost entirely halted gold imports, allowing only temporary imports for re-export. This move had the unintended consequence of expanding both domestic and world gold prices.

In an attempt to stabilize the market, the Central Bank of Türkiye intervened by selling 159 tons of gold through the exchange within a two-month period from March to May 2023. However, the intervention did not end there. The government implemented additional rules, such as requiring gold traders to convert 40% of foreign currency income into domestic currency and imposing heavy taxes on gold imports and jewelers.

Despite these interventions, the market remained insecure, and traders responded by pricing the risk premium high, causing it to surge from USD 100 to USD 150 per ounce. This situation created a challenging environment for traders, large gold shops, and the general public, with a policy that seemed to result in losses for everyone involved. The Turkish experience serves as a cautionary tale about the complexities and challenges associated with managing a gold market through interventionist policies.

The economic landscape in Vietnam, characterized by stagnant public investment, a sluggish bond market, a stock market experiencing a loss of confidence, a real estate market downturn, weakened aggregate demand, and falling interest rates, has led individuals to turn to gold bars as a safe-haven asset. This surge in demand for gold further widens the gap between domestic and international gold prices.

Addressing the substantial disparity between domestic and world gold prices is a critical task. While Decree 24, the regulation governing gold business activities in Vietnam, has its shortcomings, declaring it as having "completed its historic mission" and advocating for market-based solutions raises concerns about potential unintended consequences.

The dormancy of the gold market for over a decade has created a situation where reawakening it poses inherent risks that may be challenging to control. These risks extend to factors such as foreign exchange reserves, exchange rates, and monetary policy. While reform is essential, a cautious and well-considered approach is crucial to prevent unintended disruptions and maintain stability in the broader economic landscape.