Instead, gold is purely a storage asset with minimal direct benefits for economic development. Yet, it has caused regulators significant challenges due to its erratic price fluctuations.
Treating Gold Prices Instead of Indulging Them
When the State Bank of Vietnam (SBV) stabilized the gold market in 2012, it was clear and resolute: anti-goldization, ending gold mobilization/lending, closing gold exchanges, and standardizing gold bars managed by the SBV. This period was likely more complex than the current gold price gap. Thus, the decision not to license gold imports up to now demonstrates a consistent viewpoint: not to sacrifice foreign exchange reserves just to meet storage needs, as it does not serve economic development.
After stabilization, the gold market experienced a long period of stability, with the gold price difference reducing to zero. However, since 2021, unlike previous years, the "wild horse" of gold price difference suddenly lost control. Thus, understanding this "wild horse" is necessary to "treat" it, not just import gold to "indulge" its whims.
Gold functions both as a currency and a commodity, used for storing and trading. As a trading asset, there will be waves in any market. Gold waves bring profits not only from buying low and selling high but also from the difference between buying and selling prices. When price fluctuations are strong, this difference becomes larger, creating more profits for "bookmakers."
To create gold waves, factors like interest rates are crucial. Low interest rates, as seen from 2021 to early 2022, or late 2023 to now, create an ideal environment for stimulating any asset class, especially gold. This year, gold waves are more favorable due to rising world gold prices from geopolitical instability, while stocks and real estate are less attractive than in 2021-2022. Thus, conditions are ripe for creating gold waves.
First, history shows that without importing gold or breaking the SJC gold bar monopoly, the "wild horse" of gold price differences can still be controlled, with domestic and international prices in sync.
In 2014-2015, after selling 74 tons of gold, the price difference remained high, 10%-20% above world prices. During this period, world gold prices dropped by 12%, but domestic prices only decreased by 5.7%. Thus, even with large gold imports, stabilizing and reducing price differences is not quickly achieved. This confirms the need for alternative measures to reduce price differences, not just sacrificing reserves to buy and sell gold.
From 2016-2019, gold prices gradually stabilized, with the domestic price remaining steady despite rising world prices, reducing the price difference to zero.
In 2019-2020, during the first world gold wave, the world gold price surged by 55%, and domestic prices followed, but the price difference remained insignificant. This disproves the argument that a world gold wave increases domestic demand and price differences.
From September 2020 to August 2022, world gold prices dropped by 10%, but domestic prices increased by 10%. Low interest rates during this time caused stocks and real estate to rise rapidly, attracting huge cash flows from investors. Investors likely sold gold to invest in stocks and real estate, not due to a world gold wave or increased gold demand.
Thus, the price difference increased to its highest in history in September 2022, equivalent to 42% of the world gold price. Few mentioned importing gold for stabilization, but many proposed: (i) allowing raw gold imports for jewelry processing; and (ii) breaking the SJC gold bar monopoly. Both proposals benefit gold businesses directly.
From August 2023 to now, both domestic and world gold prices have tended to rise. However, domestic prices increased significantly during periods when world prices were stable, widening the gap. Gold prices increased by 32% and 26%, while low interest rates and quiet stock and real estate markets made domestic gold waves easier to create.
Understanding Market Dynamics
Understanding the underlying market dynamics is crucial. The fluctuation in gold prices can be attributed to several factors, including speculation, demand-supply imbalances, and macroeconomic conditions. Speculation often plays a significant role, where traders create artificial demand to drive prices up or down to benefit from price differentials.
The demand-supply imbalance can also lead to price fluctuations. When demand outstrips supply, prices rise, and vice versa. However, in the context of gold, other factors such as geopolitical tensions, economic instability, and changes in interest rates can have a profound impact on prices.
Macroeconomic conditions also influence gold prices. For instance, in times of economic uncertainty or inflation, gold is often seen as a safe haven, leading to increased demand and higher prices. Conversely, when the economy is stable and interest rates are high, the demand for gold may decrease, leading to lower prices.
Given the complexity of the gold market, policy recommendations should focus on a multifaceted approach: (1) Enhancing transparency: Increasing transparency in the gold market can help reduce speculative activities. Implementing stricter regulations on gold trading and improving market surveillance can help achieve this. (2) Diversifying reserves: Instead of relying heavily on gold, diversifying reserves into other assets such as foreign currencies and bonds can help stabilize the market.
(3) Encouraging alternative investments: Promoting other investment avenues such as stocks and bonds can reduce the over-reliance on gold as a storage asset. This can be achieved through financial education and providing incentives for alternative investments. (4) Improving infrastructure: Enhancing the infrastructure for gold trading, such as setting up more transparent and efficient exchanges, can help stabilize prices. (5) Monitoring macroeconomic indicators: Regular monitoring of macroeconomic indicators such as interest rates, inflation, and geopolitical risks can help in making informed decisions regarding gold market policies.
In conclusion, realizing that the domestic gold price and price difference do not fully reflect the balance of supply and demand, taming the "wild horse" of gold price differences cannot rely solely on massive gold imports for price stabilization. This approach misses the target and wastes unnecessary reserve resources. A comprehensive approach, considering market dynamics and implementing robust policies, is essential for stabilizing the gold market and ensuring its alignment with economic development goals.
