Unraveling the Fluctuating Dynamics of Gold Prices

(SGI) - Gold prices are experiencing instability due to a scarce supply. Saigon Investment spoke with Mr. HUỲNH TRUNG KHÁNH, Vice President of the Vietnam Gold Trade Association (VGTA), and advisor to the World Gold Council in Vietnam.

Unraveling the Fluctuating Dynamics of Gold Prices

Mr. Khánh suggests that, after 11 years of implementing Decree 24/2012/ND-CP on the management of gold business activities, gold has evolved beyond being just jewelry or an investment and storage means. He believes it is now necessary to amend or replace Decree 24 with a new decree to address market challenges.

JOURNALIST: - Sir, the domestic gold price has recently surged, reaching a new record of VND 74.6 million per tael. What factors are influencing the domestic gold price?

Mr. HUỲNH TRUNG KHÁNH: - The primary factor impacting domestic gold prices is the fluctuation of world gold prices. Currently, global gold prices are trending upward for several reasons. First, the decision of the US Federal Reserve (Fed) not to raise interest rates in November and the possibility of no rate increases in December, with potential reductions in the first and second quarters of the following year. This has led to a decrease in the US Dollar Index, and when the US Dollar weakens, gold prices typically rise.

Second, ongoing geopolitical instabilities, such as the Russia-Ukraine war and the Israel-Hamas conflict, continue to affect economies and oil prices. Third, there is an increase in world gold demand in the last quarter of the year, with substantial demand from Central Banks. In 2022, central banks purchased 1,100 tons, and in the first nine months of 2023, they bought 800 tons, with expectations of continued purchases.

While rising world gold prices contribute to the increase in domestic gold prices, the crucial factor pushing domestic prices to break records in 2022 is the scarcity of supply. Over the past decade, the State Bank of Vietnam has not allowed SJC Company to produce gold bars from raw materials but only processed dented gold bars that do not meet circulation standards. Consequently, SJC gold has seen no new supply, relying solely on buying and selling based on the existing volume from the past 10 years. Despite an increase in gold demand, the shortage of supply, particularly from the State Bank's restrictions, has led to a significant impact on prices.

Additionally, gold rings with four numbers 9 have largely come from floating gold in the market, understood as regenerated gold recycled from jewelry. About a year ago, the Ministry of Public Security initiated a project to catch smuggled gold on the Southwest and Central borders with Laos. This revealed that the origin of floating gold was mostly smuggled, and the ongoing investigation has made businesses reluctant to purchase floating gold, creating a deadlock in the jewelry industry regarding raw materials. As gold is not officially allowed to be imported, and floating gold faces restrictions, the lack of supply has driven a sharp increase in domestic prices.

- In the gold market, the persistent issue of a price disparity between domestic and world prices has been a hot topic for many years. Could this be the reason, sir?

- The issue of price difference has deep roots. Before the issuance of Decree 24, there were years when the State Bank issued quotas for importing over 100 tons of gold. However, since the implementation of Decree 24, the State Bank has prohibited the importation of gold, while market demand, which once reached 100 tons, has not drastically decreased to the current range of 3-5 tons. Estimated gold demand stands at around 50-60 tons per year, with recycled gold jewelry meeting the highest standards only amounting to about 4-5 tons. Consequently, this scarcity of raw materials has resulted in domestic gold prices standing "isolated in the market," increasingly deviating from world prices. This unique characteristic causes gold prices to surge more significantly with each increase, and the difference acts as a stimulus for gold smuggling.

The Vietnam Gold Trading Association (VGTA) has proposed solutions to the State Bank of Vietnam on multiple occasions, but the issue remains unresolved. Drawing on my approximately 30 years of experience working with the World Gold Council, I can attest that the Vietnamese gold market is a special case, with no other country experiencing such a substantial gap with world prices. Even as China tightens its gold regulations, the difference is not as pronounced as in Vietnam. Currently, domestic gold rings differ by 6-7% compared to world prices, while SJC gold is priced 16-17% higher.

- Sir, considering the difficulties arising from Decree 24, would correcting or amending it resolve the market problems?

- Indeed, the source of the difficulty is linked to Decree 24. Correcting or amending this decree could potentially alleviate the market issues. The Vietnam Gold Trading Association (VGTA) shares this perspective, acknowledging that over a decade ago, Decree 24 was crucial to prevent the "goldenization" of the economy and rectify the market. However, after 11 years of its implementation, the situation has evolved. The market has stabilized, and the dominance of gold in the economy has diminished. Gold is no longer a medium of exchange and payment; rather, it is primarily regarded as jewelry or an investment for storage. Therefore, VGTA advocates for the amendment or replacement of Decree 24 with a new decree, proposing several adjustments.

Specifically, concerning physical gold, VGTA recommends permitting the import of gold jewelry materials based on the actual needs of large enterprises. If businesses can substantiate the amount of raw material required for production, the State Bank of Vietnam could grant them import licenses. Addressing concerns about the impact on foreign exchange, VGTA suggests allowing small-scale imports. For instance, importing 500kg of raw gold per month, costing approximately USD 250-300 million, would not significantly impact foreign exchange reserves. The argument is that the country already imports numerous luxury goods like high-end phones and luxury cars for consumption, while gold, not strictly a luxury item, possesses re-export value and should be considered accordingly.

In the realm of legislation, norms implemented for several years typically undergo amendments and supplements. However, Decree 24 has remained largely unchanged for 11 years, despite VGTA's proposals for partial amendments rather than advocating for complete liberalization.

- Thank you very much.

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