Gold Exchanges’ Days Are Numbered
By staff writers
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| Gold exchanges will be closed, but investors still hope the Government will allow them to resume operations under a clear legal framework. |
The Government has shut downgold exchanges for fear of theirnegative impacts on the economy
On the last day of 2009, the Government issued an announcement that shows its clear standing on the operation of gold trading floors in Vietnam, which has recently caused upheavals on the local market and affected the stability of the economy. In the announcement issued by the Prime Minister’s Office on December 30, 2009, the Government leader orders that all activities regarding the operation of gold exchanges and trading on local and overseas accounts must stop by March 30, 2010. He also instructs the State Bank of Vietnam (SBV), Vietnam’s central bank, to review current regulations on bullion management and draft a decree on gold management whereby the bank will be the agency responsible for managing this special commodity.
The Government does not ban gold jewelry trading but it has asked the central bank and local authorities to provide concrete guidelines for the trade.
In a meeting to announce the decision on gold exchange closure last week, the SBV said gold trading on accounts is a form of margin trading that implies high risks for gold investors and gold exchanges as well. The local media reported that about 80% of investors at gold exchanges have suffered losses and only a few professional investors have gained. Even Tuan Tai, a big gold trading enterprise in HCM City, has gone bust due to losses from trading on gold exchanges.
Nguyen Van Binh, deputy governor of the SBV, said the trading does not create added value for the economy, but drains a large amount of capital that should be otherwise invested in production and business activities. At the peak time of the trade, trading at big gold exchanges like that run by Asia Commercial Bank (ACB) posted a total trading value of over VND8 trillion (nearly US$450 million) a day.
The bank said the establishment of gold exchanges does not have a legal basis and their operations have bred some elements that may cause economic and social instability. Since gold exchanges set their own trading rules and investors, especially individual traders, are not fully aware of potential risks from gold trading on accounts, there have been disputes between gold exchange operators and investors. A typical case is an individual investor has recently sued the ACB gold exchange at the HCM City Court. According to the local media, the investor has demanded the exchange pay compensation worth over VND58 billion for losses he suffered due to errors that he claimed were caused by the exchange.
There are 20 gold exchanges in Vietnam, which are run mainly by commercial banks and gold trading companies. These entities also join trading on international gold exchanges, which the bank said is a high risk activity due to the volatile gold price. Their operations, which hinge mainly on trading on accounts, have caused upheavals on the local market recently, especially the outflow of foreign currency. “Therefore, the Government has asked the central bank to cancel the regulation on gold trading on overseas accounts,” Binh told the press.
To heed the Government’s call, the central bank has issued Circular 01 banning gold trading on overseas accounts from January 6. Credit institutions and businesses must close their overseas accounts by March 30, 2010. After this date, the permits for trading gold on overseas accounts previously granted by the central bank will become invalid.
Impacts
The closing of gold exchanges has received strong support from economists. Vo Tri Thanh, deputy head of the Central Institute for Economic Management, said in a poor country like Vietnam, financial resources should be channeled to production and business activities to provide goods and services for the economy. Trading on gold exchanges in the present context of the economy has caused instability on the macro level and eroded confidence in the market.
Dr. Tran Hoang Ngan, member of the National Advisory Council for Financial and Monetary Policies, said the closing of gold exchanges is necessary to minimize the negative impacts on the gold market in particular and the monetary market in general, as gold trading activities affect the financial market and the monetary policy regulation, Ngan said in Sai Gon Giai Phong. Over the long term, he said authorities should put gold trading in order and establish a gold exchange operated under a strict legal framework like the stock exchange. “This can help reduce gold imports and trade deficit as well,” he opined.
Shortly after the closure announcement, commercial banks have drastically cut the interest rate for gold deposits. ACB, which has run the largest gold exchange in Vietnam, cut the rate from some 4% per year to 2.5% per year. Eximbank reduced the rate from over 4% to 2% per year, Sacombank from 4% to 3.1% and Vietnam Asia from 4.1% to 3.5%.
Meanwhile, trading at gold exchanges is falling as investors feel worried and want to withdraw their capital to put into other investment vihicles. The local media reported that trading at exchanges these days averages out at some 30,000 taels of gold per day, just one-seventh of the volume during the peak time last year.
To close their exchanges, banks are increasing buying physical gold in the local market to balance the gold they sold previously, Tuoi Tre reported that the amount of gold sold by Saigon Jewelry Company (SJC), the biggest bullion trading company in Vietnam, has recently tripled the normal level, and the buyers were mainly banks that run gold exchanges and gold trading companies.
According to analysts, among the five investment channels at present—physical gold, stocks, real estate, foreign currency, mainly U.S. dollars, and bank deposits—stocks seem to be the most attractive investment vehicle. Most securities companies agree that the closing of gold exchanges will have a positive impact on the operations of the stock market. Given the lackluster real estate market, low yields from bank deposits and foreign currency and volatile gold price, investors on gold exchanges may shift their money to the stock market, which has the highest liquidity at present.
Indeed the market got a spectacular boost with the first session in the new year witnessing the VN-Index rising 4.5% to 517 points shortly after the fate of gold exchanges was decided. Given its high liquidity and reasonable stock prices, there is a strong possibility that the market may see the VN-index surpassing 600 points before Tet (Lunar New Year festival). Some gold exchanges like Vang The Gioi (World Gold) also plan to turn their transaction system to stock trading.
However, the operators of most gold exchanges hope that they may have a chance to resume operations, as gold is a commodity and trading gold on exchanges is a common trend in many countries around the world, including nations that have similar conditions to Vietnam. They believe that the closure is just a temporary solution, pending the development of a clear legal framework for this form of trading. A gold exchange that can meet the public demand and at the same time ensure transparency and security is what they hope for. “We hope the authorities will soon complete the legal framework to regulate the operation of gold exchanges so that we can have an attractive playground,” said an individual investor.