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Wednesday, October 5, 2022

Is the gold price volatility an omen of uncertainties?

By Thuy Le

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The SJC gold price has consistently been far higher than the equivalent world rate and has often been going up quickly and down slowly, partly reflecting the imbalance between supply and demand in the presence of policies restricting gold import.

The volatile gold price

With an increase of 15% in just one month from early February to early March, the global gold market has become one of the most profitable investment channels amid the constant corrections of risky assets such as stocks. On March 7, the price of this precious metal once approached the old record of around US$2,070 per ounce (established in August 2020), before it moved back to some US$1,970 by the middle of this month.

The surge in the domestic gold price was even more outrageous when it ascended from about VND62 million to VND74 million per tael, sometimes expanding the gap with the world equivalent rate to VND20 million a tael (the highest ever, registered on March 8). However, like every price rise before, the market rapidly went up just to suddenly take a dive two days later, with each tael of gold losing VND7 million, or nearly 10%, to sell for around VND67 million.

In addition to the fear of the hostilities in Ukraine leading to escalating tensions between Russia and the West – led by the U.S. and the European Union (EU), with sanctions and retaliation against each other on the economic, diplomatic and political fronts, the trend of soaring inflation globally is also driving money into gold as a safe option.

The consumer price index (CPI) stateside further increased in February, hitting 7.9%, the highest since January 1982, when the prices of oil, food and housing all shot up, following the rise of 7.5% in January. In Europe, the February CPI also set a record high of 5.8% due to exorbitant gas and oil prices. Vietnam cannot go against the prevailing trend, when the CPI in February picked up 1% compared to the preceding month under the influence of fuel prices skyrocketing according to the global rates.

Another factor with a major impact on the recent upswing of the international gold market is the forecast that the demand for building up reserves worldwide may soon grow again. Specifically, in the context of the war affecting the economy, prompting Russian people to step up the conversion of the ruble to gold, the Russian Government in late February announced it would resume buying this precious metal after two years of keeping its reserves unchanged.

Moreover, as recent Western sanctions have frozen some US$300 billion of the US$640 billion Russia keeps in its foreign exchange reserves, the lesson from Russia will urge many other countries to stock up on gold as a safe-haven asset under any circumstance, as well as to diversify foreign exchange reserves, limiting the impact in case they, unfortunately, get embargoed. In fact, since 2014, Russia has gradually reduced its holdings of the greenback, accumulating gold and non-U.S. currencies instead, including the euro and the yuan.

As per statistics from the World Gold Council, central banks around the globe increased their reserves by nearly 463 tons of gold last year, a surge of 80% against 2020. In addition to the purchasing power from the government, that from the private sector has also grown sharply, said the gold organization. Specifically, in 2021, Indians bought nearly twice as much gold jewelry as they did in 2020, totaling 611 tons, whereas in mainland China, gold consumption leaped 63% to 675 tons.

Fear of uncertainties

Back to the gold market at home, the fact that the SJC gold price has consistently been far higher than the world equivalent rate, plus the fact that it often goes up faster and down slower, partly reflects the imbalance between supply and demand in the presence of policies restricting gold imports.

Without a doubt, as the domestic gold price has made a big jump in just a short time, widening its gap with the world price to VND20 million per tael, hardly any individual investors will dare to buy this precious metal, and quite a few people are even trying to sell it. Therefore, it comes as no surprise how many gold dealers have quickly brought down their buying rates following a shocking price hike in a short time.

In fact, since the profitability of the gold market in recent years is no longer attractive when compared with other investment channels, whereas the risks are high due to the vast price difference, from the difference with the world converted price to that between buying and selling rates, people are no longer keen on this investment channel.

Lukewarm buying power mainly comes from those who prefer long-term asset accumulation and are willing to have their cash stuck in one place.

That said, if the market continues to be this volatile, it will be a worrisome indicator of the uncertainties of the economy in the coming period.

It should be noted that basically, when monetary tightening happens, with interest rates going up again, cash flows tend to shift to better-yielding assets, causing gold to diminish in value. However, this seems not yet the case in the present context. To be specific, despite the intention of the U.S. Federal Reserve (Fed) and other central banks around the world to put up interest rates this year, the price of gold has been in a strong upward trend in the year to date.

The world gold price will probably reach a milestone of US$2,300 per ounce soon this year, and pass the US$3,000 mark in the next three years, in the prospect of stagflation likely to spread across the globe, as forecast by longforecast.com. Notably, this organization also predicts the world oil price will soon exceed US$200 per barrel early next year, making galloping inflation more serious, continuing the vicious cycle of escalating inflation, currency depreciation and gold price rise.

In the past, gold always shined the brightest in times of crisis. The price of this precious metal skyrocketed amid the stagflation of the 1970s, increasing more than seven-fold during that decade, reaching as high as US$850 per ounce in early 1980. Later, the price of gold rebounded after the 2008 global financial crisis, peaking at US$1,900 an ounce in 2011, but then tumbled for most of the following decade, before it picked up again starting from 2018 and made a breakthrough in the first half of 2020 due to the Covid-19 pandemic.

With the prospect of gold prices further going up in the context of geopolitical tensions and high inflation expectations, making the domestic price persistently volatile with an awkward gap with the equivalent world rate, it is inevitable that some professional investors and a part of the population will really make a comeback for swing trading in this market.

In that case, the demand for gold will grow again, and cash flows from other investment channels, even the safe ones such as bank deposits, will also be drawn here, affecting the liquidity of the banking system and, in the process, putting interest rates under pressure. “Goldization” may return with greater intensity.

Besides, in an economy that is fond of gold and tends to use the price of this precious metal to determine prices in various aspects of life like Vietnam, inflation is expected to further edge up as the escalation of gold prices has not come to an end. The fact that the domestic gold price is excessively higher than the world equivalent rate will also exert pressure on the exchange rate between the U.S. dollar and the dong, as major gold traders will gather the greenback in the country to smuggle in gold in response to the rising demand at home. The downtrend of the dong and inflation expectations will place interest rates under greater pressure.

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