Bank curbs could intensify hoarding of gold: experts

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Hoarding gold a "˜real, long-lasting demand' that has to be acknowledged


Small gold bars seen at a gold trading firm in Ho Chi Minh City. Experts said new banking policies will not change the fact that many people will still prefer gold savings in Vietnam.

New rules that restrict the use of gold by commercial banks may not be able to solve the ongoing speculation problem in the country, experts say.

The central bank last month issued a circular that stopped banks from selling gold deposited by customers and using the funds to offer loans. Previously, banks had been allowed to convert a maximum of 30 percent of their gold deposits into dong for this purpose.

The circular also banned banks from lending gold for producing and trading gold bars, which are used widely in the country as a savings vehicle and to buy property, for which prices are often set in gold terms.

Banks are now only allowed to lend gold for the purpose of producing and trading jewelry.

Economist Le Tham Duong of the Ho Chi Minh City Banking University said he supported the new rule, adding that it should have been issued earlier to prevent market fluctuations that have taken place so far.

The circular will help curb gold speculation in the country and help the central bank keep the market in check, he said.

But some experts believe the new rules will not have any real impact in the long run. New banking policies will not change the fact that many people will still prefer gold savings. Even if they do not receive any interest from banks, they will still hold on to gold because unlike other currencies, the precious metal does not face devaluation.

Since the new ruling took effect on October 29, local gold prices have been on the rise.

Some banks, including Eximbank and Viet A, have said they are still considering whether or not to cut gold interest rates. Some worry that if they cut back on their gold services, there are other organizations that will take over the job unofficially, as is the norm with the foreign exchange black market now.

Le Duc Thuy, chairman of the National Financial Supervisory Commission, said local authorities do not manage the market well, noting there were conflicts between their policies and market movements.

The recent circular to tighten control over gold loans and deposits would force commercial banks to sell parts of their gold reserves, Thuy said. The problem is that their reserves, equivalent to VND73 trillion (US$3.7 billion), are not large enough, compared to the amount of gold outside the banking system. As a result, the sales would not have any significant impact on the market, he said.

Gold savings

Economist Ho Quoc Tuan said in an essay published on the Thoi Bao Kinh Te Saigon magazine last week that the circular does not tackle the problem at its root. "It may stabilize the gold and monetary market in the short term but it can also make it even more volatile in the future," he said.

In the immediate future, the new ruling would help curb gold speculation and reduce gold deposits, but later it could cause a supply shortfall, Tuan said.

"It's necessary to accept that there is a real and long-lasting demand for using gold as savings among the public," he wrote. "Restricting banks from lending to gold bar traders will put pressure on the gold supply for the public's savings purpose. The circular can therefore have a side effect, inciting people to hoard gold even more and at the same time, create incentives for smuggling."

Tuan also said when banks are not able to offer attractive interest rates on gold deposits, their lending scope is restricted. "As a result, gold will still stay with the public, and not go into banks," he said.

Gold reserves with the public have reached an estimated 1,000 tons, worth $45 billion, the National Financial Supervisory Commission said last week.

Such reserves, if officially reported, can put Vietnam in the World Gold Council's top ten countries with largest gold holdings. As of September, the gold holdings of the top ten nations ranged from 612.5 tons to 8,133.5 tons. Vietnam was not included in the September list published on the council's website.

Thuy said if banks can attract the public's gold reserves, the economy will have a large source of funds. But in order to do so, there need to be policies that increase public confidence in the banking system.

He said the government has ordered the National Financial Supervisory Commission, the State Bank of Vietnam and concerned agencies to create a new plan for managing the gold market. The main objective of this plan is to help the banking system attract personal gold reserves, he added.

The government is also considering lifting a ban on banks having offshore gold accounts that was imposed in July this year.

Thuy said the closure of local gold trading floors was the right decision, but the ban on overseas account has made it impossible for banks to balance out risks taken at home.

COOLING DOWN THE MARKET

The central bank allowed a "reasonable" volume of gold to be imported in two weeks in an attempt to stabilize the local market.

The institution decided to allow the imports as global prices continued to fluctuate and local traders expressed an interest in importing the precious metal, central bank Governor Nguyen Van Giau told the press on Tuesday.

This is the third time this year that the central bank has allowed exceptions to its gold import ban.

"The central bank is capable of stabilizing the market," he said, adding that gold imports will bring local prices down.

Gold hit a record high of VND38 million per tael (1.2 ounces) on Tuesday, according to SJC, Vietnam's largest gold trader.

The company sold 8,000 taels the same day.

The price fell to VND36.48 million per tael on Thursday morning, still 8 percent higher than a week before.

Giau attributed the recent gold frenzy partly to speculation. "Speculation is unavoidable in any market economy," he said. "We have to accept the fact that it exists."

He also said the central bank would sell dollars to lenders that requested them.

"The central bank is willing to supply foreign currencies to commercial banks so that they can meet the demand of gold importers and other businesses," he said.

The director of one gold trading firm told Thanh Nien that granting import quotas "in dribs and drabs" to cool down the market wouldn't solve any of the current problems. "Short-term gold imports will drive the dollar higher. Then when the dollar surges, gold will follow. This is a vicious circle."

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