Central bank unable to lay hands on privately-held gold

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  Gold bars seen at a bank in Ho Chi Minh City. Banks will be banned from accepting gold deposits starting late November.

Though the central bank is yet to find a way to mobilize the massive volume of gold held by private individuals in the country to serve economic needs, it has banned banks from accepting gold deposits with effect from late November.

Nguyen The Hung, general director of the Vietnam Gold Investment and Trading Corporation, said that according to Swiss banks, the main source of gold imports for Vietnam, the country bought some 500 tons of gold between 1990 and 2011.

Privately held gold is estimated at some 400 tons valued at US$22 billion, or equal to the country's foreign currency reserves, he said.

If the central bank can mobilize just half that amount and sell it or use it to secure cheap loans from international financial institutions, the economy will have a new major source of funds, he said.

Hung said it would also enable the State Bank of Vietnam to ease the volatility in the gold market. "It will be very wasteful unless the privately-held gold is mobilized."

A plan by the central bank to gain access to privately-held gold, which should have been submitted to the government for approval in the second quarter of this year, has not yet been completed.

Hung said the central bank should issue gold certificates to mobilize gold held by private individuals, and it can authorize commercial banks to do this.

Nguyen Tuan Quynh of Phu Nhuan Jewelry Company agreed that if the central bank bans commercial banks from accepting gold deposits, it should introduce gold certificates and attract the valuable asset from the public itself.

People can exchange their gold bullion for the certificates, which can be traded easily like bonds on the market, Quynh said. "Investors interested in gold could simply buy the certificates at gold exchanges, which is safe and helps them avoid fake and substandard gold."

Nguyen Thanh Long, chairman of the Vietnam Gold Trade Association, said the central bank should put off the ban on gold deposits and loans to reduce the pressure on the price of the precious metal, and consider importing more.

The ban should in fact take effect only after the market stabilizes, and then the central bank should issue long-term gold certificates to mobilize privately-held gold, he said.

But other experts say that even though attracting gold from the public is advisable, it is a task fraught with complications and difficulties. Besides, if funds from the new source flow to ineffective sectors and results in more bad debts, things will be even worse for the economy.

An economist, who did not want to be named, said if the money is lent to ineffective firms, it will be very difficult for the central bank to recoup the capital later.

Meanwhile, the issuance of gold certificates is also not easy, because there is the question of determining their face value and interest, and assessing the quality of the metal, he said.

Then, when the certificates mature, the central bank may have to import a massive amount of gold to repay the holders, which could cause prices to surge. The state budget will also face the risk of losing money if gold prices in the world market rise at that time, he said.

Price hike

Gold sold at VND47.7 million ($2,271) a tael (37.5 grams) on Wednesday, or $152.3 higher than global prices.

When gold prices were sky-high a year ago, five major banks including Asia Commercial Bank, DongA and Eximbank sold gold deposited by customers to raise dong funds which they then lent at over
20 percent. The move was allowed by
the central bank since it was also necessary to bring down domestic gold prices at the time.

Now these banks are trying to purchase enough gold to repay maturing deposits.

Hung of the Vietnam Gold Investment and Trading Corporation said the problem is that the lenders had sold gold on hope that they would be allowed to import gold later if necessary. But now that the State Bank of Vietnam has become the sole importer of the precious metal, the banks have to buy it from the local market at all costs.

Economist Nguyen Dai Lai said the monopoly in gold bullion production is another reason for the large price gap between the domestic and world markets since the market only has SJC gold bars now.

Long of the Vietnam Gold Trade Association attributed the spike to the low supply in Vietnam: "The gold supply and demand situation is very strained. Banks are rushing to buy gold before they are banned from accepting gold deposits on November 25."

Besides, there has been a scramble to buy gold due to fears of a price hike soon, Long said.

In August, the central bank chose Saigon Jewelry Company as the official bullion supplier, with production to be done only on order.

Its brand, SJC, accounts for more than 90 percent of the domestic gold bar market.

The long-anticipated move came after the central bank said it would take over gold production to tighten control over the market.

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