Vietnam saw yet another gold frenzy this week, with the gap between local and world quotes expanding, and experts say it proves the country's gold import policy has not worked out well.
Global gold prices, after a recent surge, plummeted in the last few days as many investors sold the metal to offset losses in other assets. Meanwhile, gold demand in Vietnam remains strong, keeping domestic prices high.
At local gold shops, the precious metal hit VND45.7 million (US$2,190) per tael Tuesday afternoon, before easing to VND44.4 million on Thursday morning. A tael is equal to 1.21 ounces.
Explaining the reason the local price tends to trade at a premium to the international price, Vu Minh Chau, general director of major gold trader Bao Tin Minh Chau, said the local demand is large as many people try to buy the metal when prices are low.
There is also a supply shortage in the domestic market because some traders did not import a large volume of gold on anticipation that prices could continue to fall, Chau said.
He said his firm's gold sales sometimes doubled or even tripled its purchases in the last few days.
Despite heavy rains in Hanoi early this week, hundreds of people rushed to gold shops in the streets of Ha Trung, Tran Nhan Tong and Cau Giay to buy the metal after the international price of gold fell below $1,600 per ounce.
Local residents are seeking to buy gold as a way to protect their wealth because of concerns about inflation, which has slowed up, but still remains high at 22.4 percent year-on-year in September.
The demand is also rising after banks earlier this month were forced to strictly abide by a 14 percent ceiling on deposit interest rates. Earlier, some banks offered dong deposit rates of 18-19 percent a year.
"If our policy is good, the local gold price should fall in correlation to the international one," said former central bank governor Cao Sy Kiem. "In fact, our recent imports have not really made an impact. The volume of less than one ton of gold that each firm is allowed to import is not enough to meet the rising demand, failing to narrow the gap between domestic and world prices."
Local gold traders said they sold out the combined 20 tons of gold valued at some $1.5 billion that the central bank recently allowed them to import.
Kiem said a survey on the market's gold supply and demand should be conducted, so that the State Bank of Vietnam could know the exact volume of gold it needs to import to stabilize the market. Vietnam has not been proactive enough in gold import and export activities, he said.
Making the corrupt use of high demand and thin supply, some firms, which imported gold when prices were high, could join hands to not reduce their prices to avoid losses, Kiem added.
Economist Vu Dinh Anh said the gold market now is swayed by speculators, who push domestic prices up.
"The large gap between domestic and world prices shows that measures to control gold market have not been effective," he said. "The State Bank of Vietnam allows gold imports every time there's a price hike. After such a move, the price could ease. However, only several days later, domestic prices will rise again, outpacing the international rates."
Acknowledging the large gap between local and international gold prices, central bank deputy governor Nguyen Dong Tien said it would allow firms to import more gold to stabilize the market.
He advised the public to stay cautious and not to be exploited by speculators.
Chau of Bao Tin Minh Chau said the gold import is necessary to reduce prices in the domestic market. It is also a long-term measure that the central bank should consider.
Former governor Kiem said for the time being, allowing more gold imports is the right move. "However, the import is only effective when it is timely and enough to meet market demand," he said.
He also expressed concerns about increasing pressure on the dong as gold imports must be paid for in dollars. Although some gold shops are quoting the US dollar in a range of VND21,240-VND21,300, buyers are asked to pay at least VND21,500 per dollar if they want to buy large quantities.
"If the import lasts for a long time, the foreign currency supply may be strained, especially in the last months of the year, when the country needs more dollars to pay overseas loans and other imported commodities," Kiem said.
He said another reason for the big gap between domestic and world gold prices is that Vietnam is not able to mobilize hundreds of tons of gold held by the public, while the country's gold reserve is too thin.
According to some experts, the central bank should establish a national gold fund to attract gold sources held by local residents.
When the price of gold in Vietnam rises past the international price, the central bank could use gold from the fund to stabilize the market, helping to reduce the use of dollars to import the precious metal, they said.