Gold market still unstable, large price gap persists

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Banks in Vietnam have been asked to stop receiving gold deposits

Commercial banks have stopped accepting gold deposits since November 25 in compliance with a State Bank of Vietnam regulation, but the gold market is still effervescent as local demand for the precious metal remains high, leaving a large gap between the world and domestic prices.

The regulation states that existing gold deposits can be retained until June 30, 2013.

Banks can now accept gold from customers for safekeeping, but they are required to collect fees for the service. They are now charging between 0.05-2 percent of the gold's value per year.

As world prices went down this week, domestic prices followed suit, dropping to VND46.8 million (US$2,250) per tael on Wednesday from VND46.9 million on Tuesday. However, the price was still higher by nearly $200 per 37.5-gram tael than the global price.

Vo Tri Thanh, deputy director of the Central Institute for Economic Management, said the gold price in the domestic market as well as the gap between global and domestic prices should have been much lower after the new central bank instruction.

But its impact has been very limited because most people and firms still regard gold as a safe investment channel as the property market remains frozen and the stock market weak, he said.

Economist Can Van Luc said the world gold price is expected to go down when international gold floors close for the Christmas and New Year holidays. However, demand for the precious metal in some Asian countries, including Vietnam, is still high at that time as it is the wedding season, when gold jewelry is purchased or made.

The main reason for the current large gap between global and domestic gold prices is the thin supply of SJC-branded gold in the local market, said Nguyen Thi Cuc, deputy general director of jewelry manufacturer PNJ.

In fact, the large gap is mainly seen in SJC gold, while gold of some other brands have prices equal to or a little higher than the world price. Most local customers, however, prefer SJC gold because the brand has been recognized as the sole national brand.

Last August, the central bank officially took over the production of gold bullion, appointing Saigon Jewelry Company as the country's only producer. The firm, whose SJC-branded bullion already accounted for 90 percent of the local market, now only casts gold bars based on orders from the central bank.

To narrow the international-domestic gap,

Thanh said it is necessary to set up a national gold exchange. "Now is a good time to do it, as the foreign exchange rate is stable."

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Troubled moves

The central bank has allowed banks and gold firms to bring their non-SJC gold bullion to Saigon Jewelry Company for recasting and rebranding, but this has been implemented very slowly.

Among 350,000 taels (13 tons) of non-SJC gold bars and distorted SJC ones sent to the company, only 155,000 tons have been recast, said Nguyen Hoang Minh, deputy director of the central bank's Ho Chi Minh City branch.

He blamed the slowness on the need to examine the authenticity of non-SJC gold bullion, a time consuming process. SJC also had limited equipment for the rebranding task, Minh said.

The conversion of gold bullion of other brands into SJC has been controversial, with a senior official of the firm saying other brands did not have the same quality of the precious metal.

The statement is met with protests from other gold producers, who have also expressed their skepticism over the purity testing equipment used by the SJC. They have asserted that there is no Vietnamese standard for gold bullion.

To accelerate the conversion process, the State Bank of Vietnam has agreed, in principle, to allow some firms to export their gold bullion and then import gold materials to cast SJC gold bars. The imported gold materials meet international standards, so the examination and production will be faster, Minh said.

He said eight banks and 13 gold firms have registered to trade gold bars.

According to a central bank regulation, from next year, gold bar traders will be required to have a minimum capital of VND100 billion ($4.76 million) and a presence in at least three major cities. The rules aim to restore order into the market, which now has more than 10,000 traders.

To cope with the regulation, many gold companies that cannot meet the requirements have released gold rings of 99.99 percent purity, instead of gold bars, and can be sold as jewelry. 

The only difference between the gold ring and bars is their shape, but the former is VND2 million a tael cheaper. The ring also comes with features typically found on gold bars including packaging with an anti-counterfeit stamp, the company's name, logo and seal.

Tran Thanh Hai, CEO of the Vietnam Gold Business Company, said it will be difficult for gold rings to completely replace gold bullion.

"The gold ring is not as convenient to transport and store as gold bullion," he said. "Moreover, the quality of the gold ring is still questionable." The rings are mostly produced manually and its quality is varied and determined by each gold shop or company without any official check from authorities, he said.

An economist said producers will need more gold to produce the ring if demand for the product goes up. This can lead to smuggling, increasing the demand for dollars, which in turn could negatively affect foreign exchange rates and macroeconomic stability.

Therefore, the central bank should consider a more suitable policy to manage the gold market in the coming time, he said.

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