Gold premium seen dropping on central bank sales

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A customer examines a gold ring through a pocket microscope at a Phu Nhuan Jewelry Company shop in Ho Chi Minh City

The premium paid by gold buyers in Vietnam, the largest user in Southeast Asia after Thailand, will extend declines from a record after banks complete the return of bullion deposits to investors this month.

The gap between domestic and global prices for immediate delivery will probably drop to VND4 million a tael (US$159 an ounce) by the end of July, according to Nguyen Thanh Truc, vice chairman of the Vietnam Gold Traders Association. The premium reached an all-time high of more than VND6 million in April, when bullion tumbled into a bear market, spurring physical demand across Asia, according to Truc.

Vietnam's central bank has tightened rules on gold trading, including making itself the sole importer, in a bid to limit the impact of gold prices on the exchange rate and redirect financial resources toward economic development. As part of the drive, banks must return all gold deposits to investors by June 30, while the State Bank of Vietnam is selling metal to lenders and trading companies to boost domestic supplies.

"Demand for gold in Vietnam will drop significantly after the deadline because there will essentially be no more demand from banks and the auctions are set to continue," Truc said in an interview last week from Hanoi. "The gap will likely fall, but probably not as much as we hope" as there will still be retail buying, he said. The spread should be less than VND1 million, he said. When deposit owners get the gold, they may sell or keep it, depending on the price, according to Truc.

"˜Favorite tool'

Vietnam consumed 77 metric tons of gold last year compared with 864.2 tons in India, 776.1 tons in China and 80.9 tons in Thailand, according to the producer-funded World Gold Council in its February report. Vietnamese people hold gold as a store of wealth for protection against inflation and currency depreciation. Premiums in India, the world's biggest consumer, were $7 an ounce last week, according to Haresh Soni, chairman of the All India Gems & Jewellery Trade Federation.

"The stricter regulatory measures implemented by the State Bank of Vietnam and the fear of a steep decline in gold's price may affect gold demand temporarily," Albert Cheng, Far East managing director at the council, said in an e-mail. "In the long run, for the majority of Vietnamese, particularly those who have lived through the war years and the ensuing economic regression, gold is still considered as the favorite tool for saving and investment."

Economic stress

India is also trying to curb demand for gold as part of efforts to rein in a record current-account deficit. The government has increased the import tax fourfold to 8 percent since January last year and restricted overseas purchases by banks and state-run trading companies on a consignment basis.

"In periods of economic stress, expectations for dong weakening caused people to buy dollars and gold," Matt Hildebrandt, a Singapore-based economist at JPMorgan Chase & Co., said in a phone interview on June 10. "The central bank is trying to reduce the use of gold to create more stability for the dong." The Vietnamese currency weakened 24 percent against the dollar in the four years through 2011.

Bullion slumped 18 percent in London this year on concern that a recovery in the global economy will curb haven demand, spurring record sales from investment products. The spot price was at $1,377.24 an ounce on Wednesday. Bullion may drop to $1,100 in a year, Credit Suisse Group AG said in May.

In Vietnam, the price of bars from Saigon Jewelry Co., selected by the central bank as the national gold brand, has declined 11 percent this year to VND40.5 million a tael as of Tuesday, according to data from the company compiled by Bloomberg. The premium was at VND5.6 million on the same day, according to Bloomberg calculations. That's the equivalent of about $221 an ounce. A tael is about 1.2 ounces.

The central bank has held sales since the end of March to help banks return deposits by June 30. So far 709,800 taels, or about 27 tons, have been sold in 28 auctions through June 7, according to the bank.

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