Gold price hike stokes exchange rate, inflation fears

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Domestic gold prices surged to a new all-time high this week following a gaining streak in world prices. As gold exports remaining high and supply may go down, concerns have arisen over exchange rate instability and a hike in inflation.

At local gold shops, the precious metal traded at VND39.6 million (US$1,931) per tael late Tuesday afternoon, after world prices peaked at $1,605 per ounce. Domestic prices were recorded at VND39.57 million per tael Thursday morning. A tael is equal to 1.21 ounces.

World prices have surged since last week as debt worries in the US and Europe have intensified. Gold is considered a safe investment and usually gains at times of global economic uncertainty.

Experts say if the global economic situation does not improve, gold may continue to rise. Vu Minh Chau, head of major gold trader Bao Tin Minh Chau told Thanh Nien Weekly that gold prices in the domestic market would soon surpass VND40 million per tael.

"Besides the impact of world price hikes, domestic gold prices have increased because some financial groups have strengthened purchase of gold for exports or for reselling to earn profits," Chau said.

However, the skyrocketing prices pushed gold transactions down on Tuesday as many investors had already sold their gold a few days ago when the prices started to soar. Meanwhile, others stopped selling, expecting prices would continue to rise, he said.

Chau said his company's gold purchases had gone down by 20 percent on Tuesday from a few days earlier. Still, the number of people selling gold to the company on Tuesday accounted for 70 percent of its total customers.

Other trading firms reported similar situations, including Vietnam's largest gold trader, SJC.

Due to the high number of customers selling gold, some trading firms said late last week that they considered suspending purchases because they did not have enough funds.

Exports surge

Vietnam exported around 24 tons of gold, mainly in the form of jewelry, in the first six months of this year, according to the General Department of Customs. SJC alone exported between 500 and 600 kilograms of gold in the first two weeks of July.

Some experts said local traders were trying to take advantage of lower prices at home to boost shipments.

Anticipated trading restrictions had cost gold some of its luster in Vietnam, and local prices have been lower than world prices since April. Domestic prices are below world prices by some $10 per tael at present, compared to about $25 last week.

According to the General Statistics Office, the export of precious stones and metals hit $1.027 billion in the first half of 2011.

Vietnam has restricted the shipment of gold bullion. It has granted export quotas to very few companies.

However, some industry insiders have said gold is being exported in the form of jewelry. Early this year, the Ministry of Finance had imposed an export tax of 10 percent on jewelry with 99 percent gold content, instead of zero percent as before.

In an attempt to dodge the regulation, some traders tried to reprocess their jewelry products to lower the ratio to 98 percent.

Chau said the export increase has thinned domestic supply, contributing to higher domestic prices of the precious metal.

Meanwhile, Do Minh Phu, general director of gold trader DOJI, said the government should encourage gold jewelry exports to generate jobs and raise foreign currency earnings. If it tightens exports, gold could be smuggled across borders, causing tax losses, especially when local prices stand below world prices, he said.

Exchange rate worries

The government said in late February that it would tighten control over gold trading in the country. The announcement influenced many people to steer away from bullion holdings.

Chau said a recent draft decree of the State Bank of Vietnam, which allows gold trading and only bans the use of the precious metal as a means of payment, has prompted many people to keep holding on to gold. In this context, the market activity picks up when gold prices surge.

"Gold transactions fell by 70-80 percent a few months ago, when people were worried about the gold bullion trading ban. However, the situation has improved since the draft decree announced late last month," he said.

Cao Sy Kiem, former governor of the State Bank of Vietnam, said the increase in domestic gold prices may affect the foreign exchange rate as well as efforts to curb inflation.

If the local demand for gold increases and supply goes down, trading firms will boost imports, which may contribute to increasing the foreign exchange rate, Kiem said.

The dong has remained relatively stable over recent weeks due to a strong dollar supply in the market.

Some other experts said the price hike may prompt gold hoarding. Money may be poured into the gold trade, causing a capital shortage for production and businesses, which would again push inflation upwards.

Chau also expressed his concern over uncertainty in the domestic gold market as well as the small difference between buying and selling prices. Financial groups and commercial banks have strengthened purchases of gold, raising their buying prices and narrowing the profit margin, which he said has negatively affected the market.

The difference between the prices used to remain at 1 percent, but now it has gone down to just 0.25 percent, so many gold traders are not able to earn enough to cover their costs and overheads, he said.

He also said some firms have given up on trading in gold bullion and shifted to trading in jewelry.

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