Gold speculators send prices to all-time high

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Speculative behavior, not demand-supply dynamics, was responsible for the sudden upsurge in domestic gold prices this week, experts said.

The precious metal soared to a new high following an increase in the world market, but the difference was so high that it raised worries about risks in trade of the precious metal and of the downward pressure that it would exert on the Vietnamese dong.

Gold hit US$1,780 an ounce on Tuesday as a worldwide rout in equities and commodities deepened on concerns the global economic slowdown will worsen after Standard & Poor's cut the US credit rating. The metal surged past $1,800 an ounce on Thursday as investors continued to buy up the safe haven.

At local gold shops, the precious metal traded at VND45.3 million (US$2,175) per tael Thursday morning, after peaking at VND46.3 million per tael Tuesday noon. A tael is equal to 1.21 ounces.

The State Bank of Vietnam has blamed the latest surge on the global price jump and speculators taking advantage of the domestic shortage, following large amounts of gold jewelry exports in recent months.

Vu Minh Chau, general director of major gold trader Bao Tin Minh Chau, said the gold price fever is mainly due to a thin supply of the metal that is due to firms have strengthening exports for some time now while imports had decreased.

Gold exports reached US$1.8 billion in the first seven months of this year as traders boosted shipments to around 36 tons, aiming to take advantage of the gap between local and world prices, according to the General Department of Customs. Domestic prices, a month ago, stood at $25 per tael below world prices.

Nguyen Ngoc Que Chi, head of SBJ, the gold trading arm of Sacombank, said, "In addition to the impact of world price hikes and thin supply, domestic prices increased due to speculation."

She said prices increased sharply although the purchasing power was not very high, indicating there was speculation at work.

"The current price is virtual. It does not reflect supply and demand. Gold traders are forced to increase their prices under peer pressure. The hike is not because purchasing power has risen," Chi said.

Economist Nguyen Minh Phong of the Hanoi Socioeconomic Research Institute said there was a psychological factor behind the price rise as some residents were worried it could still go higher and put the metal out of their reach.

The owner of a gold trading firm said many people with gold were not selling and many wanted to buy more. Her company sold three times the gold that it purchased on Monday, she said.

Gold is considered a safe investment and usually gains at times of global economic uncertainty. The world's largest gold-backed exchange-traded fund, SPDR Gold Trust, has recently bought 23.63 tons of gold, raising its holding of the metal to 1,309 tons.

Cautious investment

Gold traders said investors should not buy more gold when the gap between domestic and world prices is as large as it is now. Higher demand will not only put more pressure on the thin supply, but it will also raise local market prices to levels much higher than its real value.

Former governor of the State Bank of Vietnam Cao Sy Kiem said purchasing gold at current prices was a risky move because they may plummet when investors start selling to reap profits.

"Political and economic turmoil in the world may affect gold prices, so short-term gold investors should be very cautious," he said. "Obviously, a long-term investment would be profitable, as gold prices are expected to rise."

Kiem said gold prices are expected to rise sharply in the coming months as China may increase its gold reserves amid dollar devaluations in the world market, and the global economic turmoil continues.

Economist Phong said prices are unlikely to go down, even though the increase is unlikely to be as sudden as it is now. So trading in gold is still a good investment channel, he said.

The gold price hike has also seen an increase in dollars, which are used to price the precious metal.

The currency was devalued by about 7 percent in February, the most since at least 1993.

Imports allowed

To stabilize the market, the State Bank of Vietnam has allowed local companies to import a total of five metric tons of gold. It plans to grant businesses licenses to import an additional five tons to meet domestic demand. 

The central bank also said its "consistent policy" is to stabilize the value of the dong and that it was "risky" at the moment to buy and hold gold.

"In fact, the import of five tons is not enough to stabilize the market," Kiem said. "However, it could increase local investor's belief in the central bank's policy, and help to reduce the gold fever. In the local market, buyers' psychology is deciding the demand and supply situation."

Phong said the move was very good, helping to meet a part of the demand for gold. However, the import would have been be more effective if it had been allowed two days earlier, when prices started to surge, he said.

Last weekend, to increase the local supply of gold, the Ministry of Finance had imposed a 10 percent export tax on jewelry that has more than 80 percent gold content.

The tax previously applied to jewelry containing more than 99 percent gold.

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