Gold bars of Saigon Jewelry Co., the only legal producer of gold bars in Vietnam, is shown at a bank in Vietnam
The target of Vietnam's campaign to stabilize its currency is in the locked bedroom wardrobe of retired civil servant Vu Thi Huong: gold bars.
"It's been my habit for ages, buying gold whenever I can save up some money," said Huong, 57, who watches the financial news every day to monitor the price of the precious metal. "With gold, I can save my fortune and later on have something valuable to pass down to my children and grandchildren."
Huong is among millions of Vietnamese who hold an estimated 300 tons to 400 tons of bullion to store their wealth - valued at as much as US$19 billion at domestic prices and equal to official UK holdings - a legacy of more than a century of war, revolution and economic turbulence. The central bank wants to convert the hoard, much of it smuggled in, into dong deposits to strengthen the currency, which has slid 21 percent against the dollar in five years.
Private gold holdings "reflect both the Vietnamese cultural values as well as the lack of confidence in the dong," said Trinh Nguyen, Hong Kong-based economist at HSBC Holdings Plc. "High inflation and depreciation of the dong in the past have caused people to keep their savings in gold."
Demand for bullion prompts importers and smugglers to sell dong for dollars to buy gold from abroad, depressing the local currency, Michael Kokalari and Hang Vu, analysts at Maybank Kim Eng Securities in Ho Chi Minh City, wrote in a note July 3.
To reduce contraband and persuade people to sell their bullion, the central bank made itself the sole importer and Saigon Jewelry Co. the only legal producer of gold bars. To discourage people from holding the precious metal, it banned banks from paying interest on gold deposits from June 30. Banks now have to charge customers a fee for storing it instead.
The central bank has held gold auctions since March, selling 1.17 million taels, or about 44 tons, according to bank data. Nguyen Quang Huy, head of the central bank's foreign-currency management department, said in a posting on the bank's website in April that banks would prioritize the purchase of gold from auctions to close their positions by the June deadline.
State Bank of Vietnam will reduce the volume and frequency of auctions because banks have bought enough gold to return gold deposits, the Tien Phong newspaper reported last week, citing an unidentified central bank official.
"The gold policy really is to help stabilize the dong because if people hold less gold, they don't try to move away from the dong," said Alan Pham, chief economist at VinaCapital Group in Ho Chi Minh City. "The side effect of that policy is increasing the amount of capital. That's like hitting two birds with one stone."
Monetizing private gold holdings isn't the only measure the State Bank of Vietnam is pursuing to shore up the dong and increase cash deposits with lenders. The central bank said it will set up an asset-management company this month to buy non-performing loans from banks "to resolve bad debts and boost credit growth to a reasonable level to support the economy."
Extensive use of gold and dollars is hampering the central bank's ability to manage monetary policy, HSBC's Nguyen said. "The holding of gold does not generate productive investment."
While the central bank devalued the dong last month for the first time since 2011 as the dollar strengthened, it cut the interest-rate cap on dollar deposits to discourage people from holding US currency and help boost foreign-exchange reserves.
Other countries with large private gold holdings are also trying to wean citizens off bullion. India, the biggest gold consumer, has increased import duties and a trade group called for suspension of sales of coins and bars to retail investors to help narrow a record current-account deficit that pushed the rupee to an all-time low.
During the Great Depression in 1933, President F.D. Roosevelt banned US citizens from hoarding gold, forcing them to sell to the Federal Reserve.
"The State Bank of Vietnam can buy gold to pump out dong to serve as funds for socioeconomic development," Huy of the central bank said on state television July 4. The central bank didn't respond to written questions from Bloomberg News about its gold policy.
Vietnam's central bank wants to convince savers that it's more lucrative to hold assets other than gold, which means boosting their confidence in the dong, said an SBV official who asked not to be identified as the plans are still being discussed.
That argument has been helped in the past nine months by a 27 percent slump in the world gold price, compared with a 1.8 percent drop in the dong against the dollar in the same period.
Before the metal began to decline in October, its price more than quadrupled in a decade, while the dong slid 27 percent. Vietnam's currency traded at 21,246 per dollar on July 18.
Gold deposits at Vietnam's banks dropped 75 percent as of the end of May from the end of 2012, according to a June 12 statement on the government's website.
Still, Vietnam's affinity for gold, combined with the central bank's rules restricting imports, meant Vietnamese buyers paid a record premium of more than VND6 million per tael ($235 an ounce) over the world price in April when the precious metal tumbled into a bear market. Saigon Jewelry gold bars sold for VND37.6 million a tael at 8:45 a.m. local time on July 18, according to data from the company. A tael is about 1.2 ounces.
The differential between world and domestic prices encourages smuggling. About 50 tons to 60 tons of gold were legally imported to produce bars each year in Vietnam prior to 2012, while some 50 tons to 70 tons were smuggled in, according to a central bank report this year.
Vietnam bought 77 tons of gold last year, both legal and smuggled, down 24 percent from 2011, the producer-funded World Gold Council said in a report in February. The UK's official holdings in July were 310.3 tons, the World Gold Council said.
"These habits are deeply ingrained," said Jonathan Pincus, an economist with the Harvard Kennedy School's Vietnam Program in Ho Chi Minh City. "It's going to take a long time."
The central bank's bullion rules combined with price swings in the gold market are starting to affect people's attitude toward the metal, particularly in larger transactions such as property deals, said Nguyen Van Doanh, 39, a real estate broker in Hanoi since 2005.
"In the past, gold prices were pretty stable, everything with a large value such as houses, land, cars were priced in gold," Doanh said. "Given the changes in gold prices, together with the government restrictions in gold-bar trading, it's no longer safe and convenient to use."
Nguyen Thuy Huong, 64, is marketing her five-story house in downtown Hanoi for VND7 billion ($330,000). She bought the house seven years ago for 190 taels of gold.
"I can't price it in gold since nobody would want to pay in gold these days," said Huong, pointing at the advertisement of her home in a local newspaper. "If someone wants to pay me in gold, I'm not going to take it either."
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