New gold market regulation prompts skepticism

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A customer buys gold bars at a shop in Ho Chi Minh City. Thousands of gold shops in the country will get out of the bullion business and focus strictly on jewelry due to new regulations on gold trading, industry insiders say.

A new decree of stricter requirements for gold traders in Vietnam has come under fire from critics who say no guidelines for its implementation have been issued and that the new rules will push thousands of gold traders out of business.

The regulation, which also aims to give the State Bank of Vietnam complete control over gold bar production, as well as the import and export of materials for casting the bullion, comes into effect Friday.

But the government has not been clear on what "complete control" means and local gold traders and experts are skeptical the decree will be effective.

"I don't think the decree could be strictly implemented Friday, as a circular with specific regulations for the decree's implementation has not yet been issued," said Nguyen Tuan Anh, manager of a gold shop on Ha Trung Street, the capital's de-facto gold trading hub.

"The government wants to control gold, but the regulation may not be as effective as expected. It will make things a bit tougher for traders. But there will always be ways to trade the bars," he said.

The decree stipulates that bullion traders will be required to have a registered capital of at least VND100 billion (US$4.8 million), a minimum tax payment of VND500 million, and a presence in at least three provinces or major cities.

Banks that want to deal in gold will have to meet three conditions, including having a charter capital of at least VND3 trillion and a trading network that spans five provinces that is under government supervision. They will also have to officially register for gold trading with the central bank.

The state lender will provide the one-time issuance of licenses to gold traders that can meet its new requirements for bullion trading, giving other companies six months to quit the business.

Anh said he could never meet the new requirements and will likely quit selling gold bars after the six-month period, but until then, he will wait to see if the government rethinks the policy.

He said demand would be the ultimate factor regulating the gold trade because black market trade will always be easily available.

Picking on the little guy

Industry insiders argue that the strict requirements could force thousands of other gold shops to get out of the bullion business and focus strictly on jewelry instead.

"Most of the 2,000 gold shops in Ho Chi Minh City are small, with less than VND10 billion in capital, and will not be able to meet the new requirements," said Nguyen Van Dung, chairman of the Saigon Jewelry Association in Ho Chi Minh City.

The head of a gold firm in Hanoi who asked not to be named said it was not easy for a private firm to raise their capital to VND100 billion, so his firm would have to stop trading gold bars.

Gold bullion used to bring the the company its highest profits, he said. His firm is one of eight gold bar producers in Vietnam.

"The regulation will waste a lot of investment in gold bullion processing facilities, as well as in branding," he said.

Only the state-run Saigon Jewelry Company, often known as SJC, which holds 90 percent of the gold bar market in Vietnam, is expected to stay in the bullion business.

Former governor of the central bank Cao Sy Kiem said there are two things that need to happen after the decree takes effect: the price gap between domestic and international gold should be narrowed, and individual gold holdings must be put to good use.

Despite a steady market since early this year, gold in Vietnam still trades at a premium compared to international prices.

Kiem said an acceptable gap between two prices would hover around VND400,000, or about $20, per tael, but the actual gap is frequently around VND2-3 million per tael. One tael is equal to 1.2 ounces of gold.

"This shows that our management is not very good, while speculation still exists," said Kiem.

Gold prices on the domestic market sunk to VND41.35 million per tael on Wednesday, compared to VND41.75 million on Tuesday. The gap between domestic and global prices was around $100 a tael.

Contradictions

An industry insider said the amount of gold kept by local residents is massive about 300 to 500 tons. He said that value should be mobilized and used in the economy, but the country still does not have a new legal framework for mobilizing gold from the public.

Nguyen Thi Cuc, vice general director of gold firm Phu Nhuan Jewelry, said several recent regulations on gold market were contradictory in this sense.

Banks have been prohibited from receiving gold deposits or lending the metal since May last year, according to a regulation issued by the State Bank of Vietnam the previous April.

However, banks are still allowed to issue gold certificates of 12-month terms or less.

This changes the game in name only as customers can still give their gold to banks in exchange for the certificates and interest, Cuc said.

Banks are allowed to hold gold for customers for a fee, though many have been illegally paying interest on the gold they are holding.

The central bank has recently extended the deadline for banks to stop issuing short-term gold certificates to November 25 instead of May 1 as previously scheduled.

Cuc said the point of the gold certificate issuance was to mobilize gold.

But she said requiring commercial banks to collect fees from customers who deposit gold would have the opposite effect.

This would encourage people to withdraw their gold from banks, she said. If that happens, banks will not have enough gold to repay their customers because they may have used their gold stocks as collateral to take out loans or to sell for Vietnamese dong.

Though banks are only legally allowed to sell 30 percent of their total gold deposits in exchange for dong, if they do not have enough of the metal and have to start buying up huge supplies of gold to repay customers, the gold market will face a supply-demand imbalance, said Cuc.

Coping with the ban on short-term gold certificate issuance, which should have taken effect on May 1, many local commercial banks have switched from mobilizing gold to keeping the precious metal for customers. Some have continued to mobilize long-term gold deposits in the form of gold custody services instead of mobilization.

The illicit interest rates for gold now range from 2 to 3 percent via such services.

Changing the trade

Former governor of the central bank Kiem said allowing the purchase of gold via trading accounts at official gold exchanges could stabilize the gold market and narrow the price gap.

He said the mechanism would ensure a supply and demand balance, especially amid major fluctuations on the world market.

It could also create a legal framework for individuals to invest in gold, and help the state manage the gold trade and prevent risks.

Vietnam's gold exchanges were closed in early 2010 due to a lack of oversight and rampant risky trading.

Kiem said the central bank is drafting a new regulation, under which gold traders can open accounts if they obtain licenses from the Prime Minister and the central bank.

"I think this is a reasonable management solution in the current context," Kiem said.

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