Selling gold reserve for market stabilization unnecessary

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A staff at a bank in Ho Chi Minh City prepare gold taels to sell to customers

The central bank has decided to auction gold from the reserves to stabilize the market, a move analysts think is unnecessary and could jeopardize the country's reserves.

Nguyen Quang Huy, director of the State Bank of Vietnam's foreign exchange department, said it was aimed at narrowing the gap between global and domestic gold prices.

Domestic gold prices stood at VND44 million (US$2,095) per tael of 1.2 ounces on March 20, VND3.2 million higher than global prices.

Huy said the State Bank seeks to pump a large quantity into the market to redress the imbalance between supply and demand.

But Le Tham Duong of the Ho Chi Minh City Banking University said the move to narrow the gap between the domestic and world gold prices is "unnecessary in the long term since people's habit of keeping gold will be eliminated when Vietnam sees better economic development."

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If the dong is kept stable and the use of gold as payment is eliminated, people will use the metal only for jewelry, he said.

"Nobody will want to keep gold at that time, so it is unnecessary to stabilize its price."

In the past the government itself has said it is unnecessary to stabilize gold prices since this could put paid to the foreign currency reserves, but after seeing domestic prices much higher than the global rate, it ordered the central bank to narrow the gap, possibly to prevent smuggling in of the metal, he said.

Briefly last month the price difference was as much as VND5.4 million.

The large gap is due to poor management of the gold market and the monopoly in production and trading of the metal, Duong explained.

The Saigon Jewelry Company Ltd. (SJC) was ordered last month to stop producing its SJC-brand bullion. It can now only produce it on getting orders from the central bank, which will base the orders on demand and monetary policy.

Economist Nguyen Dai Lai called the move in "unreasonable."

"The central bank need not do anything to adjust gold prices, as gold is a common good. The bank should stick to combating inflation," Lai said.

In other countries, central banks occasionally turn gold in the reserves into products and sell them when prices are down for a long time, he said.

"No country uses the gold reserve to manipulate prices of the metal in the market."

The government should liberalize the gold market and allow import and export of the metal, which would help keep the domestic prices in step with international prices, he said.

"We don't have to worry about a gold drain because Vietnam has always been an importer."

But the government should prevent the use of gold as a means of payment, he said.

Auctioning the reserves also poses the risk that world gold prices could rise, making it a costly proposition for the central bank, he pointed out.

With the global economy not recovering yet, the risk is indeed big since gold prices are forecast to rise to $1,750 per ounce from around $1,600 now.

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