Too few players control gold market unfairly: economists

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Experts worry that allowing a monopoly on gold sales won't have desired long-term benefits


A customer examines a gold bar at an SJC outlet in Ho Chi Minh City. The gold trader, together with five commercial banks, pumped a total of six tons of the metal into the market last week.

The central bank has allowed several major commercial banks to sell gold to bring down local prices, a move that economists believe will, in the end, not benefit the market at all.

Asia Commercial Bank, Eximbank, DongA Bank, Techcombank and Sacombank were given the green light Thursday last week to sell parts of their gold stock and deposits as the State Bank of Vietnam tries to narrow the gap between domestic and world prices.

Previously, all banks in the country were banned from doing so, even if they were holding hundreds of tons of the precious metal.

Together with Vietnam's largest gold trader, SJC, the five banks sold a total of six tons of the metal last week.

The sudden increase in supply immediately pulled the premium down to some VND1.5 million per tael from around VND3-4 million just days before. One tael is equal to 37.5 grams, or 1.2 ounces, of gold.

These six institutions have also been allowed to reopen gold trading accounts on international markets for the first time since a ban in mid-2010.

The policy came after the State Bank of Vietnam had granted gold import quotas totaling around 20 tons in the first nine months of the year to stabilize the market, with limited success.

Economist Le Dat Chi said the new policy could stabilize prices for some time. But as an improvised move, it will not solve market problems, he said.

Chi also said the decision will only benefit the banks and SJC, since they can profit from any price scenario.

Now that the local price is trading at a premium to the international price, they can buy gold from overseas markets and sell the metal at higher prices to local buyers. When domestic prices dip below world levels, they can increase purchases at home and wait for prices to surge again, he said.

So either way, as long as they still control the market, the group of "Five plus one" will continue to make profits, Chi said.

Banks are paying interest of around 1.5 percent a year on gold deposits. If the rate is capped at 0.5 percent by the central bank as expected, the profits for the lenders could be even larger, Chi said.

Local media reported Tuesday that two more lenders may also join the scheme. News website VnExpress reported that the group of "Five plus one" had sold more than 10 tons of gold as of Wednesday.

Le Tham Duong, a professor at the Ho Chi Minh City Banking University, agreed that the policy should not be sustained in the long run because leaving a group of institutions as the only link between the domestic and world markets could lead to blockages.

If authorities really plan to allow banks to sell their gold, a clear set of criteria needs to be announced so that all other qualified banks and gold traders can join in, Duong told Thanh Nien.

There should be no special treatment for a small group like this, he said, adding that even small institutions should not be kept out of the market.

Duong said the central bank should also ensure that the reopening of gold trading accounts is well managed to prevent negative impacts on the market.

Professor Hoang Cong Gia Khanh of the University of Economics and Law said allowing a few  banks to reopen trading accounts and sell their physical gold stocks was unfair.

He said that as the main goal of the policy is to bring down domestic gold prices, a regulation to cap profits is necessary. The policy should not be taken advantage of as a business opportunity, he added.

"Just add a reasonable profit margin to the world price to create a price ceiling that the institutions are allowed to quote. This is the only way to keep domestic prices closer to world prices," Khanh said.

Tran Thanh Hai, general director of gold investment firm VGB, said the new policy was an unexpected intervention, which is not good for the market.

It's already hard enough to forecast gold prices based on world trends, but now with the new scheme, it will be even more difficult to know where local prices will be headed, Hai said.

Many people were caught completely off guard by the increase in gold supply last week, he said.

How much gold the banks can continue to add to the market is another question, Hai said, noting that there's a chance that the public will just keep buying and storing gold without selling the metal back to the banks.

Hai also said the new gold trading policy would not be an effective way to stabilize the exchange rate, if it's what the authorities are aiming at.

The government should take long-term measures to restore confidence in the dong, and then it can issue gold certificates to attract public gold holdings, breaking the habit of keeping physical gold, Hai suggested.

Economist Chi said buying gold via offshore trading accounts can help ease the demand for dollars to import actual gold as trading parties are only required to put down a margin, a kind of deposit, instead of paying for all the gold.

But Chi noted that due to the volatility of the trade, many exchanges are demanding higher margin levels.

Besides, if local people don't stop hoarding gold, the country will have to import the metal eventually, putting pressure on the exchange rate, he said.

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