Vietnam gold premium to narrow after banks return gold deposits

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The long standing gap between international and domestic market prices of gold is expected to narrow after banks complete returning the precious metal to depositors this month and demand decreases, experts say.

"There is no more demand from banks, but retail buying only. Thus, the gap will decrease, but not as sharply as expected," said Cao Sy Kiem, former governor of the State Bank of Vietnam.

Inflation has not yet stabilized, so local residents would still want to keep gold as savings and investment, he said. "It is unlikely that gold prices go down sharply down just after (banks complete returning gold deposits to investors).

The SBV has tightened gold trading rules by assuming a monopoly over bullion import and production in a bid to limit the impact of gold prices on the exchange rate and redirect financial resources toward economic development.

As part of this drive, banks are required to return all gold deposits to investors this month, while the central bank sells gold to lenders and trading companies to boost domestic supply.

Echoing Kiem, Nguyen Ngoc Trong, managing director of gold trader PNJ, said the price gap will likely decrease to some VND3 million ($142.9) per tael within a month after the banks complete returning gold deposits if the central bank continues its gold auctions.

The premium reached VND6.4 million on Wednesday, when bullion tumbled into a bear market. In the local market, gold was traded at some VND38 million per tael, the lowest price since July 11, 2011.

Most banks are set to wind up gold deposits and return the gold to depositors by the extended deadline of June 30, the central bank said. The deadline was extended from late last year since banks did not have enough gold to complete the task.

The central bank has injected over 891,000 gold taels into the market through auctions since late March. One tael equals 1.21 ounces. More than 10 banks, including major ones ACB and Eximbank, have completed the task.

Economist Nguyen Tri Hieu said that when deposit owners get the gold, they may sell it, helping to narrow the gap.

In fact, there is a concern that the premium paid by local gold buyers is still large, although the central bank has sold large volumes of gold. The gap may increase smuggling and induce economic instability, he said.

However, the central bank said the large gap is partly due to big demand in the local market. The central bank has no reason for subsidizing gold buyers to narrow the gap while they accept the price.

Moreover, the gap could make higher contributions to the state budget, local media quoted deputy governor of the State Bank of Vietnam, Nguyen Minh Hung, as saying recently.

Despite the gap, the local market has been stable, and the foreign exchange rate has not been affected. Thus, the central bank's goal of stabilizing the gold market has been initially met, he said.

Agreeing with Hung, economist Hieu said the central bank has been on the right track. "We need to stabilize the market, not stabilize the price. If the market is kept stable, the gap between the world and domestic prices will be narrowed."

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