Finance

Vietnam Grapples with Gold Market Volatility Amidst Booming Smuggling

In the face of a thriving black market for gold, the Vietnamese government is urgently seeking to stabilize the national gold market. Illegal smuggling operations have been exploiting the considerable disparity between local and international gold prices, leading to a series of economic repercussions.

Authorities Call for Solutions

Prime Minister Pham Minh Chinh, assisted by the National Financial and Monetary Policy Advisory Council, has been vocal in advocating for effective measures. Their collective voice emerges amid concerns that persistent pricing discrepancies could lead to unfavorable economic outcomes. It was recently announced by the Prime Minister that there's an imperative to minimize the local and international price gap, as such measures would ensure the avoidance of detrimental developments. The Central Bank of Vietnam has been directed to intensify its efforts to steady the market.

The Surge in Gold Smuggling

Data provided by the World Gold Council indicate a striking increase in Vietnam's gold imports, rising from 39.8 tons in 2020 to 55.5 tons in the previous year. Sources close to Bloomberg News, who remain anonymous due to the sensitivity of the subject, suggest that the majority of this growth in imports is via unauthorized channels. This is as Vietnam maintains stringent regulations concerning the importation of the precious metal.

Smugglers are motivated by both the scarcity of legally supplied gold and the demand from those seeking financial refuge during economic downturns. This tide of illegal gold trade is placing substantial pressure on the Vietnamese dong, as smugglers typically need to acquire US dollars on the black market to fund their activities.

The Economic Impact of Gold Smuggling

The consequences of the surge in gold smuggling extend beyond mere legalities. Vietnam's currency, the dong, has experienced a significant devaluation, closing at 24,962 against the US dollar recently in Hanoi. With a depreciation of 2.9% just this year, the dong has been inching closer to record lows, which in turn has had a knock-on effect on the broader Vietnamese economy.

According to Nguyen Tri Hieu, a prominent economist and the general director at Toan Cau Institute, the amplified dollar demand to facilitate these illicit gold imports is forcing the dong's value to dip even further. This depreciation is making it increasingly challenging for the central bank to contain inflation, which is exerting a negative impact on the domestic economy.

Record-Setting Gold Prices Amid Global Tensions

The price of gold has been on an upward trajectory, reaching new heights over the past several weeks. As of last Friday, gold hit an apex of $2,330.50 an ounce. This climb can be largely attributed to ongoing concerns such as the constant unrest in the Middle East and the ongoing conflict between Russia and Ukraine, which has heightened the metal's status as a safe-haven asset.

This scenario isn't unique to Vietnam; other major gold-consuming countries like China have faced similar challenges. In China, there has been robust domestic demand since last year due to uncertainties over the nation's economic rebound. This prompted the Chinese central bank to put measures in place to limit gold imports when the yuan approached multi-year lows.

Vietnam's situation sees the price of gold reaching $3,263.26 per tael, translating to approximately $2,719 per ounce, which is significantly higher than global rates.

Vietnam’s Deep-Rooted Affinity for Gold

Vietnam's turbulent history of wars, revolutions, and economic fluctuations has engendered a deep-seated partiality towards gold in its population. This is evident from the fact that until 2012, banks in Vietnam would accept deposits and issue loans in gold. The central bank, in an effort to regulate the market, banned the practice and took on the exclusive role of gold importer while naming Saigon Jewelry Co. the sole authorized producer of gold bars.

The spread between local and international gold prices has been remarkably large, soaring to as much as 15 million dong ($600) per tael in the recent months. This is a significant hike when compared to the 2 to 3 million dong margin seen roughly a decade ago after the state monopoly was established. This information was shared by Huynh Trung Khanh, who is the vice president of Vietnam Gold Traders Association.

Proposals to End the Monopoly

Recently, the National Financial and Monetary Policy Advisory Council put forth a proposal suggesting an end to the state-held monopoly over gold imports and the production of bullion. The council claimed that the regulation, which has been in place for 12 years, has successfully accomplished its intended objective.

The current regulatory framework has been critiqued over the years for inadvertently boosting the illegal gold trade, as Vietnamese jewelry makers are left with little choice but to turn to unauthorized sources for their gold supply due to lack of legal import permits. The proposed lifting of the monopoly would, theoretically, create more legitimate avenues for access to gold, thus attenuating the excessive local premiums.

Potential Consequences of Maintaining the Status Quo

Mr. Khanh has warned that preserving the monopoly could escalate local premiums and therefore exert adverse pressure on the economy and the currency. Projections indicate that the gap could widen to between 25 to 30 million dong later in the year if the monopoly remains unchanged.

An end to the monopoly has the potential not only to curb smuggling activities but also to increase the government's tax revenue through the regulation of official imports. This view was reiterated last month by the Supreme People’s Procuracy as they prosecuted 24 individuals linked to two criminal rings. These groups were accused of smuggling approximately 6.2 tons of gold from Cambodia into Vietnam.

The Smuggling Crackdown and Future Prospects

The Vietnamese government's approach to combat smuggling has been unequivocal. The prosecution of smugglers is a clear indication of the determination to rein in illegal trading activities, which will be complemented by an overhaul of the current import and production regulations.

Should the recommendations of the National Financial and Monetary Policy Advisory Council come to fruition, we may witness a significant shift in Vietnam's gold market dynamics. This shift could not only afford an opportunity for a more transparent and competitive market but also play a role in stabilizing the national currency.

The dong's stability is crucial, not only for local economies but for the country's attractiveness to foreign investors. A more balanced and regulated approach to gold trading could thus serve as a cornerstone for broader economic stability and growth.

In conclusion, Vietnam is at a crossroads with its gold market policies. The coming months will be critical as the government decides whether to maintain its grip on the market or adopt a more liberal approach. The choices made will have a significant impact on both the national economy and the global perception of Vietnam's financial health.

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