Will gold rebound in Year of the Horse?

Tuesday, Jan 28, 2014 09:00

The Year of the Snake was one of the worst years of the Vietnamese gold market, which plunged 25 per cent in value against 2012, and ended the 12-year bull run of the yellow metal. This tarnished the sheen of the traditional asset of Vietnamese people, but the attractiveness of gold remains controversial.— Photo vietq

HA NOI (Biz Hub)— The Vietnamese gold market spent the last days of the Year of the Snake, 2013, with less fuss than usual, and entered the Year of the Horse, 2014, silently too.

Will this year be energetic, cheerful and nice, just like a horse's nature, towards local gold and gold holders? Would gold stay in demand?

The Year of the Snake was one of the worst years of the Vietnamese gold market, which plunged 25 per cent in value against 2012, and ended the 12-year bull run of the yellow metal. This tarnished the sheen of the traditional asset of Vietnamese people, but the attractiveness of gold remains controversial.

Nguyen Tri Hieu, a gold expert told Investment newspaper: "In the mid to long term, local gold will follow the downtrend of world gold. Many investors have rejected this metal, which I see as a wise move because there are no signs of a recovery happening this year."

Huynh Trung Khanh, senior consultant of the World Gold Council in Viet Nam, argued that world gold would rebound this year, probably to US$1,300 per ounce.

However, market observers argued that given the ups and downs in gold prices, the Vietnamese people who might not be involved in speculation or investments, would still stick to gold as a hedge against inflation.

"I prefer gold for accumulative purposes. In any case of currency depreciation, gold always has physical value. I don't have much money to think about big interests, to deposit money in banks or buy foreign currencies," said Do Thi Hai, a 53-year-old teacher in Hai Phong City.

Another retired woman, Hoang Anh, 67, said: "I have gold bars and have great confidence in gold, despite the decrease in its prices last year. My experience shows that gold has a good resistance in the long-run."

Women in their 30s argued that they have gold assets because the local currency is too volatile and inflationary pressures still exist.

But not everyone shares these ideas. Nguyen Hoang Ha, a 35 year-old reporter in Ha Noi, said: "The wide fluctuation in gold prices last year was so frustrating. Now I deposit my savings in banks. The interest rate is not very high but it's rather stable." She added that it's easier to exchange Vietnamese dong with foreign currencies than gold with currencies.

In 2013, Viet Nam consumed 110 tonnes of gold despite unprecedented behavior by the yellow metal, according to the World Gold Council.

The central bank estimates that the public is hoarding around 250 to 300 tonnes of gold. Market observers said that it's getting more and more important to mobilize such a big resource of gold.

The government has instructed the State Bank of Viet Nam to issue "proper" policies in order to mobilise this gold and use it for socio-economic development.

How to mobilise private hoards

Experts have suggested a number of methods, including the issuance of gold deposit certificates that can be used in derivative transactions This would mean the re-establishment of gold exchange floors, this time with much firmer legal and technical frameworks that would prevent market destabilising movements.

Tran Hoang Ngan, deputy head of HCM City University of Economics, suggested that the authorities should issue gold bonds, which are similar to normal government bonds, with reasonable yield rates.

Moreover, Nguyen Thanh Long, chairman of Viet Nam Gold Traders Association, argued that an establishment of the national gold floor that allows every party to join was urgent.

In the past, the focus has been on "larger national interests", but that failed to consider the factors behind the Vietnamese public's tradition of hoarding gold, which they see as the safest investment and insurance in times of economic and financial uncertainty.

However, experts warn that a fresh attempt to mobilise gold would be effective only if public concerns about it are addressed.

The government's latest instructions have come after three years of applying several administrative measures to encourage people to release their gold hoards and settle the "disorder" that the domestic gold market has experienced over the past several years.

The disorder, which included significant price differences between domestic and world gold prices and the impacts of speculative activities, has been blamed by many experts on weak legal and technical frameworks that governed the market.

The situation was exacerbated by developments in the forex market that undermined public confidence in the domestic currency.

In response, the State Bank of Viet Nam took several steps, including suspension of 20 gold trading floors, the closure of all gold deposit accounts in commercial banks, stricter conditions for trading in gold bars, establishment of a single national brand and conducting gold auctions.

Last year ended with the closure of gold deposits as well as the end of a 12-year bull run on gold, the domestic prices of which plunged 24 per cent year-on-year towards the end of the year.

Vu Viet Ngoan, Chairman of the National Financial Supervisory Committee, said that given the perspective that the decline in local gold prices was in keeping with the global trend, the central bank's moves have stabilised the domestic market.

World gold prices plunged 28 per cent in 2013 after the US Federal Reserve announced plans to reverse its ultra-loose monetary policy starting January 2014, diminishing gold's appeal as a hedge against inflation.

Experts also suggest that the central bank should issue gold deposit certificates for fixed-term deposits that cannot be withdrawn before the maturity date. Gold deposits thus mobilised can be used as collateral for borrowing foreign currencies at cheaper costs from foreign credit institutions. The capital thus raised can be used to further socio-economic development, they say.

They also say that to facilitate this process, policymakers need to prepare "competent legal and financial grounds," as also a derivatives market where the gold deposit certificates can be traded easily.

However, they hasten to add that no measure can be effective unless public concerns are allayed and the gold deposit certificates have the liquidity that allows owners to use them for purposes that gold had been traditionally used for, such as buying land and other properties. — VNS

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