Investment & Finance

Wide gap in domestic and world gold price

SGI

World gold price has continuously slipped in the opening trade sessions, sometimes even falling as low as USD 1,450 per oz. amid global equity market rout due to rising cases of Covid-19.

Wide gap in domestic and world gold price

The fall in domestic gold price however, is much slower, pushing the difference between domestic and world gold price to nearly VND 4.4 mn per tael to set a record low in last eight years.

In a talk with Saigon Investment, Mr. Tran Thanh Hai, Chairman of Vietnam Gold Business and Investment Joint Stock Company (VGB), described this phenomenon.

JOURNALIST: - Sir, the difference in domestic and world gold price from the beginning of the year until now has been constantly widening. What is the reason for this?

Mr. TRAN THANH HAI: - There are two reasons for this occurrence. First, the current Covid-19 crisis is much worse than what happened in the 2008 global recession. In 2008, from February to the end of the year, the Dow Jones index dropped by 46%, from 13,000 points to 7,000 points. In the same year, from March to November, the price of gold decreased from USD 931 per oz. to USD 742 per oz., a decrease of 20%. After dropping to USD 742 per oz., the gold trading giants, including commercial banks, were swept up, then the gold price suddenly rose again in early 2009 and peaked in 2011. Some banks had to cut margin and suffer losses. Gold traders in Vietnam learnt valuable lessons from 2008.

At the present time, when stocks and gold prices are plunging, like the 2008 scenario, countries in turn have launched a series of stimulus packages including fiscal and monetary policies. When countries such as the US, UK, Australia, and EU have almost pushed the interest rate to 0% and launched monetary policies in various forms, everyone saw that when stocks and gold plunge, money is king. When money is being flooded by countries, the price will have to recover sometime, that means stocks will recover and gold prices will also recover.

In the current market, stocks and gold prices are plunging, while the policy of lowering interest rates and economic stimulus policies will take at least a few months to come into effect and flow into the bloodstream of the economy. In addition, the Covid-19 pandemic may peak in Europe and the US, which is expected to take 6-8 weeks more, about two to three months later. Because of these factors, business circles predict that gold prices and stock prices will still continue to fall.

In 2020, the Dow Jones peaked at 29,500 points on 12 February after US President Donald Trump escaped impeachment in the House of Representatives. Although Dow Jones has reached a peak of 29 years, but by mid-March it has fallen to around 20,000 points. According to forecasts, the Dow Jones will fall below 20,000 points, even to 16,000 or 17,000 points.

But why is the world stock price forecast to fall further but the domestic gold price will not decrease but remain stable? Because the domestic gold traders have calculated that the world gold price will decrease again but the domestic price will only reduce gradually. Certainly with the monetary stimulus package and the fiscal stimulus package launched, gold prices will gallop up as in 2009, 2010 and 2011. Having experienced the 2008 global recession, gold investors are expecting gold to increase in price in the future.

Also, it must be said that in 2008, when the price of gold went down, only the price of physical gold went down because then there was no Decree 24/2012 on management of gold trading. At that time, if SJC had not made gold processing, other banks or gold trading companies would have done the gold processing. They would import border gold, process gold bars and then sell them on the market. Thus, supply is available to meet demand.

But after applying Decree 24/2012, the State Bank of Vietnam (SBV) has monopolized gold bar production and import of raw gold to produce gold bars. A self-employed enterprise must have a purchase in order to sell, if they cannot buy, they will not dare to sell and must anchor at a high price. That is why the price of gold bars in our country cannot go down. These are the main reasons that as of now the domestic gold price is about VND 4 mn higher than the world gold price.

- Sir, are you concerned about the risk of gold smuggling when domestic and world gold price is so high?

-  Certainly yes, because the SBV has monopoly on import and export of gold bars, so the domestic gold market will not be connected to the world market, leading to risk of gold smuggling that can happen if the price difference is attractive enough. Thus, if the difference of gold price in the domestic market and the world market increases, it is certain to increase the risk of smuggling of gold.

- In your opinion, how should the State Bank of Vietnam handle this situation?

-  I think the State Bank also knows that in this situation the world gold price will go down. Assuming that if the SBV handles this situation for the short term, it will be advantageous as well as disadvantageous. Short-term handling by importing raw gold and delivering raw gold to SJC for processing, then selling can reduce the gap between domestic and world gold price and also gain big profits. Though this solution must change because it will consume a large amount of foreign currency and increase the possibility that the economy may "goldenize". Therefore, this is not the optimal solution. Using willpower and order to lower gold price is not feasible in a market economy because of the reasons analyzed above.

Now it is not easy for people to sell gold at a cheap price even though many people want to buy gold. Therefore, in my opinion, the State Bank of Vietnam must keep the market operating. SJC gold price is reasonably high in buying and selling because they do not have gold to buy, so they have to raise price to sell. At the same time, lessons from the 2008 crisis are still there, so let the market move, let people see that gold is like a mask, and follows the law of supply and demand.

- Thank you very much.

Translated by Hoa Nam

Yen Lam (Interviewer)

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