Saturday, January 2, 2010

Vietnam to Put an End to Gold Trading

By Tim Johnston
The Financial Times
Friday, January 1, 2010

Vietnam has ordered all gold trading floors to close by the end of March, putting an end to a business which turns over $1bn a day but which the government feared was spinning out of control.

“Both the owners of the gold-trading floors and traders are doing their transactions on a fragile foundation that lacks legal, economic and technical frameworks and knowledge,” the government said in a statement.

The order also bans using overseas accounts, but does not affect jewellery or retail gold sales.

The government said it was particularly concerned that some investors had been drawn into overleveraging their positions by low interest rates and the ever-increasing price of gold , which has risen from $660/oz when the first trading floor was started in 2007 to almost $1,100/oz today.

The government said that in some cases, investors had only been required to put up 7 per cent of the value of their portfolio.

The regulation will affect around 20 gold trading floors, but it is unclear if the government is intending to re-write the regulations and allow the floors to re-open or if the move is long-term.

The trade has become a lucrative source of income for many of the banks and trading houses which have opened the exchanges, and the ban could hit profits. But analysts say it could free up liquidity that might flow back into the stock markets, lifting the index.

Gold has a special place in Vietnamese investment portfolios. It often plays a key role in hedging property transactions, and historically provided a buffer against political uncertainty.

Today, Vietnam is one of the world’s largest gold consumers. The Vietnamese buy a similar amount of gold per head as the Germans, who have a GDP per capita more than 40 times greater.

But the appetite for gold has put significant pressure on the dong and was a key factor in forcing the government to devalue the currency by more than 5 per cent at the end of November. But the currency is still trading below the government’s approved trading band on the black market

In May 2008, the government tried to take some of the pressure off the currency by banning gold imports, but it was forced to relax the ban when Vietnamese prices hit a premium of $150/oz to the London Gold fix.

Gold imports were a substantial contributor to a ballooning trade deficit, which hit some $12.2bn in 2009, contributing to fears of re-emerging inflation.

For further reading:
"Vietnam to shutdown gold trading floors by end of March", Digital Journal, January 2, 2010
"Dong weighed down by deficit", The Financial Times, December 1, 2009

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