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Operation mechanism of the gold market:
International experiences and implications for
Vietnam
Student: Nguyen Khac Dung
Master of Finance, Banking, Insurance
Vietnam and Southeast Asia
Cohort 2013-2015
Supervisor: Dr. Nguyen Cam Nhung
Hanoi, June 2015
1
Abstract
Background
To have better understanding of the operating mechanism of the gold market, the way
the market is controlled and regulated, as well as organizational and managerial
experiences of the gold market of countries over the world, in accordance with the
reality of management of gold market in Vietnam, it is duty to find out appropriate
measures for the stability and development in Vietnam gold market in the trend of
international economic integration.
Research methods:
The study applied a variety of methods including statistical methods, synthesis,
comparison, analysis of the data in tables, graphs, references to the mechanisms and
management policies of some countries in the world.
Results:
The research studied the real situation in Vietnam gold market, the current management
policies of the Government for this market. Based on the experience of some selected
countries’ markets, the study proposed radical solutions to streamline and stabilize the
gold market in Vietnam.
Conclusion:
The study was based on the actual situation of Vietnam’s gold market where the
volatility of price and price gap between domestic and international gold market is
significantly large. We have studied the management policies of gold market which
were successfully applied some countries as well as analyzing the existing problems in
management of the gold market in Vietnam. Therefore, the proposed solutions made in
the research are practical and can be contributed to the management and development
of the gold market.
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TABLE OF CONTENTS
ABSTRACT............................................................................................................................................ 2
TABLE OF CONTENTS ...................................................................................................................... 3
ABBREVIATIONS ................................................................................................................................ 5
PREFACE .............................................................................................................................................. 7
INTRODUCTION ................................................................................................................................. 8
Research objectives ..................................................................................................... 9
CHAPTER 1:
GOLD AND FACTORS AFFECTING THE GOLD PRICE .............................. 10
1. GOLD AND ROLES OF GOLD ....................................................................... 10
1.1.History of Gold market ...................................................................................... 11
1.2.World gold market structure ............................................................................. 17
1.3. The main forms of business in the gold market ..................................... 18
2. Factors affecting the gold price ......................................................................... 19
2.1.The supply and demand ..................................................................................... 19
2.2.Macroeconomic situation ................................................................................... 22
2.3.The stability of the currency, especially the US dollar .................................... 23
2.4.Other factors ........................................................................................................ 24
CHAPTER 2: STATE MANAGEMENT MODEL OF THE GOLD MARKET ........................... 26
1. Role of Central Bank in GoLD market ............................................................. 26
2. Management of the gold market in the countries over the world .................. 33
CHAPTER 3: VIETNAM GOLD MARKET: SITUATION AND PROBLEMS .......................... 44
1.
OVERVIEW OF VIETNAM GOLD MARKET .................................................................. 44
2.
PARTICIPANTS IN VIETNAM GOLD MARKET ............................................................ 44
3.
DOMESTIC GOLD PRICE IN RECENT YEARS .............................................................. 45
4.
VIETNAM GOLD MARKET SITUATION ......................................................................... 52
1.2 Gold import – export ................................................................................. 55
1.3 Production and sale of gold bars (bar hoardings) ...................................... 56
1.3.1 Paper gold trading ................................................................................... 56
1.4 Gold mobilizing and lending activities ..................................................... 57
5.
SHORTCOMINGS OF VIETNAM GOLD MARKET
58
1.1 Inconsistency between domestic and world gold price ............................. 58
1.1 Gold import-export smuggling .................................................................. 59
3
1.2 Lack of hedging instruments ..................................................................... 59
1.3 Negative impacts of gold price on the macro economy ............................ 60
1.4 Deformed and illegal businesses after paper gold trading on account activities
banned ........................................................................................................... 62
CHAPTER 4: RECOMMENDATIONS TO DEVELOP VIET NAM GOLD MARKET
65
1.RECOMMENDATIONS TO DEVELOP VIET NAM GOLD MARKET
65
RECOMMENDATIONS TO DEVELOP VIETNAM GOLD MARKET ... Error!
Bookmark not defined.
1.Maintaining a government-centralized management model on gold market .. 65
2.Stabilizing Social psychology: .............................................................................. 66
3.Establishing the National Gold Exchange connected with the world gold
market ……………………………………………………………………………..66
4.Connect the domestic and world gold market on the basis of loosening gold
import and export activities. .................................................................. ……………69
5.Mobilization of gold ............................................................................................... 70
6.Liberalization of the gold market: ........................................................................ 71
CONCLUSION ................................................................................................................................... 72
REFERENCE ...................................................................................................................................... 73
4
ABBREVIATIONS
CPI
Consumer Price Index
ECB
European Central Bank
FED
Federal Reserve
GDP
Gross Domestic Product
IMF
International Monetary Fund
WGC
World Gold Council
GFMS
Gold Fields Mineral Services
ETF
Exchange Traded Fund
PBOC
People’s Bank of China
SGE
Shanghai Gold Exchange
SBV
State Bank of Vietnam
USD
United States of Dollar
VND
Viet Nam Dong
5
LIST OF CHARTS AND TABLES
Chart:
Chart 1.1: All time gold mining production (end – 2012)Error!
Bookmark
not
defined.
Chart 1.2: World official sector sales and purchasesError! Bookmark not defined.
Chart 1.3: World scrap supply ........................... Error! Bookmark not defined.
Chart 1.4: World official sector sales and purchasesError! Bookmark not defined.
Chart 1.5: Net world official sector sales and purchasesError! Bookmark not defined.
Chart 1.6: Nominal composition of the producer hedge bookError!
Bookmark
not
defined.
Chart 1.7: Chinese and Indian jewelry consumption
Chart 1.8: Global semi-conductor billings; world fabrication of bonding wire; dental
gold fabrication; other industrial & decorative usesError! Bookmark not defined.
Chart 2.1: Domestic gold price in 2011 ............................................................. 47
Chart 2.2: Domestic price in 2012 ..................................................................... 49
Chart 2.3: Domestic price from 2010 - 2012 ..................................................... 51
Chart 2.4: Gold price history: 2003-2012 .......................................................... 58
Chart 2.5 :Recent Gold Price Developments: May 2012 – March 2013 ........... 58
Chart 3.1: SGE Organization Structure ............................................................. 42
Table:
Table 1.1: Gold reserves of countries and institutions 2000 – 2014 ................. 11
Table 1.2 : World gold supply-demand (tonnes)Error! Bookmark not defined.
Table 1.3 : Top 20 gold mining countries ......... Error! Bookmark not defined.
Table 1.4: Gold and other reserves (end 2012) . Error! Bookmark not defined.
Table 1.5: World investment (tonnes) ............... Error! Bookmark not defined.
Table 2.1: Gold bidding statistics ...................................................................... 51
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Table 2.2: Physical gold bar investment (tonnes).............................................. 53
Table 2.3: Gold jewelry consumption of Vietnam and other countries (tones) 54
PREFACE
The pace of development of world gold market in recent years is extremely high.
Demand for gold in the world has increased dramatically since Septmeber 2008, when
the global financial crisis began to escalate and strong attack on the market after the
collapse of investment bank Lehman Brothers. Gold and gold investment products
became attractive investment tool in the context of the world economy was still
potential instability such as the slow recovery of the economy world economy, the
debt crisis in Europe, rising inflation or fear of political conflict has led investors look
to gold as "Gulf storm".
Vietnam is not out of this spiral after integration and opens the doors of
international capital flows. In stark contrast to the bleak colors on the stock exchanges
or the quiet atmosphere of the real estate market, the gold business is almost in a state
of excitement.
However, the rapid development of Vietnam's gold market has led to the
formation of the illegal gold trading, speculative activities for profit, underground
transactions increased, that make the gold market instability, risk, psychologically
confuse people. Management of the gold market is now becoming a very urgent issue
for state agencies. The gold market stability cannot be done overnight but must be
included in the overall policies. Some strong regulations have been launched in 2010 as
the Gold Exchange closed, prohibited commercial banks trading in gold, gold import
duty reduced to 0%. Circular No. 11/2011/TT-NHNN dated 29/4/2011 is a downside
risk to gold mobilization and lending by credit institutions, but on the other hand
wasted social resources , when a large amount of gold just lying in the closet, and
cannot be invested to stimulate production and development. Therefore, in the longterm this policy of management will not be the solution for the gold market.
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From the above issues, the topic "Some recommendations to develop the gold
market in Vietnam" was selected with the goal to identify problems, to propose
solutions for building a healthy domestic gold market, thereby contributing to the
stabilization of the fiscal and monetary system and macro economy.
INTRODUCTION
Gold has been used widely throughout the world. It has a variety of applicants such
as mean of exchange, jewelry, medicine, food and drink, electronics and, especially,
investment. Government, institutional and private investors invest in gold for a number
of reasons, of which the main reason is to hedge against inflation (Kolluri, 1981). Gold
appears to act as safe-haven in times of political or financial turmoil (Baur and
McDermott, 2010). Gold is often seen as an alternative channel to the stock market.
Buying shares can give investors higher return because they receive dividends and
possible growth in share capital. In times of economic turmoil or recession, the value of
shares tends to go down. Then, investors may sell shares and buy gold. Thus, fear over
a recession tends to increase the value of gold as people move from more risky stock
market to the safer one.
Sharma and Mahendru (2010) showed that the movement of gold price is highly
sensitive to the changes in fundamentals of any economy and future prospects
expectation. Expectations are influenced by the micro and macro fundamentals which
may be formed either rationally or adaptively on economic fundamentals, as well as by
subjective factors which are sometimes unpredictable and also non-quantifiable. The
price of gold is determined by several factors. The common macroeconomic factors
which may influence the gold prices are: oil price, USA exchange rate, interest rate,
inflation rate (Toraman, 2011).
In Vietnam, gold is used not only as a mean of reserve but also as a mean of
payment in transactions in the past. Recently, the economy in Vietnam has been in
downturn where the real estate is frozen and stock market is still sensitive and has high
risk, the gold market is one of the alternative channels for investors to concern. The
gold market in Vietnam has been young and complicated and the government has
attempted to stabilize and developed it by improving the policy system. Thus, thorough
understanding the gold market as well as factors affecting the gold prices is necessary
for not only investors but also the government.
According to Central institute for economic management (CIEM) (2011), from
2001, gold’s price increases continuously, especially, from April 2006, the price gold in
Vietnam increased dramatically (from 0.98 million to 1.5 million VND per unit).
Although its stability after that with 1.3 million, gold price all over the world and in
Vietnam increased sharply that broke the record in 1980. In 4 year from 2012 to 2015,
the price of gold still fluctuated. It sometimes went up to 47.4 million per tael in 2012.
Comparing December 2011 and December 2001, the gold’s price rose about 8.6 times.
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This period of time can be called “the century of gold”. After rising dramatically and
continuously in a long time, the price had the trend of reducing (from October 2011 to
July 2012). However, this trend could not remain any longer as from the end of August
2012, gold price started to rise sharply. The enormous rise in gold price causes an
unhealthy psychological effect on investor: when the price goes up, they try to buy as
much as they can, but when it falls, people tend to sell gold as quickly as possible. This
is one of the reasons for the expectation of increasing price level of gold, beside the
main factors brought by the fluctuations in the international gold prices.
Decree No. 24/ND-CP on gold market was issued officially and was valid from
25th, May, 2012. According to the decree, the State Bank is responsible for supplement
gold bars to the State foreign exchange reserve, importing and exporting gold,
establishing quotas, making purchase and sales of gold bars in domestic market and
mobilizing gold. In another word, the State Bank plays as a monopoly of bullion gold
in Vietnam. When the difference between the domestic gold price and the international
gold is large and the international gold price fluctuates sharply, the State Bank’s
interventions in the form of auctions has kept domestic prices and domestic gold
market more stable. Through the sale, SBV aims to raise the gold supply and to
stabilise the market and minimize the negative impacts on the macroeconomic
stability. This prevents from motivation of speculation and price manipulation of
speculators to make profit..
RESEARCH OBJECTIVES
This thesis studies the determinants the operation mechanism of gold market , legal
system, framework of the gold market in developed. How the market works and the
factor affecting the gold price so The results will support the development of Vietnam
gold market.
This research aimes at to access the impact of determinants affecting gold price in
Vietnamese market. The study attempts to answer the research questions as follows:
- How the gorvernment in countries over the world manage the gold market ?
- What are the existing situation and problems of Vietnam gold market and What
are the determinants of gold price Vietnamese market ?
-
What are the effective method to develop Vietnam gold market and for the
government to manage the gold market ?
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CHAPTER 1:
GOLD AND FACTORS AFFECTING THE
GOLD PRICE
1. GOLD AND ROLES OF GOLD
Gold has been found and has been used for a long time in the development of the human
society. Gold has certain characteristic such as dense, soft and ductile with a bright
yellow color that is considered attractive. Since long before the beginning of recorded
history, this metal has been highly-sought by merchants all over the world in order to
craft precious jewelries. Since then, gold has become a monetary and symbolic function
many ages ago. Until now, gold is the only metal in the world that satisfies all
requirements of a monetary symbols including distinguishable, sustainable, not so scarce
and its value has been stable.
 As an ordinary good: the total amount of gold that has been mined during 6000
years was 140 thousand tons. The total gold reserves in the European Central Bank
(ECB) – and the U.S Federal Reserve are 21 thousand tons. Gold is traded in various
forms such as gold jewelry, gold bullion or as raw materials for engineering, industrial
and decorative industries.
 As a currency: the monetary role of gold is the unavoidable evolution of the
economy. Gold meets all the requirements as a monetary symbol as its value can be
measured and can be used as a medium of exchange. The Bretton Wood system,
established in 1 July 1944, has change the global monetary system by accepting the U.S
dollar as a worldwide currency while breaking down the gold-based international
monetary system. Since then, the direct convertibility of currencies to gold has been
abandoned by world governments. However, the monetary function of gold did not
disappear completely. Gold has still been accepted as a means of payment in many
countries around the world for its simplicity and value. In addition, gold has still been
attractive from the perspective of the government, banks, investment funds and
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individuals...etc as store of value. Thus, many banks and many investment funds
consider gold as a n attractive investment channel when market is volatile. Individual
investors also prefer to reserve gold to hedge against inflation and to invest in a long
horizon.
Table 1.1: Gold reserves of countries and institutions 2002 – 2014
2002
Thousand
tonnes
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013 2014
31.44 31.95 31.44 30.83 30.47 29.96 29.98 30.50 30.84 31.20 31.68 31.87 31.99
Billion USD 362.91 427.65 440.26 508.58 619.09 803.19 838.37
1,066.5 1,393.5 1,535.9 1,688.4
1,710.3 1,734.1
6
4
9
2
Gold as % of
11.40 10.81
total reserves
10.07 11.35 11.42 11.70 11.92 12.1
9.21
9.34
9.39
9.55
9.13
Source: World Gold Council-WGC
1.1. HISTORY OF GOLD MARKET
Throughout the ages, it has become clear to economists that the only currency to retain
its value is that of precious metals: namely, gold and silver. While government-issued
paper currencies burst into use and then quickly lose their value, gold and silver
continue to be traded in every country and in every era. The Origins of the Gold Price
History:
700 BC to the 16th Century
Gold only entered the local economy at the beginning of the gold price history around
700 BC. This was when gold was made into coins for the first time. However, the
demand for gold currency could not keep up with the limited supply of gold bullion,
which soon led to the great gold rushes in America during the 15th century. These gold
rushes were a pivotal time in the gold price history, because by the 16th century, it had
increased Europe’s supply of gold by 500%. In this way gold’s place in the world
economy was established.
Gold coins and bullion faced a threat in the 16th century due to Europe's introduction
of paper money. While gold coins and bullion stayed as strong measures of value in the
European market for several hundred years, paper money eventually began to dominate
the economy in the 18th century. The struggle between paper money and gold would
eventually result in the introduction of a gold standard.
1717 - UK gold standard commences
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Britain moves onto a de facto pure gold standard, as the government links the currency
to gold at a fixed rate (establishing a mint price of 77 shillings, 10-and-a-half pennies
per ounce of gold).
The
gold
standard
leads
to
economic
bliss:
1797 - 1914
Real gold backs the economy
In 1797, the European economy began to encounter problems by using paper money as
the primary currency. There was too much worthless credit, and the market was flooded
with bits of paper with no meaning or value. It was clear that a gold standard needed to
be implemented to instill the necessary controls on money. An economy that is backed
by the gold standard is an economy that uses a monetary system in which paper money
can be easily exchanged for a fixed amount of gold. In other words, gold backs the
value of paper money.
By 1821, England had officially switched to the gold standard, becoming the first
country in the world to do so. Other nations soon followed, 1870- 1900, most players
in the international economy were converts to the gold standard. Governments began to
stockpile large amounts of gold to settle any trade disparity between nations during
difficult times, a practice that exists even today. The 19th century's dramatic increase in
global trade and production brought large discoveries of gold in the Americas,
Australia, and South Africa, and at this point in the gold price history, the gold standard
had gained its footing well into the next century.
It was the period between 1871 and 1914 in thegold price history that the gold standard
ruled the economy of the world. During this period of economic stability, near-ideal
political conditions prevailed between different governments as they worked together
to improve the economy for the betterment of everyone. However, this golden period
could not last and with the outbreak of the Great War in 1914, everything changed
forever.
Economic
Turmoil:
1914-1971
The fall of the gold standard
During the Great War, everything that the world economy had taken for granted for the
past few centuries was thrown into turmoil. Political alliances changed and
disappeared, international debt grew in unsustainable amounts, and local economies
suffered. The gold standard could not cope with the economic strain and confidence in
this monetary system’s ability to hold through both good and bad times disintegrated,
marking a low period in the gold price history. It was determined that the world needed
a more flexible monetary system on which to pin its expectations.
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1925 - Gold standard returns
The UK returns to the gold standard at pre-war parity of $4.86=£1 with sterling
convertible to gold at 77sh 10.5d per standard ounce. This follows the country's
departure from the gold standard six years previously at the outbreak of the First World
War.
The gold supply fell behind the economy’s recovery after the Great War, and at this
stage in the gold price history, gold was replaced as the global reserve currency and
standard by the British pound sterling and the U.S. dollar. Countries with less economic
heft began to stockpile these currencies instead of gold bullion, which resulted in the
world’s supply of gold being placed in the reserves of just a few large nations. By
1931, the gold standard was suspended in England, leaving only the United States and
France with large gold reserves.
1933 - Roosevelt suspends gold
President Roosevelt suspends US dollar convertibility to gold (gold at US$20.67/oz).
The export of all transactions in, and the holding of gold by private individuals, is
forbidden. Presidential proclamation makes the dollar convertible again in January
1934 at a new price of $35 per troy ounce.
In 1934, to better its struggling economy, the U.S. government decided to reprice gold
by increasing the amount of paper money it took to buy one ounce from $20.67/oz to
$35.00/oz. The Gold Reserve Act of 1934 gave the government the power to peg the
value
of
the
dollar
to
gold
and
adjust
it
as
it
pleased
This was a major event in gold price history. Since other nations could suddenly get
more U.S. dollars for their remaining gold holdings, they instantly sold the bullion over
to the U.S. government, effectively allowing the U.S. to corner the gold market.
Devaluing the currency prompted an influx of gold from other nations because the
purchasing power of the U.S. dollar was still relatively high. Unfortunately, the
problem with sweeping economic policy changes is that the short-term thinking often
leads to long-term problems. Normally the nationalization of a commodity would have
been a huge controversy, but the Gold Reserve Act was seen as a necessary step to
ending the Great Depression. Its shock value was also moderated by the fact that an
executive order had already made the private ownership or trading of gold a criminal
offense.
In 1939 Second World War closes gold market,The London gold market is closed on
the outbreak of war, as at the beginning of the Second World War. The world will later
return to a fixed system of exchange rates, this time with currencies fixed to the dollar
and the dollar convertible into gold..During the aftermath of World War II, the
enormous amount of gold the U.S. had managed to stockpile over the early part of the
13
century began to dwindle as money tied up in international aid efforts depleted their
reserves.
The Bretton Woods System
In 1944,A landmark system for monetary and exchange rate management established.
The Bretton Woods Agreement was developed at the United Nations Monetary and
Financial Conference held in Bretton Woods, New Hampshire, from July 1 to July 22,
1944. Major outcomes of the Bretton Woods conference included the formation of the
International Monetary Fund and the International Bank for Reconstruction and
Development and, most importantly, the proposed introduction of an adjustable pegged
foreign exchange rate system. Currencies were pegged to gold and the IMF was given
the authority to intervene when an imbalance of payments arose. Because the United
Statesat the time accounted for over half of the world's manufacturing capacity and
held most of the world's gold, the leaders decided to tieworld currencies to the dollar,
which, in turn, they agreed should be convertible into gold at $35 per ounce.
Under the Bretton Woods system, centralbanks of countries other than the United
States were given the task of maintaining fixedexchange rates between their currencies
and the dollar. They did this by intervening inforeign exchange markets. If a country's
currency was too high relative to the dollar, itscentral bank would sell its currency in
exchange for dollars, driving down the value of its currency. Conversely, if the value of
a country's money was too low, the country would buy its own currency, thereby
driving up the price
By the late 1960s, inflation and an overextended economy reduced the gold standard to
a pauper in comparison to its previous glorious gold price history. Inflation in the United
States and a growing American trade deficit were undermining the value of the dollar.
Americans urged Germany and Japan, both of which hadfavorable payments balances, to
appreciate their currencies. But those nations were reluctant to take that step, since
raising the value of their currencies would increases prices for their goods and hurt
their exports. Finally, the United Statesabandoned the fixed value of the dollar and
allowed it to "float" -- that is, to fluctuate against other currencies. The dollar promptly
fell. Finally and inevitably in 1968, the U.S government’s feeble attempt to boost its
economy during 1934 backfired on them. A gold pool that had previously dominated
the gold supply amongst the U.S. and a majority of European nations ceased to trade on
the London market. World leaders sought to revive the Bretton Woods system with the
so-called Smithsonian Agreement in 1971, but the effort failed. By 1973, the United
States and other nations agreed to allow exchange rates to float. The result of this move
was the endgame of capitalism: the freedom of the market to determine the price of
14
gold. Gold price history was made. During the period of 1968 to 1971, only a few
select banks could afford to trade with the U.S.’s premium gold price of $35/oz.
Economists call the resulting system a "managed float regime," meaning that even
thoughexchange rates for most currencies float, central banks still intervene to prevent
sharp changes. As in 1971, countries with large trade surpluses often sell their own
currencies in an effort to prevent them from appreciating (and thereby hurting exports).
By the same token, countries with large deficits often buy their own currencies in order
to prevent depreciation , which raises domestic prices. But there are limits to what can be
accomplished through intervention, especially for countries with large trade deficits.
Eventually, a country that intervenes to support its currency may deplete its
international reserves, making it unable to continue buttressing the currency and
potentially leaving it unable to meet its international obligations. Soon, the death knell
tolled for gold convertibility and even the central banks had no further use for the huge
stocks of gold they had amassed.
The Bull Market of the 1970s
Fortune’s favourite
By this time in the gold price history, the gold rate was at US$35. Fast-forward ten
years; the price had jumped 2, 485% to US$870 per ounce. According to the rules of a
free market, the price of gold is subject to the principle of supply and demand, but more
realistically, it is also privy to other external factors such as central banks with huge
buying and selling power, economic forces on a national and international scale,
conflicts and crises, jewellery demand, and the whims of the industry and investors.
Gold share prices began to rise in the 1970s, creating a bull market for investors
because the precious metal could be freely traded both nationally and internationally
and it was seen as the safest form of investment during the economic turmoil that most
Western nations were facing during this decade in the gold price history. A stagnant
market with low growth, high inflation, and a high unemployment rate plagued the
economy. With national debt on the rise, gold and other material assets were seen to be
the only way wealth could be retained.
Falling Prices in a Bear Market:
1980-2001
Buyer beware
If the prime buyers market in the gold price history of the 1970s can be explained by
the end of the gold standard, new rules of trade, and economic decline, then the ensuing
bear market of the next twenty years can be explained by the eventual end of the
economic stagflation in the creation of President Bill Clinton’s so-called ‘New
Economy.’ This period was marked by an extraordinarily stable economy, low inflation
rates, and a rejuvenation of the employment figures. The market transitioned from an
15
industry that revolved around manufacture to one that emphasised new technology and
service-based industries.
In this period of the gold price history, gold investors that could have benefited from a
profit margin of 2500% due to the gold price jump during the seventies would have
experienced a decrease of 60% if they had bought gold in January 1980 for a rate of
US$677 and then attempted to sell ten years later when the gold price rested at only
US$283 an ounce in December, 2000. Sadly, it was a bear market for gold investors.
The Current Bull Market:
2001-present
An Investor’s Dream
We are now climbing toward a peak in the gold price history where the market is
seeing the gold rate rise from US$265 per ounce at the beginning of the 21st century to
more than US$1400 ten years later. Contrasting dramatically with the bear market of
the previous twenty years, this current bull market is indicative of a new age of prime
gold investment in the gold price history.
This new rise in the gold rate can be attributed to several factors that have several
things in common with the previous bull market during the seventies.
Firstly, it can be linked to a reduction in the gold supply. There has been a 10% drop in
global gold production within the last decade, and this has been matched with an
increase in jewellery demand due to China and India’s newly found economic clout.
Secondly, the central banks that were so eager to unload their gold reserved during the
last century have renewed their interest in large amounts of gold bullion. And lastly, the
U.S. economy is slipping back into a state of decline with increasing national debt and
an ever-weakening US dollar. The United States is still recovering from the Wall Street
crash of 2008, during which the demand for physical investments rose again.
The rises and falls in the gold price historyhave surely shaped the world’s economy
since the very early days of civilisation. As the figures show, this current market is an
exciting time for the gold price history and is an ideal time to invest in gold as
insurance for your future.
16
1.2. WORLD GOLD MARKET STRUCTURE
Market Regulation
The global gold markets are overseen and regulated by both governmental and selfregulating organisations aimed at establishing rules designed to prevent market
manipulation, abusive trade practices and fraud.In addition certain trade associations
have established rules and protocols for market practices and participants. In the United
Kingdom, responsibility for regulation of all market participants falls under the
Financial Services Authority (FSA), as designated by the Financial Services and
Markets Act 2000 (FSM Act).
In the United States, the OTC market for gold is overseen by the Commodity Futures
Trading Commission (CFTC), an independent agency created by Congress with the
mandate to regulate commodity futures and option markets. The CFTC also requires
that any trader holding an open position of more than 20,000 ounces in any one
contract month on the COMEX declare his or her identity, nature of their business and
the details of his or her positions.
The Japanese equivalent is the Ministry of Economy, Trade and Industry – the
regulatory authority that oversees TOCOM operations.
Trade in gold around the globe consists of over-the-counter (OTC) transactions, bids on
shares in exchange-traded funds (ETFs), and purchases of gold futures and options. The
main centres for OTC transactions are London, New York and Zurich – with most
trades clearing through London. Without a formal structure or open-outcry meeting
place, the London Bullion Market Association (LBMA) acts as the principal point of
contact for OTC transactions. The gold market is dominated by large institutional
players and high-net-worth individuals who conduct business with bullion banks via
telephone or computer dealing systems. In contrast gold futures and options contracts
are traded on regulated commodity exchanges around the world.
The most significant gold futures exchanges are the COMEX – now part of the
NYMEX’s metals division and part of CME Group, and the Tokyo Commodity
Exchange (TOCOM), which has been trading gold futures since 1982. Like the
COMEX and TOCOM, many futures exchanges operate through a central clearing
system, allowing the exchange to act as the counterparty in the trade. Trading futures
and options contracts on exchanges is also based on fixed delivery dates and transaction
sizes. Although trading costs are generally higher than OTC transactions, they are
negotiable. As a matter of practice, only a small percentage of futures market turnover
ever comes to physical delivery of the gold represented by the contracts traded.
17
Physical Exchanges
This is list of exchanges by country:
1.3.
London: LBMA
Turkey: Istanbul Gold Exchange
UAE: Dubai Multi Commodities Centre
Commodity Futures Exchanges
USA: CME Group
Japan: Tokyo Commodity Exchange
China: Shanghai Gold Exchange; The Chinese Gold & Silver Exchange Society
Dubai: Dubai Gold & Commodities Exchange
India: Multi Commodity Exchange of India; National Commodity and
Derivatives Exchange
Brazil: BM&F Bovespa
Taiwan: Taiwan Futures Exchange
Indonesia: Jakarta Futures Exchange
Turkey: Turkish Derivatives Exchange
Russia: RTS Exchange
The main forms of business in the gold market
 Physical gold trading
Physical gold investors buy and hold physical gold in the form of gold coin, bar and
bullion to preserve the value or sell when price volatility is beneficial. Advantages
of trading physical gold is investors can secure holding of physical gold and limit
risk against large fluctuations in prices. However, physical gold trading involves
significant costs related to delivery and inventory. At the same time, the lack of
leverage also limits the size of the trading volume and number of pảticipants on the
market.
 Paper gold trading
Investors open accounts at banks or institutions and authorize them to conduct gold
trading on the account. Paper gold trading does not come with the actual delivery of
gold and is merely speculation or arbitrage investment instrument which is
derivative financial operations from physical gold. Paper gold trading has many
18
advantages compared to physical gold trading due to its convenience, speed,
liquidity, connection to global market, etc. and especially its leverage so it does not
require much funds. However, there are also potential risks in trading paper gold,
and it can be developed only when there is a strict legal system as well as a stable,
reliable and modern trading platform. The form of gold trading account specifically
include spot contracts, spot deferred contract, futures contracts, option contracts and
swap contracts.
 Buying gold investment fund certificates.
Gold Investment Fund (Gold exchange-traded fund-GETF) is raising capital funds
of investors to trade physical gold. The investment fund certificates issued to raise
capital funds and fund certificates listed on major stock exchanges around the world
as a kind of stock.
The advantage of this form of business is investors can participate in the physical
gold market in an indirect way, to take advantage of the experience of the fund
managers as well as reduce the cost of delivery and preservation of physical gold.
At the same time, the liquidity of the certificate was listed on the stock exchanges is
high. However, investors are unlikely to obtain a certain percentage of profits as
savings or lending gold.
2. FACTORS AFFECTING THE GOLD PRICE
The gold market is one of the most exciting markets in the world, reflected in high
liquidity. Therefore, changes in world gold markets will deeply affect other markets,
the organization reserves, gold trading, hoarding individuals, retail buying gold, and
of course, market gold in each country. In addition to supply and demand factors,
the factors affecting the gold price includes:
2.1. THE SUPPLY AND DEMAND
The gold supply and demand is a key factor determining the price of gold. In many
years, the world gold price has increased or decreased as a result of changes in supply
or demand (World gold council, 2007). Therefore, to understand the price movements
in gold, the supply and demand of gold need to be clarified
Supply
19
Gold is a rare metal. The major gold entering the market comes from three sources:
mining, recycling and official sector sales. In term of mining source, The Forbes Global
Top 2000 (2011) includes 12 gold companies. The biggest is the US Newmont Mining;
six are from Canada, two from South Africa, and one from Australia, Peru and Russia.
Mining was able to supply 2821.7 tons of gold in 2011 (Figure 1). The increase in gold
coming from mines only started from 2008, which is two to three years after the start of
the boom in the gold price. The reason for this slow reaction is the required time to
open a new mine for gold digging
Since the financial crisis, governments and central banks (official sector) stopped
liquidating their gold reserves and even started to increase their gold reserves. Central
banks try to diversify their assets as much as possible and try to reduce their assets in
Euros or Dollars, because they fear a fierce depreciation in the future
Top 20 gold mining countries
Rank
Production (t)
2014
2013
2013
20104
1
1
China
438.2
461.8
2
2
Australia
268.1
272.9
3
3
Russia
248.8
262.2
4
4
United States
229.5
205
5
5
Peru
187.7
172.6
6
6
South Africa
177
163.8
7
7
Canada
133.3
153.8
8
8
Mexico
119.8
118.2
9
9
Indonesia
109.6
116.4
10
10
Ghana
107.4
108.2
11
11
Brazil
80.1
80.7
12
12
Uzbekistan
77.4
80.4
13
14
Argentina
50.1
59.8
14
13
PNG
60.5
58.2
15
18
Kazakhstan
42.6
49.2
16
16
Mali
48.2
47.4
17
17
Tanzania
46.6
45.8
18
15
Chile
48.6
44.2
19
19
Colombia
41.2
43.1
20
20
Philippines
40.5
42.6
Rest of World
506.4
546.9
World total
3061.5
3133.1
According to USGS there is still 50000 tons of gold beneath the earth that can be
excavated in an economical viable way. This amount will lead to the change of gold
prices, production costs and techniques. If the price of gold stays the same and mankind
keeps on excavating at a paste of 2500 tons per year, gold will be depleted in less than
20 years. However, the lack of gold mining will lead to the increase of gold price in the
20
future
Demand
Reserve demand for gold of Central Bank
Central banks, international entities (e.g. International Monetary Fund) and
governments are the single largest holder of gold in the world. These institutions
controlled end of 2009 16.2 per cent (26,780 tons) of the worldwide available gold
(World Gold Council).This corresponds to a market value of 7,950 billion US dollar,
based on a gold value of 1427 dollar per ounce
According to World Gold Council (2009), in the last years, several central banks,
notably from Russia, India and China, have announced plans to increase their gold
reserves. As a consequence, in 2009 central banks have become for the first time in 20
years net buyers of gold. In this year, net buying resulted in 470 tons of gold. The
invigorated interest in gold can be traced back to the financial crisis, as this precious
metal can be used as a hedge
Investment demand for gold:
The role of gold amongst times of financial or political turmoil is significant. Investors
tend to buy gold when there is financial or political instability, since the commodity is
seen by investors as a safe heaven, with a low credit risk which at time of tumrmoil is
very liquid.
According to Ghosh (2004) supported with Mani and Vuyyuri (2005) and Tully and
Lucey (2005) Gold can be considered a tool for the reduction of risk, for their empirical
analyses suggest that gold has a negative beta. As institutional investors have to
diversify their portfolio to reduce risk, holding of gold are attractive, as it tends to show
a negative beta when compared to the market portfolio. Better diversification can be
obtained by a more negative beta, which increase gold demand and thus the price of
gold.
Industry demand for gold:
Ghosh (2004) state that the industrial gold demand is negatively related to the price of
gold, as it also becomes less attractive to purchase gold. Unfortunately, the literature
and available data about industrial demand is not very extensive which constrains the
possibility to research relations between movements in the demand of gold and
movements in the price of gold.
In the electronic industry, gold is used for wiring and as electrical connectors. The
advantages of this material are highly conductivity, resistant to corrosion and lack of
toxicity. Other uses are in the commercial chemistry.
In dentistry, gold alloys are used in tooth restorations. In medicine, gold can be applied
as a conductive coating. As gold reflects infrared light 98%, this metal is used as a
21
coating on glasses and mirrors. Besides the increasing number of appliances for
industrial gold, demand also expands due to the strong economic performance of
emerging countries. Moreover, gold is, or will be used for the following purposes:
gold- based therapeutics, diagnostic technologies based on gold, as catalysts in
industrial processes, for water purification and advanced consumer electronics
Jewelry demand for gold
Gold has been used for jewelry for 6,000 years. The reasons are its rarity, ease of
mechanical processing, resistance to corrosion and its exceptional color. In 2011, the
demand of gold for jewelry is 1963 tons (World Gold Council, 2009)
Another decorative use of gold is as gold foil, also called gold leaf. Gold foil has been
used since the ancient world. Gold foil is thinner than the wave length of the visible
light and can be applied to non-metallic surfaces, such as frames, books, furniture and
architectural elements. Besides producing gold jewelry, this precious metal can be also
applied as a galvanized coating to plastic and metal
2.2. MACROECONOMIC SITUATION
Gold is considered a safe haven asset against inflation. During the time the economy
fell into hyperinflation, holding paper currency means losing money. Meanwhile,
everyone is trying to protect the properties by buying the assets of high liquidity, value
and can be used to set a price for other asset. In this case, gold is the most appropriate
asset by the increases of gold production difficulties, the value of gold does not rely on
the health of any government. Thus, organizations and individuals will tend to move
from storing paper money to storing gold, and gold price tends to rise.
Investors tend to hold gold in their portfolios as an insurance against inflation. When
inflation is high, the value of paper currency falls in terms of the goods and services it
can buy. Investors want something that doesn’t lose its value.So gold usually has a
direct relationship with inflation. Demand for gold increases as inflation increases and
vice versa.
22
The two common measures of inflation in the United States are the CPI (Consumer
Price Index) released by the U.S. Bureau of Labor Statistics and PCE (personal
consumption expenditures) issued by the U.S. Bureau of Economic Analysis. The
major differences between the two measures is in the composition of the basket of
goods and weights. CPI usually runs half a percentage point higher than PCE inflation,
and the Fed states its objective in terms of PCE.
Low inflation trends in the economy usually lead to strong purchasing power for the
general public. With inflation remaining low, gold isn’t very attractive. On the other
hand, PCE inflation below the Fed’s target rate of 2% will deter the Fed from hiking
interest rates. This should be positive for gold..Slowing inflation is negative for gold
stocks. Slowing inflation is negative for gold stocks. But as long as it keeps the Fed
from hiking interest rates, it should be positive for gold prices. Gold prices, in turn,
affect companies such as Goldcorp Inc. (GG), Barrick Gold Corp. (ABX), Agnico
Eagle Mines Ltd. (AEM), and Kinross Gold Corporation (KGC). Gold prices also
affect gold-backed ETFs such as the SPDR Gold Shares (GLD) and the Gold Miners
Index (GDX)
Gold is used as an investment alternative. Investors think that it protects money’s
purchasing power. As an investment, gold has to compete against other investments
that are available in the market such as equities, bonds, real estate, and currencies. The
interest rate is one of the most important variables that determine the attractiveness of
the other investment alternatives.
Increasing US real interest rates
The three-month real interest rates are negative since inflation is higher than the
nominal interest rates for three-month T-bills. However, they’ve started to increase
because of falling inflation in the United States. The CPI for November was 1.3%,
23
much lower than 1.7% for the previous three months. The real interest rate was -1.29%
for November compared to -1.69% for October.
The US dollar and gold
Gold mainly trades in US dollars (or USD). As a result, a weaker USD makes gold
cheaper for other nations to purchase. It increases their demand for gold.
Also, when the dollar starts to lose value, investors look for an investment to store
value. Gold is a good alternative. Gold will go up and down depending on the strength
of the USD and the US economy.
2.3. THE STABILITY OF THE CURRENCY, ESPECIALLY THE US DOLLAR
Effect of dollars to the price of gold is considered to be directly affected and the most
clear. The reason is because the dollar is the currency for the pricing of gold products.
A weaker dollar is the fundamental factor supporting gold prices rise and vice versa. In
fact, after the Fed announced QE1 and QE2 package, due to concerns about the weak
dollar by printing too much money, gold prices peaked 1920.3 U.S. dollars / ounce not
long after that (6/9 / 2011). QE is due to be halted at the end of October 2014,
coinciding with the next meeting of the Federal Open Market Committee which is
scheduled for 28/29 October 2014. Monetary policy plays a big role in gold’s fortunes
and so the strategies put in place by the central banks around the world need to be
watched very carefully. In the absence of a major event we would anticipate that the
Fed will go ahead and end QE and will also talk in hushed words about the timing of an
interest rate increase. The end of QE and the talk of an interest rate rise will be
supportive of the US dollar and inversely will put downward pressure on gold prices.
This is just one factor that deserves consideration when trying to assess gold’s future
movements. There are also a lot of other factors that go into this melting pot such as the
slowing of the economies in Europe and what action Mario Draghi may take, the effect
of the trade sanctions with Russia, the unrest in the Ukraine, the growing strength of
ISIS, supply and demand, governmental restrictions on gold imports, etc.
2.4. OTHER FACTORS
The interest rate on the money market: lower interest rates affect the income received,
not to mention the period of inflation, real interest rates fell, even negative. As such,
investors will look for safe investment instruments such as gold to protect capital.
24
Growth of the stock market, real estate market and the labor market: When the market
is quiet as a sign of economic instability, investing in gold as an alternative safe and
effective in that case.
According to the literature review, the other variables such as unemployment rate and
national debt are the explanatory variables of gold price. However, these variables’ data
are generated annually, while this study tends to study base on monthly samples. Thus,
these factors are eliminated to achieve the consistent of other variable samples.
On the whole, this chapter has thoroughly reviewed literature that is relevant to the
gold which is views as financial asset as well as factors driving the gold market. The
conceptual framework identified determinants affecting gold price with three main
approaches which are macroeconomic approach, speculation approach and inflation
hedge approach. There are gaps in the literature for further research to be carried out on
how to model the price of gold in such a young and complex gold market like Vietnam
in recent years. This has given a solid platform that will support our research on what
determinants of gold price international and in Vietnam and recommendation to
stabilize Vietnamese gold market and it can be contributed to the management and
development of the gold market.
25
CHAPTER 2: STATE MANAGEMENT MODEL OF THE GOLD
MARKET
1. ROLE OF CENTRAL BANK IN GOLD MARKET
Meltzer (2003) indicated that central banks have generally had three main
objectives and roles:1)to maintain price stability, subject to the monetary regime in
current operation, for example the gold standard, a pegged exchange rate or
inflation target. 2)to maintain financial stability, and to foster financial development
more broadly. 3)to support the state’s financing needs at times of crisis, but in
normal times to constrain misuse of the state’s financial powers.
Central Banks has played an important role and had a huge impact to the
change of the gold price
In 1944, the establishment of the IMF (International Monetary Fund) puts gold at
the center of the new international monetary system. The first international
agreement on gold came with the signing of the IMF’s articles of agreement in July
1944 (Central Bank gold agreements of World Gold Council, 2012). These laid
down that all member countries should establish “par values” for their currencies in
terms of gold, or in terms of the US dollar which was its defined in terms of gold.
In the next decade, early 1960s – Central Banks tried to stabilize the price of gold by
issue many agreements. This agreement known as “The Gold Pool” - was established
to hold the price of gold close to the then official price of $35 an ounce (World Gold
Council, 2012).
However, in 1968, the Central Banks abolished The Gold Pool, agreeing that they
would no longer supply gold to the market but transact only among themselves at the
official price. "Washington Agreement" through which the members sold a limited
amount of gold that they would sell no more than 400 tons of gold per year, for the next
five years (Central Bank gold agreements of World Gold Council, 2012). The sales
held to these ceilings and had limited effect on the gold market, which allowed the
Gold Price to rise. It is also known as the first Central Bank Gold Agreement.
26
On March 8th 2004, the signatory banks announced the second Central Bank Gold
Agreement that covered a five-year period, in this case from September 27th 2004
(immediately after the expiry of the first Agreement) to September 26th 2009. The second
Agreement started by reaffirming the first clause in the 1999 Agreement: “Gold will
remain an important element of global monetary reserves” (Central Bank gold agreements
of World Gold Council, 2012). While the rest of the Agreement covered similar ground to
the first, there were some important differences. Subsequently, it became clear that the
signatories had sold significantly less than the ceiling they had set themselves.
In 2009, the Central Banks worldwide announced the third Agreement that covers a
five-year period, in this case from 27 September 2009 (immediately after the second
Agreement expired) to 26 September 2014. This Agreement also included two
important departures from the prior Agreements: First, the collective ceiling was
reduced so that "annual sales will not exceed 400 tons and total sales over this period
will not exceed 2,000 tons", 500 tons lower than the 2,500 tons five-year ceiling
provided for in the second Agreement. However, the new lower ceiling did not come as
a surprise to market participants and had no impact on the gold price. The second
significant difference in the Agreement recognized the fact that the IMF intended to sell
403 tons of gold, and stated that these sales "can be accommodated within the above
ceiling". In the event that the IMF is unable to arrange an off-market sale with another
official sector institution, the sales will be conducted through the third Agreement
(World Gold Council, 2007).
Besides the use of management policies, Central Banks also set up centralized
market management model to ensure that the gold market is operating in a
transparent manner. In fact, the market organization model in many countries show
that the gold market is an integral part of the focus markets for goods, gold traded on
commodity exchanges under the of State agency's management. State participates in
regulating the exchanges by directly participation or appointing the leader
organizational structure of the floor, setting the conditions for capital and expertise to
members on the floor and surveillance activities through periodic written reports.There
are many gold exchange over the word but these are
27
2. SOME REPUTABLE GOLD EXCHANGES IN THE WORLD
Commodity Exchange Inc. (COMEX):
Commodity Exchange Inc. (COMEX) was founded in New York in 1933. It became
the leading gold futures and options exchange after its gold futures contract was
launched on 31 December 1974 – the date after which Americans were again permitted
to hold gold after more than 40 years. The COMEX is a futures market. In other words,
gold investors and speculators purchase contracts through the COMEX, which obligate
them either to buy or to sell gold for future delivery.
Speculators and investors who purchase what are known as Call Contracts expect the
price of gold to go higher before the contract they purchased expires at a predetermined date in the future. Those who purchase a Put Contract make money if the
price of gold declines before the expiration monthOptions on gold futures were then
launched in 1982. COMEX also trades silver Its precious metals volume exceeds that
of all other futures exchanges put together and it attracts world-wide participation, with
many traders in Europe, the Middle East and East Asia remaining in their offices until
COMEX closes. This gives COMEX unique liquidity, which in turn is much of the
reason for its success. Trading hours reflect this and the exchange has opened
progressively earlier to suit overseas clients.Trading hours futures and options: 8.20 am
to 2.30 pm New York time.After hours futures trading is also available on the NYMEX
ACCESS SM electronic trading system, beginning at 4.00 pm on Monday to Thursday
and concluding at 7.00 am the following day. On Sundays the electronic session begins
at 7.00 pm. All times are New York time.
In 1994, COMEX merged with the New York Mercantile Exchange (NYMEX) and is
officially the COMEX division of NYMEX, but it is always referred to as COMEX. the
COMEX is known principally for its gold futures trading. It is technically a division of
the New York Mercantile Exchange. Investors, gold producers and gold speculators all
combine to make the COMEX one of the world’s premier gold trading platforms.On
March 17, 2008, Chicago based CME Group signed a definitive agreement to acquire
NYMEX Holdings, Inc. for $11.2 billion in cash and stock and the takeover was
completed in August 2008. Both NYMEX and COMEX now operate as designated
contract markets (DCM) of the CME Group.[1] The other two designated contract
28
markets in the CME Group are the Chicago Mercantile Exchange and the Chicago
Board of Trade.
-
-
The COMEX gold futures contract was launched on 31 December 1974.
The COMEX gold futures contract is based on 100 ounces of gold.
Prices are quoted in multiples of ten cents per ounce, or $10 per contract.
COMEX futures are listed on the current calendar month and the next two months
and every February, April, June, August, October and December in a 23 month
period.
The June and December contracts are listed out to 60 months to provide expanded
trading opportunities for hedgers and speculators.
Last day of trading for a gold futures contract is the third last business day of
the delivery month.
Delivery is made in registered depository receipts issued by exchange-approved
depositories in New York.
Deliverable gold must be cast in one 100-ounce or three one kilobars by an
exchange-approved refiner and assayed at no less than 995 fineness.
Turnover on the exchange is usually eight to nine million contracts annually, but in
1999 rose to 9.58 million.
Open Interest is published daily. It indicates the number of contracts which have not
been fulfilled, either by making or taking delivery or by liquidation. The level of
open interest is an important signpost to both liquidity and the activity in a given
trading month
29
 Tokyo Commodity Exchange (The Tokyo Commodity Exchange – TOCOM):
Tokyo Commodity Exchange (The Tokyo Commodity Exchange - TOCOM) was
established in 1984 as a combination of textile floor Tokyo, Tokyo Rubber
Exchange and the Tokyo Gold Exchange. TOCOM was also the pioneer in
exchange activities. By 1999 TOCOM has created a futures market developing for
many commodities, including gold. Gold is traded on TOCOM is 99.99% pure gold
bullion, unit prices is starting price of 1 gram gold, with the step value is 1 yen.
Trading volume unit for spot gold contracts and option contracts is 1kg of gold, gold
futures contract is 100g.
30
 SingaporeCommodity Exchange
The Singapore Commodity Exchange - SICOM was established in 1992, under the
management of the National Monetary Authority of Singapore (The Monetary
Authority of Singapore - MAS), providing contract gold futures, which traded
between central London gold market with gold market of the Far East countries,
especially Indonesia. Gold is traded on 100% pure gold bullion, the price listed on
the London gold market, according to official T +2.
31
Hong Kong Gold Market
Hong Kong gold market is with more than 90 years of history, and the most important
is Chinese Gold and Silver Exchange Society (CGSE) which was opened in 1910 as the
Gold and Silver Exchange Company and changed its name in 1918. Hong Kong Gold
Market mainly consists of three parts: the Hong Kong Gold and Silver Exchange which
developed on the basis of the traditional gold market, the local London gold market is
established by the London and Zurich branches gold dealers, as well as the Hong Kong
Mercantile Exchange gold futures market.
The CGSE plays an important role in Hong Kong's gold market. In the time difference,
Hong Kong Gold Market fills empty time of the New York, Chicago and London
markets. It can be coherent in Asia, Europe, and the United States, so as to form a
complete world gold market, which promotes Hong Kong to become one of main world
gold market. Hong Kong gold market is the only one area to have physical gold trading,
the invisible market and the futures market.
The global gold market is a cross continents trading network with 24 hours of
continuous operation. In addition to the above four international gold markets, Tokyo,
Sydney, Dubai, Singapore, Mumbai, Rio de Janeiro, Shanghai are world famous gold
markets
32
3. MANAGEMENT OF THE GOLD MARKET IN THE COUNTRIES OVER
THE WORLD
Asian Financial Crisis of 1997 -1998 and then the global financial crisis in 2007 has
made gold become the concern of both the government and the private sector. Gold
demand in the private sector rose sharply, particularly in countries gradually loosens
the individual ownership of gold as China, India. In second quarter of 2010, investors
bought more than 274 tons of gold through the ETF. Gold holding in these funds
currently exceed 2,000 tons, 6th largest in the world after IMF, FED, Germany, France,
Italy.
Given the strong growth of the international gold market in recent years, the role of the
State in the management, regulatory stabilization of market has been enhanced. The
fact that many governments have taken measures to manage the gold market for a long
time, therefore the recent volatility of the gold does not cause too big effect on the
stability of the financial system as well as macro economy of these countries. The
following is the specific experiences of the policy as well as the construction of
government management model on gold market successfully in three countries: the
U.S, Thailand and China.
3.1. The United States of America (U.S)
In the past, gold was permitted private ownership in the U.S. During the economic
crisis in 1933, the U.S. government issued gold funds supplemented in orders to keep
their privileges before the recession and the volatility of the markets, and strengthen the
Federal Reserve. The private ownership of gold and trading was prohibited until
August 1974 under the provisions of The Emergency Banking Relief Act.
In the United States, the OTC market for gold is overseen by the Commodity Futures
Trading Commission (CFTC), an independent agency created by Congress with the
mandate to regulate commodity futures and option markets. The CFTC also requires
that any trader holding an open position of more than 20,000 ounces in any one
contract month on the COMEX declare his or her identity, nature of their business and
the details of his or her positions.
33
In US , the IRS( Internal Revenue Service) considers gold a "collectible" and will tax
people capital gains at a 28% rate. This designation includes all forms of gold (other
than jewelry), such as:
-
-
All denominations of Gold Bullion coins and numismatic/rare coins;
Precious metal bars, whether ounce, kilo or larger – whether held at home or via
secure custody services such as GoldMoney and BullionVault – and also gold
wafers;
ETFs like GLD, PHAU and so on (closed-end funds have different rules; see
below);
Any "paper gold" or Gold Certificates, such as Perth Mint Certificates and
EverBank accounts;
All forms of pool gold, rounds, and commemorative coins;
Precious metals dealers aren't required to report certain small sales to the IRS – but that
doesn't relieve you of the obligation. If people sold one gold or silver coin to local
dealer, they are not obligated under current regulation to report the sale. But selling at a
profit
requires
them
to
report
it
and
pay
28%
tax
on
gain.
Patriot Act obligates a dealer to report any "suspicious customer activity".
Gold Mining stocks, on the other hand, are not designated as a collectible and are
therefore subject to the standard capital gains tax rates like all other stocks.
Gold jewelry sales are not reportable. This makes the Heirloom Collection an attractive
consideration and an excellent diversification maneuver (for both financial and
romantic,reasons!).
In 2011 the Utah legislature passed a bill to accept federally issued gold and silver
coins as legal tender to pay taxes. As Federally issued currency, the coins were already
legal tender for taxes, although the market price of their metal content currently
exceeds their monetary value. Similar legislation is under consideration in other US
states. The bill was initiated by newly elected Republican Party legislators associated
with the Tea Party movement and was driven by anxiety over the policies of President
Barack Obama.In 2013, the Arizona Legislature passed SB 1439, which would have
made gold and silver coin a legal tender in payment of debt, but the bill was vetoed by
the Governor.
34
Currently, individuals can purchase, bullion trading, however, must be approved by the
bank or the stock market through ETFs and futures markets (futures contracts, option).
The trading market must publicly follow the same rules as the stock market and under
the supervision of the Securities Exchange Commission (The Securities and Exchange
Commission). The individual transactions are based on the tax regulations of the U.S.
Federal IRS (The Internal Revenue Service). There are many tax provisions affecting
the gold business. For example, any cash transactions over $ 10,000 are required to
report to the U.S. federal tax provisions of the 8300 form. In addition, the sale of gold
and earned interest is considered a taxable income; the tax rate can be up to 28% of the
profits of such transactions.
ETF: The New Way to Purchase Gold
Gold ETF is a way to invest in gold, if you would like to understand what gold ETF is,
first of all, you should know what the ETF is. ETF is the abbreviated of exchange
traded fund, that is an investment fund traded on stock exchanges, much like stock. The
advantages of ETF are low costs, tax efficiency, stock-like features, and etc.
NYMEX (COMEX) and other markets tend to utilize the Exchange Traded Funds
(ETF) system when trading gold. In such a system, the investor purchases shares of
gold through a stockbroker and freely exchanges them on the market. ETF buyers do
not see the actual product but are credited with having gold in their investment
portfolios. While there are many benefits to exchanging gold in this manner, the central
positive aspect is accessibility. Contrary to traditional methods of exchanging precious
metals, ETF buyers do not have to store or insure gold upon purchase. Such benefit
essentially saves the investor money and allows him or her to spend funds on more
profitable meansNYMEX (COMEX) and other markets tend to utilize the Exchange
Traded Funds (ETF) system when trading gold. In such a system, the investor
purchases shares of gold through a stockbroker and freely exchanges them on the
market. ETF buyers do not see the actual product but are credited with having gold in
their investment portfolios. While there are many benefits to exchanging gold in this
manner, the central positive aspect is accessibility. Contrary to traditional methods of
exchanging precious metals, ETF buyers do not have to store or insure gold upon
purchase. Such benefit essentially saves the investor money and allows him or her to
spend funds on more profitable means.Gold ETF is an Exchange transaction open-end
securities investment fund products, the transaction procedures similar to the stock.
Different from stock ETF, gold ETF is a financial derivatives based on gold to track
closely fluctuations of gold spot price. However, the trading of gold ETF is different
than the familiar physical gold trading, which is trading gold based on the ETF. In fact,
you do not get any gold. Even if you redeem gold ETF, you will receive the cash
35
equivalent, rather than gold in any form. Gold ETF is more and more popular among
investors because of its simple and convenient operation and good market liquidity.
Because of the high price of gold, gold ETF usually uses 1/10 oz as a unit of fund. The
net asset of each Units Price is equal to 1/10 ounce Spot gold price minus management
fees, which is used as a benchmark in the trading price of the securities market or the
secondary market price. In additional, the gold ETFs should configure the spot gold in
the spot market same proportion fund shares.
What's the advantage of gold ETF?
First of all, in a given period of time, gold ETFs provide investors with an opportunity
of accumulating gold. Because it can be purchased in small quantities, investors can
plan to purchase gold according to the future requirements.
Second, gold ETFs are simple and convenient to trading. They are listed on the stock
exchange, investors trade the gold ETF easily same as trading stock. Investors pay for
low transaction costs in trading gold ETFs. Since investors purchase gold ETFs, need
not pay the insurance fees, storage fees and insurance costs and so on; just pay the
administration expenses with approximately 0.4%. Additional, gold ETFs are with high
liquidity which is convenient for investors to trading.
At last, gold is used as a hedge product, gold ETFs also have that function. When the
risk of dollar's downside in your investment portfolio, purchasing gold ETFs may help
you hedge that exposure. Additional, gold ETFs are also used as a hedge for gaining
foreign exposure or regional risk. Therefore, if the gold is at the downside, the short
ETF will help ease the loss.
What's the disadvantage of the gold ETF?
First, purchasing gold ETFs, people can not get any physical gold, even if they redeem
for cash. Second, when buying or selling gold ETFs, you should pay the additional
costs in the form of brokerage or commission. Furthermore, compared to other ETFs
which are with many tax benefits, gold ETF may be at a disadvantage. So you should
understand more knowledge about gold ETF and how they will bring benefits for you
before decided to invest in ETF.
3.2. THAILAND
Thailand is one of many countries in the world have traditional beliefs associated with
gold jewelry. That is why this country has a long history of mining and stone
grinding. However, until the 1960s, the industry is still focused mainly serves
domestic small scale, retail business of the household, less emphasis on exports. Until
the 1970s, the government began to realize the potential of the jewelry industry and
36
has implemented measures to stimulate production as cut import duties on colored
gemstones, sponsoring exhibitions in the jewelry industry overseas. In the late 1980s,
the gold import restrictions block was completely removed in order to facilitate the
development of jewelry industry. The gold business enterprises are also exempt from
income tax and encouraging cooperation with foreign countries. Thai jewelry
products are increasingly diverse, high quality, and with the combination of
traditional design and modern sophistication of foreigners. Tax policy is clearly
differentiated when gold jewelry import duties of up to 20% while for gold bullion is
0% value-added tax levied on gold jewelry and gold bars are 10% (according to
Council world gold). The raw gold imports through government contracts due to
licensing. Gold jewelry is usually gold exports 10,14,18,22 and even 24 karat with
gems, towards the main market is Hong Kong, Japan, Europe. Currently, Thailand is
one of the major powers in the field of exporting gold jewelry with more than 6000
businesses across the country, bringing huge revenue for the national budget as well
as jobs for a large amount of local labor.
On the gold bullion market, according to GFMS, in 2005, the net accumulation of
bullion in Thailand is 28 tons, ranking the country fourth in the gold hoard in the
region outside of Europe and North America, after India, Japan and Vietnam. Gold
pieces are delivered to the market by 9 large enterprises, are members of the
Association of gold trading in Bangkok, under the management of the Department of
Gold Inspection Bangkok (The Bangkok Assay Office) and Chin Hua Heng - 1 in 9
business representations. Gold pieces of each business has its own symbol is shown
stamping engraving ensures the quality of gold. In 2004, Future Exchange of
Thailand (The Thailand Futures Exchange Plc - TFEX) was born, a subsidiary of
Commodity Exchange of Thailand (The Stock Exchange of Thailand - SET) and the
transaction of the derivatives, including gold futures contracts. TFEX is governed by
the Laws of derivative instruments BE 2546 (2003), under the supervision of The
Securities and Exchange Commission - SEC. The transactions carried out on the floor
must be made through intermediary accounts members of TFEX brokers. The broker
must be licensed by the SEC agent derivative level. To get this license, the member
37
brokers on the floor must be the business organizations, securities brokerage, or Thai
companies have a minimum 75% stake held by business organizations, stockbroker or
a commercial bank in Thailand. The condition is associated regulations must have a
minimum registered capital of 25 million baht, capable of maintaining a minimum net
working capital in accordance with the SEC, capable operating professional level and
manage the risks and conflicts of interest, with the management team and major
shareholder (holding> 10% stake) qualified, does not violate any standards under the
law.
Anyone who has the money can buy gold. Thailand has one of the more open gold
markets in the world. Any person, locals, tourists etc can simply buy jewellery by
weight. Not even a passport is required!
Thai gold is 23ct or 96.5% pure. Alloys, (usually silver and bronze), are only added to
increase the strength and durability of jewellery pieces.
In Thailand, gold can be simply traded for cash at any gold store. It's just a matter of
taking your gold into any gold store, (preferably the one you bought it from), and with
a minimum of fuss, it will be bought back for cash - no questions asked.
Daily, the gold price calculation by using the global gold spot price. Each morning
the gold stores will post their buy and sell prices in the front window. When selling a
piece of jewellery, the shop will also charge a small 'making fee' depending on the
complexity of the design. This is negotiable, but the spot price is not. But think about
it - you are buying 23ct gold jewellery by weight. This is unheard of in the retail
jewellery trade in the west!
it is technically illegal to export gold from Thailand. There is no problem for a visitor
to take their piece(s) of gold jewellery home with them, however there is a law
against exporting it on a commercial basis. Despite this, it can be sourced from
traders in the west; albeit at a higher price.
the standard measure of weight used in the Thai gold market is the baht. The Thai
baht is ALSO the unit of currency. However, in the gold business, a baht =
15.244grams.
38
there are about 6000 gold shop in Thailan. that's a lot of gold shops! Usually they are
easy to spot with their colour scheme of fire engine red, and the rear walls of the shop
festooned with hundreds of gold chains.
Gold futures contracts are traded on TFEX include 2 types: 50 baht and 10 baht Gold
(1 Thai baht gold = 15.244 grams gold) corresponding to the fee payable for each
contract is 50 baht and 10 baht, commission by brokerage agreement; gold bullion is
trading 96.5% pure. Gold prices are on the end of the morning the gold price on the
London market (the London Gold AM Fixing price) and the exchange rate of the da y
according to the formula: London Gold AM Fixing x (15.244/31.1035) x
(0.965/0.995) x (THB / USD). This price is used as the basis for the price listed next
session (with ± 10% margin for the morning session from 9:45 to 12:30 pm and ±
20% for the afternoon session from 2:30 to 16: 55, excluding the first 30 minutes to
prepare each session).
3.3. CHINA
In China, gold trading activities are regulated by the People's Bank of China (People's
Bank of China-PBOC). From the years 1949-2001, China implemented strict control
of gold trading activities, PBOC played the exclusive role in the gold market in the
country. However, along with the freedom of financial market, China has made great
strides in the liberalization of the gold market.
The process of liberalization of the Chinese gold market:
 Before 2001: In this period, totally exclusive PBOC played a totally exclusive role
in domestic gold market from the exploitation, refining, processing and trading
activities, importing and exporting gold. Specifically, the gold mining companies,
after refining into gold bars, have to sell the bars to the branches of the PBOC,
PBOC would then resell the jewelry companies specializing in gold jewelry the
gold bars. The companies are then allowed to sell gold jewelry to the public. The
jewelry business firms are only allowed to buy raw gold from the PBOC and sell,
not allowed to buy from people. People, who want to sell gold jewelry for cash,
need to sell at the branch of PBOC. In addition, the purchase price will be applied
39
gold prices stipulated by the PBOC (gold jewelry will be determined based on the
actual gold content plus the processing). PBOC managed the gold import by
giving quota for the gold importing company depending on particular time.
 From 2001 to date: Chinese gold market has been liberalized
In April 2001, the PBOC was first officially announced plans to remove
proprietary management mechanisms for purchase and distribution of gold, and
announced the establishment of gold exchanges, and announced the establishment
of Shanghai gold exchanges (Shanghai gold Exchange - SGE). This is considered
a breakthrough in the management policy of the Chinese gold market after more
than 50 years of strict control basically, liberalization plan of the Chinese gold
market also consists of 3 stages, common to other countries:
- Stage 1: Eradicate exclusive mode and gold trading price control mechanism,
together with establishing of the Shanghai Gold Exchange.
- Stage 2: Gradually eliminate licensing mechanism for the production,
wholesale and retail gold, the first step is for the retail operation. Then allow
individuals to participate in gold trading
- Stage 3: Gradually elimination of the management import and export gold. On
the basis of the above steps, the PBOC issued a series of regulations towards
deregulation of gold business activities such as
In June 2001, the PBOC began to apply the weekly price list applicable to the
purchase and distribution of gold in the country instead of daily or quotation for
each specific transaction earlier. In August 2001, the removal of retail price
controls jewelry. Gems and Jewelry companies licensed self-regulation based on
the exchange price, gold content, style and design of the product. The precious
stone and gold firms are also allowed to buy gold jewelry from the public. This
regulation has encouraged the development of the jewelry industry, companies
invested more on production lines, diversified models, which have formed many
well-known manufacturers. 11/2001, the abolition of licensing for manufacturing
operations, retail and wholesale domestic gold. However, enterprises with 100%
40
foreign capital are not allowed to participate in this field. Also in November 2001,
the SGE was officially established. In October 2002, the SGE was officially put
into operation. This is a floor for immediate delivery of physical gold. Firstly,
products allowed to trade were gold with international standards including Au
99.99, Au 99.95, then expanded into other precious metals such as platinum (Pt
99.95) and silver (Ag). To order to perform physical gold trading, systematic SGE
member companies offer storage services, storage and delivery of gold.
 The experience management of the PBOC on SGE:
Shanghai Gold Exchange (SGE) is an independent entity 100% owned by State
operated 50 years under the supervision and management of PBOC. GSE members
are exploiting enterprises, gold export and import, manipulating enterprises,
financial institutions and foreign banks, namely: HSBC, Standard Chartered, UBS
AG and Bank of Nova Scotia (BNS) in mid 2007.
Being as the market founders, GSE members participate in the market as broker,
trading agent, payment intermediary bank, stock/warehousing and logistic service.
In order to participate in the gold security exchange market, the investor is requested
to open 02 accounts (1 deposit account and gold account) at the SGE member
banks. These banks provide the broker and trader who entries and matches orders
and transaction fees receiver. As provided by PBOC, the transaction can only be
conducted by the private investors within the limit balance of their bank gold/cash
deposit accounts or using financial leverage (margin for 100%). SGE foundation,
not only makes contribution to improve the gold security exchange become more
transparent, gold liquidity, but also can be the gold price regulatory instrument when
gold can be directly bought by PBOC for market stabilization purpose.
41
Chart 3.1: SGE Organization Structure
Council members
Board of management
Special Committee
Chairman
Board of director
Trading
Dept.
Distribution and
delivery division
Information
Dept.
Clearing
division
Technical
division
General
Dept.
Accounting
Dept.
Member in
charge Dept.
R&D
Division
Source: www.sge.sh

Monitoring the establishment of the Council members: the highest decisionmaking body for all activities of the Exchange is a member of the Council's legal
representative members. According to the regulations, within 10 days after the
establishment of the Council members, SGE must send documents providing
information on Council members to PBOC. Board of Directors is ultimately
responsible agencies monitoring the implementation of decisions of the Council
members. Structure of the Board of management consists of 9-15 members,
including members of the Board are members of the Board members and some
non-member Council members. Board has 1 Chairman and 1 or 2 Vice President:
President and the Vice President must be nominated by PBOC, and then chosen by
the Board.

In addition, the PBOC has the right to convene a meeting of the Board of Directors
in case of unusual need. Also, within 10 days after the Board meeting, all decisions
and documents relating to the meeting must be reported to the PBOC.
42

Appointment of Director General and Deputy Director General: SGE has 1 General
manager and 1-2 Deputy General Manager Direct in charge of daily operations of
the Exchange. Director General and Deputy Director-General shall be appointed by
the PBOC. CEO has a term of 2 years and does not hold more than 3 consecutive
terms.

Manage members of SGE: PBOC will review registration dossiers and decide on
the admission of members of the floor as well as the termination or cancellation of
membership.

Exchange deactivated Decision: In the case of operating time have been excesses
the registered time (50 years) that council members decided not to continue the
operational or merger or split, the PBOC is agency which reviewed and approved
the closure plan of SGE.
Thus, PBOC plays the important role in managing and controlling all decisions of
SGE through the involvement of members participated apparatus and key personnel
executive floors, whereby PBOC may use the policy tools in a flexible manner to
control the gold price volatility and security national currency.
March 2003 foreign companies were allowed to invest in the field of
manufacturing and trading of gold in the domestic market. However, gold import
and export activities were under strict control of the PBOC in the form of license.
December 2006, the PBOC allowed individual investors to trade gold on the SGE
floor. Thus, gold became attractive investment channel for securities, foreign
currencies, real estate investors.
With the establishment of SGE, gold trading was done centrally through the floor
with centralized matching mechanism, pricing by market supply and demand,
PBOC did not set the price for gold bullion trading. This event marked the end of
monopoly of the Chinese gold market.
43
CHAPTER 3: VIETNAM GOLD MARKET: SITUATION AND PROBLEMS
1. OVERVIEW OF VIETNAM GOLD MARKET
In the recent years, the gold market in Vietnam has marked down exciting pictures with
a lot of activities. The needs for gold trading, the number of investors together with the
ranges of transaction types have considerably increased after a short period. In addition
to the traditional physical gold trading, there are a couple of new modern methods
turning up such as account trading in both domestic and international markets, capital
mobilizing and lending through gold, etc. However, the excessive-booming
development of gold trading market has led to the serious issue of losing control from
the state authorities. This has emerged the government and all state authorities in
tightening and restricting their monitoring in order to seek the market stabilization and
ultimately sustain the macro economy. So as to enhance the legal framework and being
able to give out the suitable solutions for gold market, it is essential to have a clear
understanding on the current structure of Vietnam gold market.
2. PARTICIPANTS IN VIETNAM GOLD MARKET
 State Authorities
State Bank of Vietnam has it roles in managing all the gold related activities such
as gold bar manufacturing, gold export/import under the form of bar,
ingots, granules; gold trading on foreign account, gold mobilizing and lending
activities from financial institutions, gold management in official reserves of State.
All the gold trading, manufacturing and processing activities; gold jewelry export
/import activities are monitored by the Department of Investment and Planning;
while quality control is handled by Ministry of Science and Technology.
 Gold manufacturing and trading entities
- Commercial banks: In the recent years, following the tendency of diversifying
trading activities, a number of commercial banks which includes both stateowned and joint stock have joined into the gold trading market through their
44
subsidiaries or through their establishment of gold trading lines. In addition to
gold material and gold bar export/import and gold bar trading, some banks have
implemented the gold trading business in foreign accounts, deposits and loans
gold, even opened exchanges of gold (before being banned).
- Gold jewelry trading companies: These companies have their main business in
trading, processing and exporting / importing gold jewelries. Recently, these
companies have not only met the rising demands from customers in gold
jewelries but also have created millions of labor works throughout the country.
Below are a few outstanding and well known names of gold jewelry trading
companies: Saigon gold jewelry joint stock company (SJC), Bảo Tín Minh Châu,
Phú Nhuận, Ngọc Thẩm, other gold and silver jewelry subsidiaries of banks such
as Sài Gòn ACB gold and silver jewelry SJC, Sacombank gold and silver jewelry
company, Phương Nam, Agribank gold and silver jewelry company, etc.
- Gold mining company: Due to the limited sources of gold mines in Vietnam, there
are currently only two gold miners that are Phước Sơn and Bồng Miêu.
 Gold investors
While a lot of investment channels such as bank deposit, stock trading and real
estate are having a lot of volatilities due to the economic downturn, the investors
have been turning their eyes to gold trading. Besides the traditional trading methods,
the investors currently also invest through a modern method of account trading on
both domestic and foreign market (not currently allowed).
3. Domestic gold price in recent years
1.1. Relationship between the world and domestic gold price
 Methodology of convertible the world gold price into the domestic gold price
-
Measurement Unit:
In Vietnam jewelry industry, the gold volume is measured in taels. One taels
weighted 37,5 gram.
45
-
Gold content:
In Vietnam: it is gold content/10
For example: 1 taels 7,5 gold content = 1 taels 75 % containted 0.7500 free gold.
According to international standard: gold content measured by kt (karat)
1 Kt = 1/24 x 100 = 0.04166666 * 100 = 4.166666
For example: Gold 24 Kt = 24 * 4.166666 = 99.99
-
Conversion formula:
Convert measurement unit gram - oz (troy ounce)
1 troy oz = 31.1034768 grams
=> 1 tael (37.5 g) = 37.5/31.103478 oz = 1.20565 oz or 1 oz = 0.82945 tael
=> Common formula:
Domestic gold price = (World gold price + logistic fees + premium) * (1 +
import tax): 0.82945 * Forgein exchange rate (USD/VND)
+ Logistic fees: 0.75$/ 1 ounce
+ Premium: 0.25$/1 ounce
+ Import tax:
- Before 20/5/2008: 0,5%
- 20/5/2008 to 12/11/2010: 1%
- 12/11/2010 to present: 0% (Circular 184/2010/TT-BTC)
+ Processing fees:
- Y2008: 30,000 VND/tael
- Y2009: 40,000 VND/tael
- Y2010 to present: 50,000 VND/tael.
We have:
1 tael SJC = [(world gold price + 1): 0.82945 * exchange rate (USD/VND)] + 50,000 VNDor:
1 tael SJC = [(world gold price + 1) * 1.20565 * exchange rate (USD/VND)] + 50,000
VND.
1.2. Gold market from 2011 to 2014
46
Gold market in 2011:
Year 2011 is the started time that the State Bank used administrative methods to
intervene directly in to local gold market to stabilize this market.
The gold market in 2011 can be divided into 2 periods: First half and second half of the
year. In the first half of 2011, the gold price was stable, around 35v-40 mils VND/per
ounce. In the second half of the year, the price of gold was significantly increased and
got the high record of 49 mils VND /per ounce on 23/8/2011 which is 36% higher than
the price of 36 mils VND per ounce at the year end of 2010.
With some macro economy management solutions, especially for foreign currency
market, the local gold market was stable reflected in 3 main signals as follow:
First, the speed of gold pricing increase had been slow down (only increased 5.18%
after 6 months, lower than 1 / 2 time of the speed of 13.28% of Consuming Price
Index).
Second, the local gold price had been turned from higher position to frequently lower
than the price of global market.
Third, the matter of re-exporting gold was appeared, strongly increased in May and
June (the export turnover of gemstone, precious metals & goods in the first 4 months
was 106 mils USD, this amount in May was increased to 242 mils USD & about 630
mils USD in Jun, the total export turnover for the first 6 months was 1,027 mils USD).
From July 2011, the local gold price started to be higher than the same in global market
with the gap up to 3 mils / per ounce.
Chart 2.1: Domestic gold price in 2011
47
Source: SJC
Main reason for this matter:
 Standard gold - SJC was covered over 90% in the local market (natural monopoly)
which leaded to the scarcity of SJC gold & drastic change when the gold in the
global market was fluctuated.
 The global gold price was significantly fluctuated, sometime down to 3 or 4%; this
made the gold companies had to expand the gap with the Global gold price to
mitigate the risks.
 The Quota import mechanism of Vietnam’s State Bank made the price changes of
local gold market wasn’t similar to that in global market.
 Speculation made the local gold price highly fluctuated but still acceptable in the
local market.
 The application of “2 exchange rate” in not only the official foreign exchange
market but also among local commercial banks, together with tense of supply &
demand in foreign exchange market. These leaded to “distortion” in the relationship
between gold price of local & the one in global market.
48
 High inflation, inactive stock market, frozen real estate and difficulty in almost of other
property investment channel resulted Speculation although the local gold price is
unreasonable high in comparison with international price.
Beside, due to the unexpected change in global gold price with the trend of regular
increase, the local gold price was also changed significantly, even the marked price was
changed 10 times per day which made the gap between buying & selling price always
in high level. The normal gap that was about some thousands of VND in stable market
was pushed up to hundreds of thousand VND in a short time when the market was
changed frequently.
Gold Market in 2012:
Chart 2.2: Domestic price in 2012
Source: SJC
In the trend of Global gold price increase, in the second half of year 2012, the Vietnam
gold market was also increased strongly in 4 consecutive months. However, the local
price was rarely lower than the global price. The highest gap was 4.5 mils VND/ per
ounce on 20/12/2012.
49
In 2012, some critical policies for Gold Market were applied. The Decree 24/2012/
ND-CP about gold business management was approved by Prime Minister, officially
promulgated and effective from 25/5/2012. Accordingly The SBV was appointed to
mange gold business activities on behalf of the Government. The SBV was allowed to
include standard gold into the national foreign currency reserves, be able to intervene in
to the gold market via export – import of raw gold and become the only one producer
of gold in the market.
In the middle of the year 2012, SJC brand was officially choose as the national gold
brand. The Gemstone Saigon JSC Company was the only one company which was on
behalf of the Government to produce gold ingot. As per this Decree, the condition for
gold buying, selling activities of organization and individual was also tightened.
Overall, the Decree 24 /2012/ND-CP is a positive policy. The Government wanted to
drive the gold market and the economy in the right way; it also reinforces the
government management over gold market.
However, the Decree 24 /2012/ND-CP also resulted to unfairness in the market because
the policy- maker should leave the market oriented by itself not by administrative
order.
Gold market in 2013
SBV applied more many new policies in order to stablize the gold market. Domestic
gold price has strong movements in the early months. SJC gold price has jumped closed
to 47 million dongs/tael, and then decrease by 44,5 – 45,5 million dongs/tael.
In Feb 2013, the different between domestic and world gold price has reached to the
record of over 5 million dongs/tael, in contrast to the expectation of the government
and SBV as well. This was organised in line with the SBV’s Circular No. 06/2013/TTNHNN dated March 12, 2013, on gold bullion trading in the domestic market and the
Governor’s Decision No. 563/QD-NHNN dated March 18, 2013, on the process of gold
bullion trading.
Through the sale, SBV aims to raise the gold supply and to stabilise the market
From the first auction on 28 March 2013 to 31 December 2013, SBV has organized a
total of 76 bid auctions and sold out to the market 1,819,700 tael equivilent to about 70
tons.
50
Table 2.1: Gold bidding statistics
Bidding in
month
Ask
(tael)
Bid
(tael)
Mar-13
26,000
2,000
Apr-13
354,000
338,700
May-13
298,000
291,400
Jun-13
326,000
324,700
Jul-13
342,000
340,400
Aug-13
222,000
219,800
Sep-13
95,000
93,900
Oct-13
75,000
70,400
Nov-13
75,000
73,900
Dec-13
65,000
64,500
Total
1,819,700
(equivilent to 70 tons)
Soure: SBV
After one year of auctions, there is approximately 70 gold tons sold out to the market.
So it seems that the efforts against goldenization is impossible.
Chart 2.3: Domestic price from 2010 - 2014
51
Source: SJC
Observing the movement of gold price in Vietnam and the world since 2010 to present,
we found that there is often a different between domestic and convertible world gold
price. Despite of the same decreasing trends, there is a huge different between the
world and domestic gold price( average about 3 million dong per tael ). Some times, the
domestic gold price is usually higher than the world price of about 6-7 million dong per
tael.
4. VIETNAM GOLD MARKET SITUATION
1.1
Supply and demand
Huge demand
.In the past, there had been several large changes of money in Vietnam before the
most recent change in 1986, form which the money remains almost the same until
today.
- In 1946,People’s Democratic Republic of Vietnam, the predecessor of today’s
Socialist Repubilc of Vietnam, issued its war-resistance government’s paper
money
- In 1958, Vietnam changed its money in second time.
52
- In 1978, the reunified Vietnam after a 20-year liberation war, changed money the
third time, and both North and South now used the same currency. In this event, a
new VND was worth old VND 500 and 350 Liberation Dong ( local currency used
in the Southern Vietnam before).
- In 1985, Vietnam changed its money the fourth time, to reduce the denominator
10 times. Thus, one new VND was in exchange for 10 dongs printed in 1978. This
was the lastest substantial change, which required the replacement of all paper
money in circulation then.
After many time change money, people have less faith in paper money, they tend to
buy gold whenever they can to protect their wealth .ProgressiveIn respect to demand
for gold hoarding, Vietnam is the world's 2nd country. In Vietnam, gold bar hoarding
as a safe haven asset and preventing inflation, as well as the custom of using gold to
pay specifically for real estate transactions in the past, have become the habit of
investment and consumption of householdsAlong with other erratic and illiquid
securities, real estate markets, gold bar hoarding demand has increased steadily and
continuously through the years. From 2006 to 2009, Vietnam has reached over 20% of
the gold bar hoarding of the world, the 3rd of the world after India and China. As of
2008, the net amount of gold hoard has reached 96.2 tons, in term of hoarding gold rate
per capita, Vietnam is the world largest.
Table 2.2: Physical gold bar investment (tonnes)
2003
2004 2005 2006
India
65.6
76.2 102.8 139.8 148.6 159.9
117.5 266.3
288
205.9
403
Vietnam
36
39.2
34
69.5
56.1
96.2
58.2
87.8
65.4
85.9
China
2
6.7
9
10.1
21
60.8
102.3 178.6 250.3 249.3
387.6
Japan
42
61
37
-47
-56.4
-39.4
-30.8
-1.0
Total
World
181
257.4
265
236
240.2 398.6
Vietnam as %
of the world
2007
2008
19.89 15.23 12.83 29.45 23.36 24.13
2009
2010 2011 2012
67
-41
-47.2 -10.5
2013
249.5 648.1 869.2 747.7 1788.8
23.33 10.34 10.10 8.75
4.75
Source: Gold Survey 2014 – GFMS
53
The data is based on the statistics of regular gold import/export. Since the gold
domestic price is higher than the international price, the situation of irregular gold
importing (gold trafficking) has been happening quite popular. Therefore, the practical
gold reserves in Vietnam are much higher than what it was shown on the above figures.
The demand of Vietnam for jewelry gold is in the World Top 20. By reason of
traditional culture and consumption habit, the demand of jewelry gold consumption in
the country is relatively high especially in wedding and New Year seasons.
The
demand is always maintained at level of 20 tons per year which ensures the position of
Vietnam in the world top 20.
Table 2.3: Gold jewelry consumption of Vietnam and other countries (tones)
India
China
US
Japan
Vietnam
Total
World
2003
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
441.7 517.2 573.5 516.4 557.8 599.8 471.4 657.6 618.3
552
615
201 224.1 241.4 244.7 302.2 340.6 376.3 451.8 515.1 518.8
860
354.5 350.5
349 306.1 257.9 188.1 150.3 128.6 115.5 108.4 112.8
31.6
34.6
33.5
32.8
31.7
31.2
22.3
21.3
16.6
17.5
17.2
22.8
26.1
26.9
22.1
21.4
19.6
15.1
14.4
13
11.4
12
2350
1730.99 1902.3 2041.4 1726.9 1884.2 1846.8 1471.6 1687.4 1673.3 1614.6
Source: Gold Survey 2014 - GFMS
Limited local supply
 Limited supply from mining and scrap recycling
The limited local supply is derived from the fact of lacking both gold mining stocks and
gold mines in Vietnam. The total gold mining stocks in Vietnam is currently remained
at 1,000 to 3,000 tonnes. Vietnam has a number of mines with different shapes and
scale such as Ngân Sơn, Bắc Kạn, Cao Bằng, Thanh Hóa, Quảng Nam, Hòa Bình, etc.
According to the statistics, the local supply mainly comes from recycling and only meet
part of the demand. Gold production from mining and recycling in Vietnam in the
recent years has only reached 10 tons/year that merely accounts for 10-15% total gold
consumption in the domestic market.
54
Table 2.4: Gold mining and scrap recycling production of Vietnam (tonnes)
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Mining
2.2
2.3
2.4
2.4
2.7
2.7
3.1
3.4
3.7
3.9
4.1
Scrap
6.6
5.9
7.8
8.3
9.0
12.2
51.5
49.8
41.1
36.4
42.3
Total
8.8
8.2
10.2
10.7
11.7
14.9
54.6
53.2
44.8
40.3
46.4
Source: Gold Survey 2014 - GFMS
 Importing is the main supply source
Since the demand for gold reserves as well as gold jewelry are high while the
recycling and mining production are still very low, the major supply for Vietnam
market are still relied on import.
1.2
Gold import – export
 Period 1997 – 2002, the gold market, both local and international are relatively
stable. Since April 2002 – 2004, even though the international gold price were
continuously boosting, the domestic gold market did not mark any significant priceshock period, partially due to clearer and more appropriate policies on gold
importing than before ; partially due to gold speculating activities from households
were largely dropped in period 1991-2004.
 From 2005 till now, people tend to hold and reserve gold in their hands, thus it made
the sum of imported gold increasing dramatically. States Bank of Vietnam has made
some adjustment on gold market through granting the gold importing licences to
commercial companies. There was no need for States Bank of Vietnam in using the
gold reserves to interfere in the market.
 Since May 2008, because of a huge deficit in the balance of transaction of Vietnam,
States Bank of Vietnam has stopped granting the gold importing license as well as
allowing companies in gold exporting.
 This situation has clearly shown that an appropriate structure in gold importing
together with some other supporting tools would not only stabilize the matter of
pricing for domestic market but also may avoid the speculation , irregular gold
importing, and eventually put the foreign exchange market to a constant stage.
55
The gold import/export monitoring policy recently has made some positive impact on
the price volatility and stability of the foreign exchange market.
Considering the special role of gold in the economy recently, a close management on
the gold import – export is essential for stabilizing the gold market as well as the goldrelated business.
1.3
Production and sale of gold bars (bar hoardings)
With the goals of basically organizing and rearranging the gold bar hoardings market,
ensuring the ability to regulate and improve the State’s market management, the
Government has issued a decree named 24/2012/NĐ-CP which regulates that not an
organization nor an individual but only SBV is authorized to produce bar hoardings.
SJC is now exclusively authorized to manufacturing bar hoardings for SBV.
The failure to meet the market demands of this exclusively authorized organization has
happened. As a consequence, the domestic gold price has been pushed higher than the
international gold price. In addition, the difficult situation also shows in the natural
monopoly of SJC while no common standards of domestic bar hoardings have been issued.
Moreover, the lack of common standards also caused difficulties in exporting.
SBV also narrows the entities allowed trading gold and discourages this activity instead of
allowing 12.000 gold trading enterprises operate freely, putting obstacles to the
management and raising the ability of “goldization”.
1.3.1 Paper gold trading
 Paper gold trading on foreign accounts
- On the basis of a license granted by SBV, some commercial banks and
businesses conduct gold trading on foreign accounts for the purpose of insurance
of trading physical gold and arbitrage
- Due to the volatility of gold price, from 2006 to nowadays, domestic enterprises
and banks often use gold trading on foreign accounts to square the position of
buying and selling physical gold daily and hedging the risk of price fluctuation in
gold scrap.
56
- When in need, these enterprises only need to transfer gold in their accounts into
physical gold by paying to the foreign partners (including the shipping cost,
insurance and tax) to import raw gold, then hiring enterprises like SJC to make
into bar hoardings for domestic consumption. In this case, the domestic price
will be higher than the international price.
- Conversely, in case the domestic price is lower than the international, the
enterprises will export gold to arbitrage between the two markets.
 Gold trading on domestic account
Gold trading on domestic account is implemented in the form of Gold Exchange.
Before 30th December 2009 – the time when the Government banned operations of
Gold Exchanges, there were approximately 30 gold exchanges all over the country,
established by banks, securities, and gold trading businesses with the sale volume of
approximately 2 billion US dollars equivalent to about 35 thousand billion VND per
day. These gold exchanges function is to take order for customers. Some of the
owner even deal directly for self-trading.
1.4
Gold mobilizing and lending activities
The gold mobilization and lending has been implemented in many provinces and cities,
mostly concentrated in the southern provinces. The form of mobilization includes
savings in gold or VND savings secured by gold price. The banks also made loans in
VND and in VND secured by gold price. Overdue gold loans accounts for a small
proportion of total outstanding loans in gold shows that banks were wary of lending in
gold to limit the risks that may occur. But due to complexities of gold price’s
fluctuation which threats banking system safety and economic stability. SBV issued
Circular 12/2012/TT - NHNN requires banks to cease all operations related to the gold
from 25th November 2012. This Circular significantly affect the liquidity of the
banking system, because not all the gold depositor will convert gold into cash, then
deposit back to the system of credit institutions.
57
5. SHORTCOMINGS OF VIETNAM GOLD MARKET
1.1 Inconsistency between domestic and world gold price
In theory, Vietnam is net imported gold country so that domestic gold price depends on
the fluctuation of the world price. But in fact, the domestic gold market is often
distorted:
 Domestic gold price is not moved along with the world price, especially in time of
high volatility in the world.
 The fluctuation of domestic gold price are in opposite with the world market.
Chart 2.4: Gold price history: 2003-2012
Source: Bloomberg and General Statistics Office of Vietnam
Chart 2.5 :Recent Gold Price Developments: May 2012 – March 2013
58
Source: Bloomberg
Note: */Price gap is calculated by taking the difference between the domestic gold price
in Vietnam and the global gold price on the daily basis. Prices and price gap are quoted
in millions of Vietnamese dong per Troy ounce.
The underlying causes are:
- SJC bullion is accounted for above 90% of domestic market which lead to the
natural monopoly advantage. Whenever the world gold price is fluctuated, the
shortages of SJC bullion make the domestic gold market much more volatile.
- World gold price are also highly fluctuated. Sometimes the price range is moved
by 3 to 4%. For price hedging, the domestic gold trading businesses have to
widen the gap between the world and domestic price as well as between the
buying and selling rate.
- The domestic gold market is isolated and not connected to the world gold
market. The passive mechanism of granting quota for gold import - export by
SBV lead to the difference in price movement in the world and domestic market.
On the other hand, a important distribution gold channel which can help to
balance domestic gold position and connected to the world gold market, is gold
trading on account, is also prohibited/restricted by the SBV.
- The gold speculation makes the price range in domestic market is rather high
although it is still be accepted by the market.
- High inflation, inactive stock market and real estate market have bad effect to the
investors. Consequently, they find gold as a safe saving and investment despite
high gold prices in the domestic market.
1.1 Gold import-export smuggling
The difference between the domestic price and the international price, in context of the
volume of official gold export is restricted and strictly controlled, motivated gold
smuggling activities, mainly to China and Thailand.
1.2 Lack of hedging instruments
59
In daily trading activities with customers or convert mobilization in gold into cash
funds, banks and businesses have position, meaning suffer the risk of price fluctuations.
In overseas markets, derivative financial instruments for trading in gold have long been
used to square position and hedging price volatility effectively. However, the
application of this tool (gold trading accounts in local and foreign) in Vietnam is
limited in scale and not in accordance with international standards.
1.3 Negative impacts of gold price on the macro economy
 The impact of gold on the exchange rate and the trade balance
Gold is not considered a foreign currency or a major commodity in the State’s
regulatory policy of import and export activities and macro economy. However,
when the gold price increases, the effects of the increased price has caused both
direct and indirect impacts on exchange rate of USD/VND as in past years. From
2008 to present, the average annual exchange rate was adjusted up by 5%. Since
2006, the State average annual import deficit was more than 60 tons of gold,
equivalents to $ 4 billion / year to import gold.
While the trade balance is deficit in a long time, the gold import creates more
pressure on the exchange rate and trade deficit. Since May 2008, the SBV
temporary does not issue limit (quota) for the import of gold for gold trading
enterprises and banks as previously, except in case of import to intervene the market
in order to prevent trade deficit. In case of imbalance of gold supply and demand, if
the SBV does not allow the official import and if the price difference is so
compelling, there will be a mass unofficial gold import into Vietnam through the
border lines Cambodia, Laos and China to clear "thirst" domestic gold. To import
the number of gold, some agencies actively collect US dollars on the free market to
pay for the import of gold, creating demand and scarce of US dollars in cash. US
dollar price in free market will rise, creating a psychological impact on a majority of
people and businesses hoarding dollars, led to the fact that they even want to keep
more US dollar, not to sell US dollar to banks. Due to not buying enough the needed
foreign currency from individuals and businesses, the banks cannot meet
60
enterprise‘s demand for US dollar for legal international settlement, which causes
both delays in payments and stressfulness for the foreign exchange market. If the
SBV official imports gold, a certain foreign currency amounts will be paid out by
the banking system for settlement of gold import. It can say that in the context of
rising gold prices and many investors are looking to buy gold, gold imports by way
of official or unofficial will also have impact on the supply and demand of foreign
currency and create pressure on exchange rate.
 Effect to the monetary policy
WGC figures has pointed out that the ratio of gold over GDP in Vietnam is of the
highest in the world. This can affect the monetary policies and management.
Particularly, without gold in money supply M2, the money multiplier of Vietnam is
around 4.8. But when include gold in M2, the multiplier is down to 2.0. It’s clearly
that the money supply system in Vietnam is being influenced by the high gold
reserved (by individual) and people’s high demand for gold. In Vietnam where gold
is normally used in pricing high value assets (real estate), once the gold price goes
up, the real estate and many other commodities price go up too. Consequently, the
gold price has huge effect to the CPI and inflation. Moreover, gold in Vietnam are
bought by USD, therefore when the demand for gold rises, the demand for USD will
increase which will make the USD/VND exchange rate more volatile. To sum up,
the gold price’s influences to Vietnam macro economy are obvious, they even can
distort in short term, the monetary policies when the Government have to deal with
its bad effects to the economy.
 Effect to the capital mobilization of the financial sector
When the gold price goes up, people tend to buy gold as their investments instead of
deposit their money in banks. Consequently, the mobilization of fund of banks may
decline which in turn have severe effect to business activities of the economy.
- Impact to the capital market: When the gold price go up and get good return, it
will attract investors and direct the capital flow out of the stock market, bank and
people savings. Therefore the capital for financing economic activities can be
61
significant decrease and may have bad effect (short-term) to the development of
the whole economy
- Impact to real estate market: Normally, Vietnamese have habit of using gold
price as measures for pricing house and real estates. Nowadays, although most
of housing advertisement is quoted by VND, the buyers and sellers always tend
to convert these prices by current gold price. Therefore, the increase in gold
price will lead to the go up in housing and real estate. In other word, the real
estate market will have another risk factor which is the fluctuation in gold price.
At particular time, this can significant bring down the liquidity of the real estate
market.
In conclusion, in Vietnam, gold and gold price is not just the matter of business but
it has been a factor that can affect savings, investments, balance of payments,
foreign exchange reserves of the economy.
1.4 Deformed and illegal businesses after paper gold trading on account activities
banned
After the gold trading on account businesses in domestic and abroad through normal
channels are prohibited in announcement no. 369/TB-VPCP dated 30/12/2009, illegal
forms will still exist. Maybe in a few synthetic forms below:
1.4.1 Gold trading account in the disguises form in domestic market

Launch physical gold investment product
- Some gold trading company has now announced the launch of physical gold
investment products instead of gold trading on account. Although the
announcement states that it is physical gold investment, meaning investors have
to 100% deposit to buy gold, but in fact specific information to investors, they
only have to deposit a certain percentage (popular at 5%) to purchase 100% of
the amount of gold of a transaction. After buying gold, gold investors deposited
gold at the company and have companies sell the gold. Investors will take the
overnight deposit rate for gold companies. After selling gold, investors will
receive their capital (e.g. 5%) and the difference if any.
62
- Some other companies’ use forms of transaction for customers to buy physical
gold, but gold futures, investors only have to deposit a certain amount (about 2 to
5%) but not delivery. At the maturity date that investors cannot afford to take, it
will be subject to deposit rate for companies. When finding a buyer of the gold,
investors sold, minus the amount of interest and collect the deposit and the
difference if any.
- Also, now some companies are open to jewelry investment products, investors
deposit instead of buying gold bar deposits, may buy 24k gold jewelry. Method
is the same with those mentioned above.
So, essentially this is still trading with accounts as the previous gold trading floor,
but gold investments are called physical gold investment or 100% depository gold
investment because the banks themselves do not lend as from previous transactions.
Instead, supporting investor in this case is gold trading companies.

Establishment of joint venture
One other way is to prepare a gold company in Vietnam closed but to open another
company in Cambodia then to open a branch in the Ho Chi Minh City. Investors
will do business as usual so far; except that the contract will have 2 languages:
Vietnamese and Cambodian. Because the company does not open within Vietnam,
the company will not be subject to the provisions of the law of Vietnam.
1.4.2 Illegal gold trading on account overseas
The development of modern technology allows investors to make gold trading on
account via online trading software held in overseas foreign business which are not
under any control from management agencies. This leads to potential risks of
destabilization of the social and economic, of which may include the illegal transfer of
capital overseas, investors’ rights are not guaranteed, or exchange rate of the free
market fluctuates abnormally
Conclusion
We have had an overview of Vietnam gold market as well as the management policies
of their Government applied on this market. While the volatility of the gold market
63
caused increasingly negative impact on money market and especially the foreign
exchange market, the Government and SBV has implemented many strictly short-term
policies such as: Banning gold exports (May 2008), closed the Gold Exchange, and
suspense the trading activities on foreign accounts,...However, the effectiveness and
efficiency of those policies remain unclear. Gold speculation, gold rush, smuggling
activities are still happened and put the financial system at risks. Thereby, in order to
effectively manage the gold market, the Government and SBV need a complete set of
solutions which focus on both stabilizing and developing the gold market. This chapter
has proposed such solutions to address the limitations in current management policies
on Vietnam gold market.
64
CHAPTER 4: RECOMMENDATIONS TO DEVELOP VIET
NAM GOLD MARKET
1.
RECOMMENDATIONS TO DEVELOP VIET NAM GOLD MARKET
Development orientation of Vietnam gold market
Today, gold is truly becoming a market force which is capable of governing the
savings, investment, balance of payments, foreign exchange reserves and capital
efficiency of the economy. Therefore, the management of the gold market and the
gold and dollar dominance issues must be studied more comprehensively and
strategically in order to have more sensible policies rather than relying on current
quotas or banning policies. It should be considered as a currency or as a capital flow
to develop a mechanism to achieve effective monitoring according to market
principle. Using this market as a tool to increase funding for the economy is probably
a reasonable policy. However, if the gold market is limited by administrative
prohibition, it is not only ineffective due to the market’s enormous scale, but it would
also possibly generate implicit uncontrollable transactions, especially in the context
of the world’s complicated gold price movements.
Recommendations
1. Maintaining a government-centralized management model on gold market
It is necessary to further improve the existing legal or regulatory documents system
directly or indirectly relating to the management of gold trading activities in order to
unify the management role of the State Bank in gold trading activities.
It is also essential to amend the current regulations (Decree 24) to ensure the market
principles and laws. Accordingly the State Bank only performs management and policy
making functions and does not participate in business; or performs market regulation
function through administrative measures which indirectly involved in businesses’
activities. If a business properly meets production and business conditions, it should be
65
allowed to actively operate under market mechanisms. Also numerous brands should be
allowed to co-exist rather than limited to an exclusive brand.
2. STABILIZING SOCIAL PSYCHOLOGY:
The gorvernment must make people believe in the value of domestic currency, will not
make the gold price spike. In the fear of currency devaluation, lack of confidence in
the currency VND, while concerns domestic prices will rise again caused gold demand
increased while supply is limited, making the Gold prices rose sharply in recent years.
There are two reasons why people follow the gold price boom.
First is the attractiveness of gold as a short-term investment and high profit. Many
people hope that gold price will go up continuous so they buy gold on speculation.
However, only a small part is speculative profit, the remaining majority of people
caught up in the psychological vortex is lost.
Second, many people are still accustomed to hoarding gold as safe heaven. When
prices fluctuate, people fear their property lost value so they keep purchasing gold
make strong demand to the market, creating a gold rush.
State needs a reasonable gold reserves
Gold plays an important role in the foreign exchange reserves of the country, especially
for developing countries, the gold reserves tend to increase with the increase of total
foreign reserves. Therefore, Vietnam needs to study the increase in gold reserves
corresponding to the increase in total foreign exchange reserves. This will help stabilize
prices and curb inflation because if foreign currency reserves in foreign currencies such
as US dollars only if the value of the devalued dollar will affect the foreign exchange
reserves of the country. Strengthen the control of the State Bank for the gold market
also means the control of the State Bank to exchange rate and the foreign exchange
market. When operating rates and foreign exchange market are flexible control so the
price of imported goods will đo , it will contribute to curbing inflation.
3. ESTABLISHING THE NATIONAL GOLD EXCHANGE CONNECTED
WITH THE WORLD GOLD MARKET
On the basis of researching various countries’ models worldwide and Vietnamese
conditions, we would like to propose a number of issues related to the preparation of
the National Gold Exchange. The National Gold Exchange will contribute to minimize the
export of smuggled gold. When a transaction center, the domestic gold price and the
66
world will connect to each other, helping formulate uniform prices on the market, to
avoid price speculation do today. This is where many investors buy and sell gold
demand, is where a true and objective price, not to the enterprises themselves published
prices. Besides, National Gold Exchange may apply derivative instruments, to help investors
prevent and control the risks while gold price fluctuations. State can mobilize huge
funds from the people through the operation of gold trading via accounts, helps expand
the gold market.
- The Gold Exchange is an independent entity and the intermediate for matching
gold buy/sell orders and money clearing VND/gold orders among market
participants. It does not have the authority to perform direct gold trading
business.
- The Gold Exchange should be a joint stock company in which the State holds
51% stake; or it should be a limited liability company owned by the State. The
Gold Exchange will be subject to strict supervision of the State Bank, and must
perform an annual audit by a reputed independent auditing firm (which must be
in the list of independent auditing firms approved by the State Bank’s Inspection
bureau).
- VND and gold current accounts of trading members participating in The Gold
Exchange must be separated and deposited in commercial banks which are
allowed to perform foreign exchange trading.
- Commodities trading of the Gold Exchange must be standardized and associated
with physical gold. It is necessary to gradually shift from the physical gold
market to the gold market with numerous derivatives; thus giving companies and
investors more hedging tools as well as integration and access to common
financial products on the international market.
- For individuals who buy/sell gold on the Gold Exchange, they must be required
to deposit 100% of the transaction value. Long positions and short sales are not
allowed.
- Financial institutions are allowed to conduct foreign exchange operations.
Businesses which buy/sell/import/export gold with "monetary in nature" are
67
allowed to participate in transactions on the domestic Gold Exchange. Among
the above-mentioned types of businesses, the State Bank allows a number of
financial institutions to trade on overseas gold accounts to create the correlation
between the domestic and the world gold market.
- The State Bank should have separate regulations on domestic gold trading status,
gold trading status on overseas accounts and specified low status (e.g., ±
3%/capital), which aims to limit institutional trading scale and speculation in the
gold business.
- The Gold Exchange helps to create a communication mechanism between the
domestic and the world gold market. However, the State Bank must be able to
control and actively regulate the margin gap (higher or lower) between domestic
and international gold prices. At the same time, there must be tax mechanisms on
importing/exporting gold with "monetary in nature" in order to regulate the
amount of gold exported/imported.
- Develop processes which are convenient; a tight and secure depository for gold,
physical gold payment.
- In the early period market participants are not allowed to conduct transactions in
gold derivatives.
- Provide for the cost of gold depository, transaction buy / sell gold and
regulations on corporate tax or personal income tax on profits from the
difference in price of buy and selling gold.
Althrough the scope of Decree No. 24/2012 / ND-CP to contain provisions on gold
trading activities, including the production and processing of gold jewelry and fine art;
business purchase and sale of gold jewelry and fine art; businesses buy and sell gold
bullion; exports, imports of gold and other gold operations, including operations in gold
and gold derivatives activities. But until now there is no document to guide the
implementation of gold trading via accounts
The Gold exchange is a good solution to control the amount of gold in the country and
mobilize broader national resources. It should be established so as to develop an
68
organized gold market, to meet the demands of increasing transactions and to protect
the interests of all parties involved. Performing transactions on the National Gold
Exchange would ensure investors’ benefits, reduce their costs and mitigate possible
risks.
The former gold exchange was run with too high financial leverage ratio: 90-97%,
while the deposit rate is only 5-7%; thus enabling speculative investors to “surf” and
make it difficult to control the market. Once the national gold trading floor is
established, gold trading organizations as participants must deposit 100%, no long
positions or short sales. This will help to control the market and limit risks.
Besides, the National Gold Exchange also performs the function of derivatives hedging
for investors when the world gold prices are volatile; for example supplying credit
source or meeting physical gold demand etc. Also through this exchange floor, the
State Bank will have an authority to promulgate regulations necessary to help manage
the gold market for more flexible gold trading activity, ensuring benefits of investors.
Thus, it can be seen that the State authorities would greatly benefit from the formation
of the National Gold Exchange, such as restricting unofficial trades and avoiding
unnecessary risks. Through that, the authorities would also understand the supply and
demand of the gold market, gold related supply of foreign currency as well as the exact
amount of gold transactions in the gold market, so as to have more active and timely
regulations when changes occur.
4. CONNECT THE DOMESTIC AND WORLD GOLD MARKET ON THE
BASIS OF LOOSENING GOLD IMPORT AND EXPORT ACTIVITIES.
The root cause of the instability in the gold market does not come from the market
itself; is that the impact of the import quota policy by central bank in the unstable
macroeconomic circumstances. Domestic gold supply is still not enough to meet the
demand; Quota application is always implicit of uncontrollable gold import and
export/gold smuggling, causing loss of revenue to the state. At the same time, due to
not controlling the export and import of gold, there is no precise information about the
supply - demand of gold in the economy.
69
Therefore, instead of banning the gold market, the Central bank can change quota
policy. Accordingly, the central bank can switch from quotas to import gold directly or
companies authorized to import gold to swap a portion of foreign currency reserves into
gold reserves. This move increases the supply of gold, therefore reducing the
speculation to stabilize the gold market; on the other hand, Central bank can purchase
gold in the market to intervene if necessary. In addition, the transfer of a portion of
foreign currency reserves into gold reserves can limit the risk in case of value of
foreign exchange reserves falls when the currency was devalued by inflation abroad.
Previously, Thailand control gold import and export by quotas, by administrative order,
but these does not prevent the smuggling of gold increases. By 2000 Thailand
abandoned this approach and implement management according to market signals.
Furthermore, the elimination of export quota mechanism, the price differences in local
and international gold will be removed, eliminates the gold smuggling.
5. MOBILIZATION OF GOLD
Through our survey, the majority of people in Vietnam hold gold and gold jewelry at
home, only a small amount of gold is deposited in the bank. According to estimates of
the World Gold Council, total gold store in Vietnam is about 1,000 tons, equivalent to
45% of GDP, whereas in most other countries around the world, this proportion
reached only below 3% of GDP. This is a very large amount of capital, which is a
waste if it is not in circulation.
Bonds or gold certificates can be issued with small denominations (1-2 or just 3-4 unit chỉ), with medium-and long-term (over 1 year), the interest rate applied on average
gold deposit currently 0.5 to 1% / year. For more attractive, valuable papers can be
traded on a secondary market or discount securities, pledged at the banks.
Some countries in Asia like China, India has huge reserves of gold. An estimated
12,000 tons stored India, China 5,000 tons and the figure continues to rise with
increasing incomes of the population, as well as of government’s policies to encourage
the take-up of gold reserves.
70
Currently, a number of countries are implementing effective policies, both encourage
the storage of gold and using this fund for the economy. China, for example,
encourages people to send gold (physical gold) into the banking system as a guarantee
for credits that people can borrow from banks.
Specifically, banks received gold deposit and gold certificates issued by banks for the
local people and then, they can sell gold certificates on the financial markets or
withdraw physical gold out of the bank. Banks can lend gold directly to the gold
jewelry business enterprise, or sold as raw materials for the Central bank (State Bank).
In fact, if the banks do not play the role as intermediaries and especially Central banks
does not participate as the buyer of gold for official reserves of gold, the gold capital
rising in the population cannot be done.
Based on the Vietnam market conditions, to ensure effective mobilization of gold
projects in the population, we propose Central bank to have a mechanism for
transforming gold into VND:
 Make swap operations between gold and VND for commercial banks. Swaps scale,
spot rate, forward rate applicable to swap transactions depending on the objectives
of monetary policy in each period.
 Central bank allows banks to rediscount gold for VND or gold bond issue to raise a
large amount of gold which has helped increase the liquidity of gold, the state
budget have more funds to implement projects, up foreign reserves, reduce the
amount of foreign currency to import gold.
6. LIBERALIZATION OF THE GOLD MARKET:
Along with the liberalization of financial markets, the gold market should be free to
step in line with the general level of development of financial markets. Gold import and
export activities by involving the supply and demand of foreign currency in the
conditions should also controls foreign exchange rate management still need to take
control gold import and export activities. Should allow export of gold as ordinary
commodities, the problem is the tax policy and export fees for gold. Should use market
instruments in the management of gold, rather than the administrative decisions.
71
Therefore the gap between domestic and international gold price will decrease, thereby
reducing speculation and market manipulation. According to the experience of many
countries, including China, the process of liberalization of the gold market began from
market liberalization physical gold, then gold trading account and finally erase control
import-export operations with gold.
CONCLUSION
Both of the world and Vietnam economy has been facing with much instability :
economic downturn, political changes, huge public debts, high inflation rate in many
countries or the volatility in currency exchange. All of these make people insecure.
In this context, the gold market has become very active. However, the recent boom
of this market has made it very hard to be controlled, which have bad impacts on the
macroeconomic stability. Therefore the need for clear and thorough policies to monitor
and develop the gold market has become more and more essential. Our research on
Vietnam gold market aims at:
First, to summarize and present academic theories about the gold market and its
impact on macroeconomics.
Second, study the legal framework and policies for the gold market on selected
countries which can be applied to Vietnam.
Third, to study the real situation of Vietnam gold market recently; analyses and
assesses the current legal framework and policies relating to the gold market; and
summarize the points that need improvements.
Fourth, to propose recommendations on managing and developing Vietnam gold
market.
We have tried our best in doing this research. However due to the difficulty in
finding academic resources and market information/data, our research may contain
particular shortcomings. Therefore we look forward to receiving your feedbacks and
comments.
72
REFERENCE
-
Ash, A., 2010. “Gold derivatives growth unsustainable”. New study from the
world gold council. The BullionVault Website
-
Bordo, MD, 2002. “Gold Standard”, Concise Encyclopedia of Economics.
-
Mahdavi, S. and Zhou, S., 1997. “Gold and Commodity Prices as Leading
Indicators of Inflation: Tests of Long-Run Relationship and Predictive
Performance.” Journal of Economics and Business, 49, 475-489.
-
Shahriar Shafiee, 2010. “An overview of global gold market and gold price
forecasting”, research paper on Resource Policy 35.
-
Batchelor, R., Gulley, D., 1995. “Jewellery demand and the price of gold”.
Resources Policy 21 (1), 37–42.
-
Reza Yamora Siregar and Thi Kim Cuc Nguyen, 2013. “Infationary Implication of
Gold Price in Vietnam”. ASEAN+3 Macroeconomic Research Office, MPRA
Paper No. 46157.
-
Dang Thi Tuong Van, 2008. “Solution to develop the gold business in Vietnam”.
Master Thesis
-
Nguyen Thi Phuong Lien, PhD, 2010. “Gold trading activities in commercial
banks in Vietnam”, research paper.
-
Nguyen Thi Nhung, Msc and Nguyen Thi Tuoi (2010), “Gold market
management of Central bank: experience of China and recommendation for
Vietnam”. Banking Journal No. 21 (November/2010).
73
ANNEX 1
OFFICIAL GOLD RESERVES BY COUNTRIES
(as at September 2014)
(Gold Survey 2014 - GFMS)
% of
reserves
Country
Tonnes
1
United States
8,133.50
72%
21
Austria
280
42%
2
Germany
3384.2
67%
22
Belgium
227.4
34%
3
IMF
2814
-
23
Philippines
194.7
9%
4
Italy
2451.8
66%
24
Kazakhstan
184
26%
5
France
2435.4
65%
25
Algeria
173.6
3%
6
Russia
1149.8
10%
26
Thailand
152.4
4%
7
China
1054.1
1%
27
Singapore
127.4
2%
8
Switzerland
1040
7%
28
125.7
8%
9
Japan
765.2
2%
29
Sweden
South
Africa
125.2
10%
10
Nertherland
612.5
54%
30
Mexico
123.1
2%
11
India
557.7
7%
31
Libya
116.6
4%
12
Turkey
523.8
16%
32
Greece
112.4
69%
13
ECB
503.2
27%
33
BIS
110
-
14
Taiwan
423.6
4%
34
Korea
104.4
1%
15
Portugal
382.5
79%
35
Romania
103.7
9%
16
Venezuela
367.6
69%
36
Poland
102.9
4%
17
322.9
2%
37
Iraq
89.8
5%
18
Saudi Arabia
United
Kingdom
310.3
11%
38
Australia
79.9
6%
19
Lebanon
286.8
22%
39
Kuwait
79
8%
Master in Finance Banking and Insurance
Country
% of
Tonnes reserves
20
Spain
281.6
24%
Master in Finance Banking and Insurance
40
Indonesia
77.1
3%
ANNEX 2
GOLD SOLD BY CENTRAL BANKS IN EUROPE UNDER CBGA
 CBGA 1 (1999 -2004)
Unit: Tons
Country
Year 1 Year 2 Year 3 Year4
Year 5
Total
1999-
2000-
2001-
2002-
2003-
00
01
02
03
04
UK
150
135
60
0
0
345
Netherlands
100
27
9
39
60
235
30
30
30
0
0
90
120
200
283
283
284
1,170
Germany
0
12
11
6
6
35
Portugal
0
0
0
90
35
125
400
404
393
418
385
2,000
Austria
Switzerland
Total
Source: WGC & IMF
 CBGA 2 (2004 -2009)
Unit: Tons
Countries
Year 1 Year 2 Year 3 Year4
2004-
2005-
05
2006-
06
2007-
Year 5
Total
2008-
07 08
09
352.2
385.8
352.8
211
142
1,444
ECB
47.0
57.0
60.0
72.0
35.5
272
Austria
15.0
13.7
8.7
0.0
0.0
37
Belgium
30.0
0.0
0.0
0.0
0.0
30
France
115.0
134.8
115.1
115
92.1
572
Germany
5.4
5.3
5.1
4.8
4.9
26
Netherlands
55.0
67.5
14.0
19.5
9.0
165
Portugal
54.8
44.9
0.0
0.0
0.0
100
Euro zone until 26/9/2009
Included:
Master in Finance Banking and Insurance
30.0
Spain
62.5
149.3
0.0
0.5
Others
0.0
242
0.4
Sweden
15.0
10.0
10.0
10.0
15.0
60
Switzerland
130.0
0.0
113.0
137.0
0.0
380
Total
497.2
395.8
475.8
358
157.0
1,884
Source: WGC & IMF
 CBGA 3 (2009 -2014)
Unit: Tons
Country
Year 1
Year 2
Year 3 Year4
Year 5
2009-10
2010-11
2011-12 2012-13
2013-14
7.1
0.9
Germany
5.8
0.8
Greece
0.7
0.2
Malta
0.3
0.1
0.2
-0.2
Euro zone until 11/3/2011
Included:
ECB
Austria
Belgium
France
Netherlands
Portugal
Spain
Others:
Sweden
Master in Finance Banking and Insurance
Switzerland
IMF until 21/12/2010
129.1
52.2
Total sold - estimated
136.1
53.1
Total to be sold
263.9
346.9
Source: WGC & IMF
Master in Finance Banking and Insurance