Vietnam goes nuclear on gold
Vietnam is frequently cited as an example of somewhere which acknowledges gold’s role as money; it is a medium of exchange and is used as such every day. Houses come with two prices in Vietnam; the price in dong and the price in gold – gold is most often the favoured form of payment (Thiers’ law in effect).
Up until last week, three forms of money circulated in Vietnam: the dong, the US dollar and gold. However, in an attempt to ‘stabilize’ the economy, the government and the central bank have announced a decree which will continue their mission to restrict the gold market by banning its use as a medium of exchange and issuing 7 ‘solutions’ in regard to bullion related activities.
The idea behind the 7 solutions, or measures, is for the government and central bank to gain more control over the gold market and reduce ‘goldization’, the practice of replacing the dong with gold in transactions. The 7 measures (outlined below) aim to reduce the impact of gold on monetary policies, prevent market speculation and to (apparently) protect the rights of the institutions and individuals involved in the gold market.
- The central bank will oversee and set up quota for bullion production for each period.
- The number of bullion traders in the local market will be reduced and bullion trading activities are to be discouraged.
- The State Bank of Vietnam (SBV) will closely supervise the import and export of physical gold.
- The SBV will supervise more closely the production, sale and purchase of jewelry gold.
- The SBV will closely monitor other gold trading activities, including gold trading on international accounts, gold derivatives trading, etc.
- In the case of adverse conditions, the central bank will intervene in the local gold market.
- The Government will regulate the gold market via tax policy.
It appears the SBV will have a monopoly over the majority of all factors in the gold market. This is not a surprising development; in November last year, the Prime Minister announced Saigon Jewellery Co (SJC), the country’s largest gold trader and producer, would be placed under government management. The company currently owns 90% of the gold bar market in the country. Due to tighter regulations this will result in SJC being the only remaining gold producer in the country.
These regulations are not just on a small market; as GATA reports, demand is so strong in the country for gold that 5 banks and jewellery companies “have been asked to expand operations in every district in the country” and alert the government of their plans for organising gold trading networks. Local media are speculating this is an indication of the government choosing the banks as official sales agents for the central bank. Meanwhile, over 2,000 smaller gold shops in Hoi Chi Minh City are facing closure due to tightened regulations which state they must close due to their low levels of registered capital.
The closure of smaller gold traders and producers will no doubt pre-empt an increase in counterfeit gold bars, something which will increase if the rumours of government plans to eventually ban all gold production are to be believed. Black markets allow counterfeit and sub-standard goods to circulate far more easily. Over 10,000 companies are expected to be driven ‘underground’ as a result of these new regulations demonstrating there is still high demand for gold bars in the country.
These measures are most likely as a result of the ‘successes’ of Resolution 11. The resolution, which has been implemented since February 2011, is an inflation-fighting strategy. At no point in the decree does the words ‘economic growth’ appear. The aim of the resolution is to bring inflation down to a single-digit in a steady manner, whilst reducing public debts to ‘manageable levels’ according to the Ministry of Planning and Investment. The government aim to gain tighter control on money, credit, the budget deficit and the state-owned enterprises.
Private credit is a major problem for the Vietnamese government. Growing from 40% of GDP in 2001 to over 120% of GDP in 2011, it now holds the world-record for debt creation.
The government are also keen to clamp down on the type of deposits received by banks. Many commentators mention with the surprise the ease with which citizens are able to switch between the dong, the dollar and gold. In order to reduce this, the central bank last year lowered the interest received for dollar deposits to 3% and maintained the rate at 14% for dong deposits.
The government’s reasons for preventing the use of gold as a medium of exchange are officially to try and steady the shaky dong. Despite the introduction of Resolution 11, the dong has gained in strength by 0.8%, after a four-year decline of 26%. Meanwhile March’s inflation figures showed levels of 14%, down 9% since August last year. Some expect inflation to head below 10% by the end of this year.
So are Resolution 11’s austerity measures and inflation-reducing drives enough to bring the country’s economy under control and transfer citizens’ faith from the world’s oldest money to the Vietnamese dong?
High gold demand in Vietnam
The Vietnamese are big gold-buyers; the decree comes in light of information that in March the gold price in dong rose faster than the global reference price (dollar/troy ounce). A WGC report stated the Vietnamese gold price had climbed 18%, compared to the global price climb of 11% in the last year.
In the decree, locals may still buy, sell and own gold, but gold may not be used as a means of payment. This may cause issue for the general public and companies as in 2011 gold was more widely used than any other currency in Vietnam. The country owns more gold per capita than either India or China; the amount of privately held gold is expected to total 300-500 tonnes.
Gold seems to feature in every element of the government and SBV’s plans to calm the economy; in a similar move to Turkey, the Vietnamese government are running a national campaign to persuade citizens to move their privately held gold into the custody of the banks. They argue this would help provide the authorities with more leverage to stabilize the economy.
The strength of gold as a medium of exchange does little benefit for the Vietnamese dong as each time a citizen chooses to use gold rather than the Vietnamese dong, more money is drawn away from the national currency and the financial system. However locals do not seem to care much for the strength of their national currency, it hasn’t exactly served them well so far.
Last year the cost of living in Vietnam rose by 18.6%, far above the maximum rate of interest offered by banks earlier this year of 14%. The increase in the cost of living, according to the Economist, is third only to Venezuela and Ethiopia.
Learn to speak Vietnamese
We should all be learning from the Vietnamese. The most quoted reason for gold purchases in Vietnam was as its use as a savings vehicle. We, and other market commentators, have repeatedly reiterated the need for individuals to invest in their own ‘gold reserves’ as a means of protection against all the issues which has placed the Vietnamese dong in such strife. These issues – credit creation, high debt levels, inflation and weak currencies – are something which the majority of Western countries have in abundance.
Whilst it appears Resolution 11 is having a positive impact on the stabilization of the inflation rate, the cost of living is still on the up and bank rates still do not compensate for this. Savings continue to be devalued as they do in Britain, the Eurozone and the US.
The Vietnamese are currently keen to own gold as it offers them a form of security and a guarantee against their economic system. The issues which currently surround economies are not creating environments which are conducive to paper money as a form of exchange. The government needs to be careful that these new gold policies don’t increase the insecurity the public already feels. Currently, it is estimated that 20-60 tonnes of gold is smuggled into the country each year, there is little sign that this will decrease.
Citizens are voting with their money, and that money is gold.
Gold is money?
The actions of the government and the SBV beautifully demonstrate the fear authorities have of the threat of gold over a national currency. But even more so, it shows the power of individuals when they have the right to choose and how much this concerns politicians and central bankers.
In the US, Dr Ron Paul is famous for frequently asking Ben Bernanke to allow US citizens to spend in gold and silver. Unfortunately it is still not allowed, this can only be for the sole reason that it would demonstrate the lack of faith in the US dollar, as seen in Vietnam with the dong.
In the UK, Douglas Carswell MP is campaigning to repeal legal tender laws. At present UK citizens may spend in what they like, but realtors will only accept what the banks can legally accept – British pounds. In Vietnam they are heading down a similar path, in May last year it was announced that within 2 years it will become illegal for banks to accept gold on account. We are now looking at currencies which are no longer backed by confidence but by authority and the law of the land.
The actions of the Vietnamese citizens are evidence enough that gold is money. One does not need a government to tell us so. People are worried that the promises of governments and central bankers to be able to pay is something which they cannot manage; the debt burden is now so great worldwide that they may have to rely on further promises.
In a recent article we quoted a Vietnamese sociologist; “Empires may fall, currencies may change … gold will always survive.” This seems to be relevant once again.
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