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VIETNAM - Legal framework restricts gold market

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Post by lexie Sat Jan 07, 2012 5:29 pm

January 7, 2012

Legal framework restricts gold market

The nation's gold market caught public attention this year when the domestic gold price skyrocketed even beyond global prices.

In an attempt to stabilise the market, the State Bank of Viet Nam granted quotas to certain gold dealers to import about 15 tonnes of gold during the first nine months of 2011. This helped cool down the market somewhat, but more measures are needed to control the influence of speculators and market manipulation.

To restrict gold exports and control supply, the Ministry of Finance issued Circular 111/2011/TT-BTC on August 2, revising Circular No 184/2010/TT-BTC of November 2009, to stipulate that gold with purity of 99.99 per cent and gold jewelry with a purity of 80 per cent would be subject to a 10-per-cent export duty.

The tax rate is high enough to erase any profit of gold dealers in exporting gold, further compounding the problems for dealers facing domestic prices higher than prices that can be fetched internationally. Gold dealers have therefore been trying to worm their way around the tax provision by lowering the purity of gold for export or to fashion it into rudimentary jewelry.

Restrictions on exports have had other unintended consequences. Real, quality jewelry (not rudimentary) may become less competitive because of the addition of the high export tax. The restrictions also encourage cross-border smuggling, a challenge and a significant cost to law enforcement and customs authorities.

Meanwhile, even though the current import tax for gold is set at 0 per cent, gold dealers have faced difficulties in importing the metal. The State Bank only grants quotas on a case-by-case basis, creating additional motivation for smuggling, as well as undercutting foreign exchange managment efforts since smugglers pay out US dollars for gold they bring into the country.

Gold lending, deposits

In addition to regulations on export and import of gold, the State Bank issued Circular 11/2011/TT-NHNN back on April 29 banning commercial banks from accepting gold deposits or making loans in gold.

Circular 11 did not have a major impacts on credit institutions, however. By late 2010, the extension of loans in gold by credit institutions was limited to loans for production or to enterprises in the business of gold jewelry. The scope for these loans was already narrow.

Gold deposits, meanwhile, were mostly concentrated in HCM City, which accounted for 76 per cent of the national total, followed by Ha Noi at 11.7 per cent.

But the combined effect of the restrictions on export and prohibition on gold deposits was a dilemma for holders of gold, who had nowhere to put their gold except for locking it up in their own safes. The regulations have therefore effectively swept a large amount of idle gold and swept it out of circulation and off the market entirely. With many enterprises finding it difficult to access loans or capital, it doesn't make a lot of sense for a lot of wealth to be sitting in strongboxes.

Speculation, manipulation

Viet Nam is not a significant producer of gold, mining and producing just two tonnes annually. With Viet Nam largely being dependent on imports, it's surprising that the domestic price doesn't track global prices more closely, with prices in recent months frequently exceeding global levels by a significant margin. This suggests that the domestic market is somehow being controlled by speculators who are manipulating prices – a phenomenon even confirmed by the Governor of the State Bank himself in October in the People's Army Newspaper Online.

Manipulation has adverse impacts on the rights and interests of ordinary citizens who lack information on fluctuations of gold prices and must primarily rely on herd mentality to make their investments. It remains a challenge for authorities to unmask and sanction those who commit fraudulent acts of market manipulation.

And with the securities and real estate markets frozen due to tight credit policies, the gold market has been hot, with many members of the public seeing the precious metal as a refuge from inflation and currency devaluations.

While a legal framework governs the securities and real estate markets, however, lawmarkers have left the gold market largely open, without tight controls or close supervision. Government Decree No 174/1999/ND-CP is simply out of date, unable to respond new situations and frequent changes in the market. The State Bank and other agencies need to promptly finalise the draft decree on regulation of gold businesses for Government approval. In the meantime, controls on import and export of gold should be lifted and sanctions should be imposed on gold price speculation and other manipulating acts.


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