Every year Vietnam consumes about 50-60 tons/year, most of which is informal
If on 3 March 2023, the price of SJC gold reached 66 million VND/tael, by 2 March 2024, the price of gold had reached a peak of 81 million VND/tael. This means that in just 1 year, the price of gold has increased by 22.27%, equivalent to 17 million VND/tael. According to Mr. *, what reasons have caused the strong increase in gold price?
The first reason is that the USD has continuously gained value compared to other foreign currencies. Specifically, the USD Index (the USD exchange rate against 6 key currencies worldwide) recently increased from 102-103 to 104 points. Meanwhile, the USD Index in the third quarter of 2023 was only at 100.3 points. And over the past decade, the USD Index has only been at around 98 points.
Gold has been continuously increasing in price over time. Photo: Như Ý
The reason the USD has increased in value is that the European Central Banks have not reduced interest rates and may still maintain them at a high level.
The second reason is that military conflicts in some places may escalate, causing the whole world to seek gold for hoarding and turn to the USD for high liquidity. This is also the reason why central banks continuously buy gold to increase reserves.
The increase in the USD and gold prices is the cause of the pressure on the exchange rate. When the exchange rate increases, the price of gold also increases more strongly.
Vietnam is also not immune to the general trend worldwide.
So you mean that the strong increase in the USD’s price recently is due to gold, right?
That’s right. According to statistics from the World Gold Council in recent years, Vietnam consumes about 50-60 tons of raw gold annually. Meanwhile, the total amount of gold mined domestically only reaches 2-3 tons per year. So almost all of the raw gold used for production and business comes from various sources, mostly through informal channels, including smuggling. With 50-60 tons of gold consumption per year, the amount of USD we have to spend is billions of USD per year, a considerable amount that puts pressure on the exchange rate.
In particular, during this time, the domestic gold price has consistently been higher than the world gold price, ranging from 13-20 million VND/tael. This is a big loophole for smuggling and causes the free-USD exchange rate to increase significantly.
Another factor that has caused the USD to increase is that in the first two months of this year, total import turnover increased by 18% compared to the same period last year. When imports increase, the demand for USD to pay for orders from abroad also increases, leading to an increase in the USD price. When the demand for USD increases, it puts pressure on the gold price.
The last reason may be partly due to the fact that the interest rate on savings deposits has reached the liquidity trap threshold. When the interest rate on savings deposits reaches the liquidity trap threshold, people tend to withdraw their deposits from banks and invest their money elsewhere. And elsewhere can be gold, foreign currency, real estate, or stocks.
As we can see, recently the VN-Index has continuously increased, while foreign investors have been selling. If foreign investors were selling, the VN-Index would decrease. This shows that even though foreign investors are selling, there is still another flow of money coming in.
In reality, the world gold price and especially the domestic gold price have been continuously increasing for over 30 years. The USD price has also increased fundamentally.
The gold price has increased 40 times in the past 30 years
Could you please analyze the continuous increase in the gold price over the past 30 years, and whether the gold price is likely to cool off in the near future?
The world gold price in 1990 fluctuated at around $40/ounce, equivalent to about 2 million VND/tael. In 2004, the world gold price reached its peak in 14 years at $418/ounce, equivalent to about 7.6 million VND/tael.
By 2024, after 34 years, the world gold price has increased to $2,083/ounce, equivalent to 66 million VND/tael, and the current price of SJC gold is nearly 81 million VND/tael. This means that the price of gold has increased about 40 times and has been continuously increasing for 34 years.
In the long run, the price of gold will continue to increase. Because the global gold production only increases by an additional 1.5% each year, while the global cash issuance increases by 5%. Not to mention the military conflicts in many countries around the world with unknown endings.
So is there any commodity that can be compared to gold?
A commodity with a steep growth rate that can be compared to gold is real estate. Based on my research data from 6 months ago, the price of real estate in Vietnam has increased 120 times after 34 years. Let’s take a small example. In 1990, when buying a small piece of land measuring 50m² in Hanoi, it had a price of only 26 million VND, and now a house has a price of 8 billion VND. So the land has increased not only 120 times but also 200 times.
Gold and real estate are considered key assets for storing money. So it’s not surprising that even under normal economic conditions, the prices of gold and real estate can still increase. The short-term graph may go up and down, with temporary fluctuations, but the long-term trend is always upward.
The state should no longer monopolize the trading of gold
So how can the domestic gold price approach the world gold price?
In the period of high inflation in 2011, with macroeconomic turmoil… at that time, the monopoly of gold like Decree 24 was appropriate, quickly stabilizing the gold market. But now, the monopoly of the production and trading of SJC gold is unnecessary. So return SJC gold to the market.
When people buy or sell gold, it is also a type of asset for storing money. When there is no longer a monopoly on SJC gold, the domestic gold price will adjust according to the market to approach the world gold price.
But doesn’t the economy worry about being dollarized or goldized?
The State Bank of Vietnam, as well as other central banks around the world, can manage it by being the ultimate buyer and seller in the gold market to maintain reserves, and even sell gold to balance the market. I want to emphasize that the economy is only dollarized or goldized when banks mobilize savings in gold and lend in gold. Just like depositing and lending in USD. Because when gold or USD is mobilized, earns interest, and lends… only when gold and USD are circulated many times can they be goldized or dollarized.
But buying and selling gold as an asset is just a way of storing money.
Thank you very much.
TS Truong Van Phuoc – Former Chairman of the National Financial Supervisory Commission:
Investing in gold, not everyone can make a profit
Mr. Phuoc said: The Fed is currently maintaining a high interest rate and has not officially cut interest rates as inflation levels have not yet decreased, so the USD is increasing in value. But in a few months, when inflation signs decrease, the Fed may cut interest rates and the USD will decrease.
For the Vietnam market, in addition to the common factors affecting the forex market, such as imports increasing in the first 2 months of the year… there are market psychology factors, such as herd mentality pushing the USD price up.
According to observations and forecasts, the USD is expected to increase by only about 3% compared to the VND in 2024, as in previous years. So the increase in the USD price is also a general trend, not necessarily a drastic change. The exchange rate is always tied to the inflation rate, and this year’s inflation rate is forecasted to be around 4%. So even though the Vietnamese dong’s depreciation trend due to inflation is present, it is not significant. In general, people usually use inflation as a benchmark, and interest rates always have to be higher than inflation. So regarding the exchange rate, holding VND is still more profitable.
Regarding the gold market, it is a different story because gold is affected by the world’s military situation, the global economy… so its price increases and fluctuates. But there are big opportunities and high risks. Gold sometimes skyrockets and sometimes decreases, it doesn’t always go up every day. So gold investors need to be cautious.
