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Betting the wrong way drove gold market crazy   2009-12-07 - Thanh Nien, Tuoi Tre

 
 
Eyes on the prize: Two investors have meal at a gold exchange in Ho Chi Minh City.  
Looking back at the unexpected gold fever last month, insiders say investors betting on price falls with loan money are to blame for the frenzy.

 

They also warn that the local gold market is still facing huge risks as gold exchanges continue to make it very easy for investors with limited funds to trade gold.

Investors at gold exchanges seeking short sales have created a huge gold demand in the country, pushing the dong down further against the US dollar, the director of a commercial bank told Tuoi Tre.

“An investor, for instance, can borrow 1,000 taels from a bank and then sell the gold at VND20 million (US$1,100) per tael. Although he doesn’t own physical gold himself, he still decides to sell the huge gold volume on an expectation that it will be cheaper to repurchase in the future.”

Most investors in recent months bet on price drops as they thought gold had already reached its peak. Unfortunately, over the past five months, the metal continued to surge from $900 an ounce to more than $1,200, forcing a lot of investors to make stop-loss purchases to clear their debts before it’s too late.

The gold fever finally broke out on November 11 when investors had become really panicky, the bank director said. As investors wanted to buy gold at all costs, a lot of purchase orders were placed, gradually driving the precious metal to an all time high of VND29 million ($1,587) per tael.

The director estimated that hundreds of gold investors at the very least were caught in the frenzy, each of them trying to buy thousands of taels in just one day.

Dong impact

Vietnam banned gold imports in June 2008 to help narrow the trade deficit. Experts said the ban caused the strain in the market to worsen, triggering gold smuggling, which in its turn led to an increase in dollar demand.

The dong is the second worst-performer among currencies of Asia’s 17 biggest economies in the past year, after the Kazakhstan tenge, as Vietnamese hoarded gold to protect their savings from further devaluation, Bloomberg said. The State Bank of Vietnam devalued the currency by more than 5 percent late November.

Gold climbed to VND28.75 million per tael as of Thursday morning, from 18.4 million dong at the start of the year at jewelry shops in Ho Chi Minh City. One tael is about 1.2 ounces of gold.

In response to the gold fever in November, the central bank decided to lift the gold import ban, saying resumed imports would have a positive impact on both the gold and currency markets. The central bank granted quotas for the import of 10 tons of gold on November 25.

Analysts, however, said even though gold investors have become more cautious, speculation still remains strong, hence the continued pressure on gold prices and forex rates.

A bank manager said if there was another gold surge and investors rushed to make stop-loss purchases again, the import quotas granted by the government would not be enough.

The market would continue to face more “raging waves” until lenders, who in fact encourage gold trading for their own benefit, stopped offering loans so easily to investors, the manager said.

Virtual deals

There are more than 20 gold exchanges in Vietnam and most of them are run by commercial banks. At the five largest exchanges alone, trading volume can reach two million tales a day, worth around $3 billion.

As most investors are unable to pay the full amount up front, it is a common practice for them to fund their gold purchases with loans from the parent bank. By using margin accounts in such a way, investors only need to pay 5-7 percent of the full price.

A gold exchange director, who wished to be unnamed, said many gold investors now prefer trading gold on paper because they don’t need to have a lot of money. For example, with VND100 billion ($5,472,000) they can only buy less than 4,000 tales of physical gold but they can leverage themselves to buy up to 80,000 taels at gold exchanges. Such a purchase is enough for them to move prices in their favor.

Analysts said if the government wants to put gold trading under control, a new regulation must be created requiring investors to fund 75 percent of their purchases themselves without depending so much on banks.

No rules

Cao Sy Kiem, a member of the National Financial and Monetary Policy Advisory Council, said the operation of gold exchanges in Vietnam has not been based on any rules, allowing speculation to thrive.

“It’s necessary to tighten control over the exchanges, even to shut them down. The government can’t let them continue to manipulate prices and upset the market,” said Kiem, also a former central bank governor.

Economist Tran Hoang Ngan, another council member, said although gold exchanges had many negative impacts on the market, the government should facilitate their business with better management, instead of leaving them on their own.

Thanks to the exchanges, many speculators have switched to gold trading using accounts, a move which eases their manipulation in the physical gold market, Ngan said.

SHUT THEM DOWN

Prime Minister Nguyen Tan Dung has asked the State Bank of Vietnam to close any gold exchanges operating without licences, a government official said.

Nguyen Xuan Phuc, head of the government office, said Tuesday at a press conference in Hanoi that gold trading is a restricted business with certain conditions applied and the central bank needs to keep the gold market in check.

At the same briefing, central bank Deputy Governor Nguyen Dong Tien said many institutional and individual investors engaged in risky gold trading activities, causing price fluctuations in the market.

The government would soon issue regulations for gold exchanges, Tien said.

State Bank of Vietnam Governor Nguyen Van Giau told a National Assembly meeting last month it was a “legal loophole” that no government agency had been tasked with overseeing gold exchanges. Giau said the central bank had not licensed any of the gold trading floors run by commercial banks.



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