Gold not a currency and doesn't pay interest? In Vietnam it is and does
Vietnam's Gold Habit Weighs Down Dong
By Tim Johnson
Financial Times, London
Wednesday, June 16, 2010
HANOI, Vietnam -- Buying 500 Vietnamese taels of gold, a large but not exceptional purchase equivalent to a little under 19 kilogrammes, takes more than 2.5 times that weight in local bank notes.
For purchases of that size, Bao Tin Minh Chau, a Hanoi gold dealer, offers complimentary armoured car service and home deliveries.
Per dollar of income, the Vietnamese consume more gold on average than anyone else on earth: in 2009, more than twice as much as Indians, 10 times as much as Chinese, and 44 times as much as Americans, according to World Gold Council data.
This heavy habit is creating concerns in the corridors of power by contributing to the country’s chronic trade deficit, as most gold is imported. This in turn adds to pressure on the dong, Vietnam's currency.
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The World Gold Council estimates that Vietnam's net imports of gold were worth $2.3 billion last year, or more than 20 per cent of the country's current account deficit. At the official exchange rate, the dong has lost almost 11 per cent of its value against the dollar since the beginning of last year, although it has become more stable over the past couple of months and the black market rate indicates that it would fall still further if the currency was allowed to float freely.
"People want to invest in gold because they believe that the dong is overvalued," says Do Xuan Quynh, a manager at Bao Tin Minh Chau.
Gold demand dropped by 37 per cent in 2009, partly as a result of the global slowdown and as investors sold off holdings into a rising market. But Mr Do believes that as the economy recovers, gold consumption could grow as much as 50 per cent this year.
"Demand is still growing because people don't believe in any other channel of investment," Mr Do says.
Speculative and largely unregulated margin trading in gold grew so rapidly -- trading volumes fluctuated between $1 billion and $1.5 billion a day late last year, as opposed to $200 million to $500 million a day on the dollar foreign exchange market -- that the government stepped in at the end of last year and ordered gold trading floors to close.
The feeding frenzy on the trading floors is symptomatic of a country where gold holds a unique emotional and economic significance.
Houses are frequently priced in gold, jewellers have illuminated signs displaying buy and sell rates on their walls -- bangles and chains are sold by weight, with little if any premium for the jewellers art -- and there are an astonishing number of streetside shops in Hanoi and Ho Chi Minh City selling safes.
In the run up to Tet, the Vietnamese new year which fell in February and is a time of traditional spending, Saigon Jewellery, the state-owned goldsmith that controls 40 per cent of the market, released 30,000 taels of gold a day (1,120kg) to satisfy demand.
Gold is effectively a parallel currency, says Scott Robertson, a senior economist with Dragon Capital in Ho Chi Minh. "It is a form of savings, people transact in it and it earns interest on deposit," he says.
Many Vietnamese banks were offering 4.5 per cent interest by weight on gold deposits last year, 300 basis points above the rate they were offering for dollar deposits, and banks took in some $3 billion worth of gold deposits in 2009, more than double what they held the previous year.
There are no accurate surveys as to how much gold Vietnamese hold, but Mr Robertson estimates that "street gold," sums held outside the banking system, amounts to about $30 billion, or 29 per cent of gross domestic product, and more than triple the volume of "street dollars."
The wars and vast political upheavals that have ripped across Vietnamese society over the past six decades created a disposition toward assets that are liquid, portable, and hold their value independent of bureaucrats, Mr Robertson says.
But he also says that Vietnamese investors have become expert hedgers of their currency and of equity risks. He points out that there was a huge spike in gold imports in mid-2008, just before the world stumbled into the financial crisis, although he declines to say whether he thought the move was driven by good luck or good judgment.
Dollars are popular but have a number of shortcomings. Many Vietnamese have lingering memories of January 1996, when the US Treasury introduced new $100 bills and local currency dealers began refusing to accept older bills at par.
That is not the only problem. "Dollars fall apart in a highly humid environment. They go off," says Mr Robertson.
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