November 8, 2011Vietnam's new move towards gold prohibition
The communist government of Vietnam has announced further moves aimed at controlling the nation’s gold market.
The state bank of Vietnam has announced that it will cut down the number of gold bar producers that are allowed to legally operate in the country. All companies with less than 500 billion dong in funds will not be allowed to continue their activities. Furthermore, those companies that wish to continue operating will have to prove that they have at least a 25% market share.
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After this decree by the country's central bank, Vietnamese experts are warning that there will be a surge in the production of counterfeit gold bars. Since spring of this year rumors have been circulating that the Vietnamese government will eventually ban all gold production in the country. The state bank of Vietnam has repeatedly devalued the dong in relation to the US dollar and other major currencies.
Vietnamese citizens as well as local investors have been using gold as a save haven to hedge against rising prices, caused by over-issuance of the dong. The flight from the national currency is piling more pressure on the Vietnamese government, which doesn't seem to be capable of solving the economic crisis affecting the whole country. Those funds invested in gold are withdrawn from the Vietnamese financial system. Thus politicians have been looking at ways of discouraging gold ownership.
After the state bank of Vietnam's decision, with SJC will be the country's sole gold bar producer (controlling 90% of the market). With only one gold producer left, the government and establishment economists hope to gain more control over the gold market.
On the other hand, the regionally acclaimed online newspaper VnExpress quotes experts warning that this could give rise to a huge black-market for gold products in Vietnam. By intervening, the government and the central bank will undermine the natural market laws of supply and demand.
Since the demand for gold from Vietnamese citizens will continue to be extremely high, this artificially induced shortage of gold will encourage counterfeit activities in the country.Furthermore, these latest decrees do anything but inspire confidence, since local investors will get even more nervous. The black-markets have already been trading dong for other paper currencies at a price that foresees future devaluations. Besides fleeing to gold, Vietnamese citizens are shifting their capital into US dollars. The greenback is being traded for dong at the black-markets at a much higher exchange rate than the official rate at Vietnamese banks.
There are currently over 10.000 Vietnamese gold dealers who don't wish to see the government thwarting their business. Many of these dealers will probably go underground. Therefore, by trying to exert more control over the national gold market, the government is actually in danger of causing precisely the opposite outcome.
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