There exist in the domestic gold market absurdities which rely on sentimental factors and the fluctuation of the world gold price. Gold remains an investment channel which is profitable in the long run if investors choose the right time to make a transaction or to keep their gold. However, allow the slightest negligence of it and you’ll fall into a gold trap!
For the first time over the past five years, the world gold price rocketed past the $1,700 per ounce mark to stand at $1,702.9 per ounce on March 8, 2020. Eight days later, on March 16, it slid to $1,455.7 per ounce, a drop of almost 14.5%. The fluctuation of the gold price could therefore be likened to the erratic bounce of the stock market. The dramatic upsurge and plunge of gold price during a short period of time has driven the greed of speculators. Moreover, the lack of liquidity of the world monetary market or more precisely, the fear that the market would become short of liquidity coupled with the anticipation of a rising US dollar against other strong currencies, has prompted investors to temporarily abandon this precious metal.
After a time of dumping, the world gold price seemed to stay stable over the weekend when it hovered around the $1,500 per ounce mark, or VND42.95 million per tael (a tael is 37.5 grams of gold) if it is calculated using the universal foreign exchanged applied by commercial banks at VND23,500 to the US dollar.
That means the domestic gold price has not faithfully mirrored the world gold price as the former is still VND3.5-4 million higher than the latter. Gold price heavily depends on two factors: speculation and supply-demand. Currently, the speculation in the gold market is not overwhelming because risks are so high. When it comes to supply-demand, demand is higher than supply. However, the gap is not very wide either. According to the gold trading arm of a commercial bank in a southern city, the number of gold buyers did increase but orders were not big. Each buy is only one or two taels. There are almost no orders for dozens of or hundreds of taels at a time.
In fact, the local gold market often fails to meet an order of 100 taels a day for several days in a row. Few people are still holding gold in the long run. The majority of them had sold their gold to take profit when gold price surpassed the VND40 million threshold last year and continued to sell it as soon as price climbed. These people also stopped buying gold when the domestic gold price was higher that the world gold price.
Then what causes the domestic gold price to be higher than that in the world? It is because there is too little SJC gold that remains in the market (SJC is the most favoured gold trademark in Vietnam), which accounts for only 10-15 percent of the gold market in Vietnam. Once making up 70 percent of the entire gold market, SJC gold has seen its market share shrink substantially each time the gold fever occurred during 2018-2019 when the world gold price was higher than that in Vietnam. Meanwhile, for many years now, the State has not given any quota allowing gold ingot to be molded into SCJ gold bars. To put it differently, new SJC gold is no longer available while the SJC trademark still dominates the market price. It is illogical, isn’t it?
In Vietnam, many gold trademarks other than SJC are available. However, as gold buyers prefer only SJC gold, its price always rises, and this is only technical by nature. Because SJC still represents the gold market, it sets a benchmark in trading for other gold trademarks. That’s why the domestic gold price is almost always higher than the world gold price.
The flu sentiment
The prolonging Covid-19 epidemic and its possible result in a global crisis accompanied by an economic recession has caused insecurity among many consumers. They have come to see gold as a safe heaven for their investment portfolio, especially in the context that the deposit interest rate has been cut and may continue to go down deeper. Furthermore, some have opined that the world gold price may only correct for a while and would continue its rising streak in the cycle. Investors should therefore take this opportunity of the corrected price to buy gold.
The domestic gold price, for that reason, is being pegged to that delicate sentimental mood of investors, which can reverse anytime dependant upon how the coronavirus outbreak develops. What’s more, demand will breed supply. The high domestic gold price has led to a comeback of gold smuggling. Smuggled gold in the form of ingot cannot be molded into SJC gold bars. However, it can be consumed via gold jewellery shops. As they cannot buy SJC gold, consumers turn to other gold trademarks. Although SJC gold can be sold or bought anywhere, one can sell gold of other trademarks at the place he or she bought it. Gold jewels such as necklaces, bracelets and rings are easily ordered at gold shops.
Data from gold shops and commercial banks show that the gap between the gold buying and selling prices in Vietnam has escalated to a new level at VND600,000-700,000 per tael, or even VND1 million, depending on the time during the day. The domestic gold price has also been corrected in line with the fluctuation of the foreign exchange rate between the dong and the US dollar, the world gold price and the rate between the green back and other strongest currencies.
Incorporating in itself so many highly changing variables, gold price may prove to be a deadly trap for investors who are inexperienced or fail to understand it thoroughly.
https://english.thesaigontimes.vn/75746/the-gold-trap.html
