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I. INTRODUCTION

1. MotivationGold has long been regarded as a valuable and highly-sought metal for its

high malleability, ductility, resistance to corrosion and most other chemical

reactions, and conductivity of electricity. Gold standards had been the most

common basis for monetary policies throughout human history, before it was

supplanted by fiat currency in the late 20th century.

Gold has a wide range of functions including electric-wiring, colored glass

production and even gold-leaf eating. And certainly it would be deemed a mistake

not to mention gold as such beautifiers as golden jewelry. Moreover, gold has

proved to be even more helpful for health as it is used to reduce the pain and

swelling of rheumatoid arthritis and tuberculosis. Restorative dentistry, especially

tooth restorations, also need the aid of gold. Of course, there are many other things

to analyze over the use of gold in industrial application.

Gold has been widely used throughout the world as a vehicle for monetary

exchange, either by issuance and recognition of gold coins or other bare metal

quantities, or through gold-convertible paper instruments by establishing gold

standards in which the total value of issued money is represented in a store of gold

reserves. Of all the precious metals, gold is the most popular as an investment.

Investors generally buy gold as a hedge or harbor against economic, political, or

social fiat currency crises. Gold is still considered an important reserve asset by

most central banks, even though it is no longer the center of the international

financial system. Gold has a track record of holding its real value over the

centuries.

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Thus because of golds undeniable applications and high value, the

fluctuation of gold price over time has attracted much of public and Government

concern. Changes in gold price are likely to make tremendous impacts on the

national economy. Particularly, in recent years, Vietnam has witnessed theinstability in gold price, which has posed risks to our economic affairs. Thus, the

understanding of gold price is crucially important to make decisions on which

policy to adopt.

The urgency of this trend has led us to choose Gold price in Vietnam

during 2010 - 2011 as the topic of our project. In this assignment, we will deeply

analyze the situation of gold price from 2010 to April 2011 in Vietnam, especially

the main causes and impacts of gold price rise on Vietnam economy during the

period. Besides, we also apply econometric methods to analyze and forecast gold

price in the future, before coming up with some possible policies against the

situation. We hope that through the arguments and statistics in our project, you

will gain more in-depth understanding about the trend of gold price in Vietnam

and be more confident if considering your investment in the gold market in the

future.

2. An overview of gold price in 2010 - 2011

2.1. During 2010

In 2010, according to World Gold Council, the global gold price benefited

from serious debt crisis in Europe in 2010, which urged investors to turn to gold

for fear of monetary risks. Consequently, gold trading activities went up. In

general, gold price rose by 29%. In addition, gold price volatility at 16% on an

annualized basis in 2010 remained consistent with its long-term trend. You can

observe the overall situation through the graph below.

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Also, Vietnam gold market had to suffer from serious instability in 2010.

Just like the whole world, Vietnam continually witnessed similar new records in

its gold market. Starting at around 26.60 million VND/ounce on December 31

2009, gold price reached approximately 36.09 million VND/ounce at the end of

2010. In other words, Vietnam gold price increased by 46% during the period.

From January to April 2010, gold price in Vietnam went around 26.5

million VND/ounce. However, world gold price successfully pushed the domestic

one to make a break-through from May at the new figure of 28 million

VND/ounce, which remained the same until August. Next, September saw a sharp

climb in gold price to 31 million VND/dong, and more remarkably, it kept rising

from 32 to 38 million VND/ounce in the following two months. Eventually,

December temporarily put an end to the growth of gold price which then stayed

stable well below 36 million VND/ounce.

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November 9, 2010 might become a memorable day of Vietnam gold price

history, as it witnessed the record price of 38.2 million VND/ounce ( SBJ gold ).

This gold boom was just similar to that in 2009: gold price rose by several million

per ounce in only one morning, thus many people flocked to buy gold regardlessof losses in the previous year.

In short, there was a wild fluctuation in gold price during the period: gold

price tended to increase most of the time and only declined at the end of the year.

This supported the fact that gold became a relatively lucrative investment channel.

In conclusion, 2010 was a year of gold phenomenon which succeeded in creating a

high gold boom and an excessively vibrant gold market.

2.2. From January to mid-April 2011

At first, there was a slight fall in gold price to around 34.08 million

VND/ounce at the end of January, 2011 ( SJC gold ).

But gold price did not remain stable for a long time. It rose unpredictably

and hit a new record of 38.25 million VND/ounce ( SJC gold ) on February 19,

2011. However, after the Government exercised a temporary ban on trading gold

bars (Resolution 11 NQ/CP), the price, despite continuous fluctuation, gradually

decreased to the figure 37.2 million VND/ounce on 15 April 2011.

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II. CAUSES OF RISING GOLD PRICE IN VIETNAM (2010-2011)

1. CAUSES

1.1. The effects of world financial crisis (2007-2009)

One of the most important reasons for the fluctuation of gold price is the world

financial crisis 2007 - 2009, which makes gold appear the safest tool to store

properties for investors. Under the context of worldwide recession, inflation

dominated most of the economies ranging from America, Europe to Asia with the

exception of Vietnam. In our country, inflation has long been a persistent problem.

From the graph below, it is not difficult to observe that inflation rate in Vietnam

reached its peak at 23% in 2008, then fell to 7% in 2009 before rising again to

11.1 % in 2010.

Vietnam Inflation Rate - Year 2005-2010

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Source: http://www.business-in-asia.com/vietnam/vietnam_2011.html

During the last two years, central banks of the US, the UK, China, Japan and

many other countries have tried to pump a large amount of money into the world

market by printing more and more currencies as well as issuing stimulus packages.

As a result, inflation rate increases. In the United States, the fact that investors lost

faith in the USD made Government bonds decrease in value and steeply raised up

interest rate as well. Every 18 days, the US carried out open market operation

which equaled the value of gold quantity mined in one year. At the same time, in

Europe, bad debts in several countries showed no sign of recovery. In short, the

expansionary fiscal and monetary policies turned out to be inefficient in pushing

the economy forward and decreasing the unemployment rate as expected. Hot

flows of money, instead, have run to emerging economies like Vietnam where

they were used to purchase gold.

In Vietnam, when the domestic currency loses its value, investors will have a

tendency to defense themselves by switching to holding gold instead of VND. On

the other hand, after the financial crisis, investment in financial or housing market,

for instance, has become so risky that investors just choose to stick to gold for

storing their assets value. All of these, eventually, have been leading to a hike in

gold price as we can see.

1.2. Mismatch between supply and demand of gold

Another reason behind the fluctuation of gold price is the mismatch between

supply and demand of gold. From the economic viewpoint, supply will increase

when demand increases to help stabilize the market price. However, this theory is

not true for the case of gold. Regardless of unprecedented rise in gold price, gold-

mining companies still fail to meet the demand simply because of the scarcity of

mineral gold ores in existence.

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Source: http://www.roycefunds.com/news/global/2010/1119-gold-full-

text.asp#

It is a fact that global gold production in recent years has increased by only 3%

while the gold price has risen by 20%.

To make the matter worse, booming demand for gold has recently put high

pressures on gold supply. Besides the increasing needs for golden jewelleries andindustrial gold, the action of governments, investors and households keeping gold

for safety has pushed the gold demand to the peak in 2010. According to WGC

(World Gold Council), the total value invested into world gold market in the third

quarter of 2010 jumped to 9.6 billion dollars, increasing by 60% in comparison

with that in 2009. At the same time, investors and some central banks in Asia and

Middle East also switched to store gold. From 2009 to 2010, the Central Banks of

India, Sri Lanka and the Republic of Mauritius purchased 212 tons of gold,

Bangladesh bought 10 tons, while Iran declared to convert 45 billion dollars

reserves into euros and gold. Also, some Middle Eastern countries proceeded to

switch 200,000 barrels of crude oil per day into gold, equivalent to 140 tons of

gold per year (if computed at the exchange rate of gold / crude oil at present).

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Although the gold price has been very high, analysts still believed the gold market

was potential enough to go further.

Limited supply opposed to boosting demand, in summary, is the reason why

gold price in the world generally and in Vietnam particularly skyrocketed during

the period 2010 2011.

1.3. The psychology of hoarding gold in Vietnam

As a matter of fact, Vietnamese people have long considered gold as the safest

means of storing value, especially in time of recession. Gold demand in Vietnam,

therefore, has increased dramatically during the last 15 years. According to the

General Statistics Office of Vietnam, from 1998 to 2010, Vietnam has imported339.86 tons and exported 268.86 tons of gold, running a gold-deficit of 71 tons.

Mr. Nguyen Van Giau, the governor of State Bank, claimed that gold imports in

Vietnam have risen sharply since 2003, reaching 90.5 tons at the end of 2008.

Undoubtedly the world economic crisis (2007 2009) has indicated great

uncertainty whether Vietnam economy will make a rapid recovery or not. After

the State Bank of Vietnam devaluated VND by 9.3 percent, people lose trust in

VND and all rush to buy gold. The central banks action has raised worries about

high inflation rates in 2011, therefore, keeping assets in gold instead of cash is

deemed to be the safest practice for people. This has boosted a great gold fever

throughout the domestic market, driving gold price up and up as a result of strong

demand versus weak supply.

Furthermore, the global crisis also causes severe impacts on the world

economy as a whole. This led to the collapse of many large financial institutions

throughout the world, thebailout of banks by national governments, downturns in

stock markets and housing bubbles in real estate market. Under such a gloomy

context, Vietnamese investors tend to switch to gold since investment in financial

http://en.wikipedia.org/wiki/Bailouthttp://en.wikipedia.org/wiki/Bailout

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assets or housing has become so risky and inefficient. This also contributes to the

dramatically increasing gold price during the period 2010-2011.

1.4. Government policies in Vietnam

Vietnam is not among the nations with the richest reserves of mineral gold in

the world, moreover, gold mining still meets with numerous difficulties in the

absence of modern technology. Thus domestic gold supply cannot adapt to the

continuously increasing demand all over the country, and we have to import gold

as a last resort. Gold imports in Vietnam are strictly controlled, as enterprises must

obtain permits from the Director of State Bank in their province to import raw

gold in form of pieces, bars or nuts. The government also imposes strict quotas on

the amount of gold imported.

In May 2008, the State Bank temporarily stopped licensing permits for

importing gold to restrain the trade deficit, ease the inflationary pressures and help

stabilize the economy. Since then the State Bank has loosened the ban several

times with limited quotas, and on February 24, 2011 it promulgated the Decree 11

NQ/CP. One of the main purposes of the decree is to control domestic gold price

through prohibiting trading gold in form of pieces.

Such policies can help restrict the amount of foreign currencies used for

imports, but on the other hand they create scarcity, or psychology of scarcity, of

gold among Vietnamese people and push gold price up as a result. Furthermore,

this caused a boom in gold smuggling throughout Vietnam and thus USD tends to

appreciates, again posing threats of VND depreciation.

1.5. The increase in exchange rate VND/USD

The exchange rate between VND and USD experienced an unpredictable

increase during 2010, which strongly affected gold price in Vietnam as well. This

effect can be described as a gold USD vicious circle as follows.

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Generally gold price is quoted by USD. Thus when gold price in Vietnam

climbs higher than the world price, many organizations and individual investors

rush to buy USD on the free market to import gold, either legally or illegally

through smuggling. This will sharply drive up the exchange rate when demand forUSD keeps going up till exceeding supply, and the price of imported gold, as a

result, also increase under the new rate.

Meanwhile, a rise in gold price or exchange rate usually indicates high risk of

VND devaluation. This is the reason why most investors just try to convert VND

into gold or USD as soon as possible to preserve their assets. Booming demand in

the short run, in its turn, causes a hike in gold price and exchange rate and the

vicious circle just go on and on.

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III. IMPACTS OF RISING GOLD PRICE IN VIETNAM (2010-2011)

1. The devaluation of VND

For a long time, storing gold has been considered the safest method of savings

for the Vietnamese. When the gold price increases significantly, people have a

tendency to withdraw their money at banks to buy gold and dollars for savings

with a hope of higher returns. When domestic demand for gold rockets beyond the

power of supply, speculators may switch to even illegal deeds like using dollars to

smuggle gold into Vietnam, and in a return, cause a scarcity of dollar. A local

newspaper reported that the action could pose increasing pressure on the domestic

currency in the context of ongoing trade deficit, which worsened the devaluation

of VND.

According to several Vietnamese analysts, gold demand has increased sharply

on the market partially because people, who have lost faith in the VND, have been

rushing to purchase gold after the State Bank devalued the domestic currency by

9.3%. Therefore, keeping assets in gold instead of cash has been considered as the

safest practice for people. Gold trading companies said that most people having

idle money have a tendency to purchase gold or dollars to keep under their

pillows. And unfortunately, no one wants to keep VND. This explains why

commercial banks find it very difficult to mobilize capital in VND, even though

they set the deposit interest rate at 14 percent per annum, the highest ever allowed

level

2. Trade deficit

As mentioned above, the relationship between the gold market and the foreign

currency market is very strong. When the gold increase, a huge sum of USD will

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be used to import gold, which makes USD in the market become scare and

increase the dong/USD exchange rate. Therefore, this will cause trade deficit.

Trade balance of Vietnam from 1999-2010

Source: GSO and vinacorp.vn

Looking at the graph you can see that the period from 1999 to 2002, trade

balance of Vietnam is in equilibrium or surplus but from the year 2002 to 2010

Vietnam witnessed trade deficit and the amount of deficit increased gradually. In

more detail, if in 2003 trade deficit of Vietnam stood at 2.581 billion dollars, in

2008 this number rocketed to 12.782 billion dollars, account for 5 times larger.

This number reached the peak of 15,412 billion dollar in 2009 and in 2010 the

trade deficit is about 12 billion dollars.

3. Great impacts on banking system of Vietnam

As stated in the first impacts, increase in gold price in Vietnam (2010-2011)

resulted in a scarcity of dollar, increased VND/foreign currency exchange rate. As

a consequence, we run aforeign currency deficit. Many companies cannot borrow

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enough foreign currency from banks to import inputs for their manufacturing,

which induces great difficulties to the whole process of production.

Also, there exists a great problem about how to make use of the very large

amount of dollar and gold sources that are lying deadly on hands of Vietnamese

people. Increasing gold price also leads to increasing speculation of gold, which

means a larger amount of gold being kept for no output.

Even when people are encouraged to put their gold savings into the banks, as a

result of the wildly fluctuating gold price, the risk in activities of lending and

borrowing gold is increased. Therefore individuals and companies dare not borrow

gold for fear of insolvency when the loan comes due. If the banking system can

mobilize gold but cannot lend them to anyone, the credit channel of gold will be

stuck, wasting a huge source of gold unused.

The ability to mobilize capital of many banks in Vietnam, thus, due to the

increase in gold price, will be reduced. This situation may have a bad impact on

the transaction activities of banking system, in particular and the whole economy,

in general.

Everyone buys gold. It is a waste of resources. The reason is that gold does not

bring about any output to the economy. Such financial assets as bonds or stocks

are quite similar, but at least they are capital instruments. But in case of gold, we

can gain nothing.

4. Inflation risk

According to Prime Minister Nguyen Tan Dung, this year, the dramatic

increase in gold price and the VND/USD exchange rate were among the reasons

for higher market prices, raising fears that Vietnams inflation rate for the whole

year may jump to double-digit figures.

In terms of CPI, according to the General Statistics Office of Vietnam in

period 5 (2009-2014), gold is not among the 572 kinds of goods and services

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included in CPI calculation. However, when the price of gold increases, the price

of inputs for manufacturing and manipulating goods in jewelry industry will also

increase, pushing up the price of jewelry products. This causes a domino effect on

the whole market eventually: when the price of one good goes up, it also pushesup the prices of the other 571 kinds of goods and services mentioned. In this case,

inflation is just inevitable.

In terms of real estate market, in the event of successive severe recessions,

there emerges a phenomenon of using gold to evaluate value of major assets,

especially real estate prices. When gold becomes a measure of value, a rise in gold

price resulted in the corresponding increase in property and other commodities

price, causing the inflation risk.

In terms of the amount of money in circulation, people would lose their

confidence in the domestic currency in time of economic crisis. Therefore, they

would buy gold as a means of storage, which means that flows of idle money from

households would be converted into gold at lightning speed. Consequently the real

amount of money for daily transactions in the circulation would become scarce

and the government would be forced to print more money. This certainly causes a

climb in inflation rate as a result.

5. The effects on the implementation of monetary policies.

As you know, the increase in gold price has indirect impact on the increase of

CPI, which indicates the inflation risk. For the time being, when the rate of

inflation has started to move beyond the control of Vietnam macro-economy, the

central bank may consider implementing some regulations like changing the

interest rate, adjusting the required reserve ratio and regulating means of payment

in the economy to curb inflation before too late.

Firstly, dramatic gold price rise has a negative impact on the implementation of

monetary policies. According to some statisticians, the gold over GDP ratio in

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Vietnam is very high, which puts pressure on the monetary policies. For example,

based on the total money for transactions exclusive gold (M2), the money

multiplier is about 4.8. However, if we calculate both M2 and gold in total, this

multiplier will become 2.0. Apparently, there are still many problems in themonetary systems resulted from the gold market.

Furthermore, according to the World Gold Council, the total sum of gold in

Vietnam is about 1000 tons, equivalent to 45 billion USD. Although Mr. Nguyen

Van Giau, the governor of State Bank, claimed that the real amount (from 1998 to

2010) just reaches 339.86 tons only, this is still a considerable figure. Such a huge

amount during the crisis has put much pressure on the monetary policies, the

economic growth rate and the activities of Vietnam commercial banks. As

mentioned above, there exists a close-knit relationship between gold market and

foreign currency market in Vietnam. When gold price increases, a huge sum of

USD will be used to import gold, which makes USD in the market become scarce

and increases the VND/USD exchange rate. Furthermore, gold price rise will also

result in continuous increases in the prices of other goods. Besides, as a

consequence of the gold rush, households will withdraw their savings at bank to

buy gold as a means of storage, which affects the liquidity in the financial market.

Therefore, the State Bank of Vietnam must adjust the monetary policies.

IV . POLICY IMPLEMENTATION

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1. SOME REMARKABLE SOLUTIONS OF THE STATE BANK OFVIETNAM (SBV) FOR GOLD PRICE IN 2010 - 2011

1.1. Shut down the gold trading floor

Comment:

The government did not estimate the reaction of market when making policies.

When all public gold trading floors were banned under an order from The State

Bank of Vietnam, investors would immediately turn their flows of capital intogold-bar marketrather than other investment channels such as savings as the

Government expected. As a result, trading in gold bars increased remarkably.

At the moment, while risks in the economy still exist and even increase, gold is

still the top priority of investors. Therefore, The State Bank of Vietnams order to

ban public gold trading floors can create other different kinds of gold market

such as gold-leaf market, gold-bullion market, and so on.

Shutting down gold trading floors have forced gold trading to be based only on

physical gold, mainly happened in gold bar market as nowadays. This wastes

foreign currencies imported and increased firms cost. The current trend of

trading in gold-account in the world makes up from 70 to 80 percent while trading

in physical gold only makes up a very small part.

1.2. The Resolution No. 11 released by the government to ban gold-bar

trading

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Comment:

The policy paid too much attention to short term problems. The recent

fluctuation of gold market is a temporary fluctuation arising from the impacts of

the current economic situation and gold quota policies. Banning gold-bar trade is a

short term solution. Apparently the policy-makers have not considered the long

term benefit of gold, which is a safe investment channel to diversify risks for both

investors and the economy.

The governments intervening policy does not comply with market rules. As

analyzed above, the main cause of gold markets unstable situation has arisen from

import quota policies of The State Bank of Vietnam under an unstable

macroeconomic situation, not from the gold market itself. Therefore, instead of

banning gold market, The State Bank of Vietnam can change quota policies.

If the government tries to eliminate the market, another market called black

market will take shape. If trading in gold bars is banned, people will buy golden

assets instead in forms of rings, bracelets, necklaces, and so on. In fact this

policy not only does not fail to decrease the amount of physical gold for

manufacturing but also raises more difficulties in managing gold market, wastes

the capital in the society and causes drawbacks to people due to hardship in

controlling golds quality.

If people are not allowed to buy gold bars, the expected chance of them selling

gold to The State Bank of Vietnam will not be high. In addition, if the measures

are not comprehensive, the inflation pressure may be increased.

Now in the world trading in gold bars is not banned in any countries, the

example of which is China. In the past China managed gold market very strictly

but now the Chinese government encourage people to hoard gold by selling more

gold bars to them.

Conclusion:

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Those intervening actions of The State Bank of Vietnam are not going along

with market rules and thus not able to solve problems thoroughly.

The government should not make administrative policies, cutting suddenly or

prohibiting trading in gold because if so, gold is not an official investment channel

anymore. Instead, an intermediate step is essential for gold to be taken into banks.

In other words, in Vietnam gold is not only a type of good but also a means of

payment and savings of people. Moreover, gold is closely related to VND and

foreign currencies. Because of those, the government must manage gold market

by market measures, not restrain gold demand with administrative orders.

2. PROPOSALS OF SOME POLICY IMPLEMENTATION

2.1. Solutions with respect to the mismatch between supply and demand of

gold.

It is high time that gold market needed a suitable and professional market

solution which helps stabilize and develop the financial market. That is setting up

National Gold Exchange.

Although gold trading floors have been shut down eternally, there is stilldemand for hoarding and investing in physical gold and gold-account. As a result,

gold investment channel must be enlarged, creating flows for the gold market

under the States control. National Gold Exchange is both a solution to the gold

markets problems and an indispensable developing step of the financial market.

In many countries in the world, not only do gold manufacturers, gold retailers etc

join in National Gold Exchange, investors and organizations join in it via

intermediary companies too. The operation of National Gold Exchange relies on

the principle of matching orders continuously and gold price is determined by

supply and demand. Thanks to this, swaying situation, blowing or pulling prices

excessively by gold speculators will not exist as in the past.

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Besides trading in physical gold, National Gold Exchange allows to trade in

gold-account, which diversifies peoples demand for gold investment, gold

hoarding and gold insurance. Gold is a special kind of good and plays the role as

foreign currency reserves so The State Bank of Vietnam can be in charge oforganizing, setting up, supervising and controlling National Gold Exchange.

In conclusion, the National Gold Exchange will both ensure the equity in the

market and avoid raising prices and creating fevers that cause damages to the

economy. In addition, this proposed project will help stabilize, manage and

develop the gold market better as well as further promote the role of the capital

source in economic development. Besides, the State will be able to supervise flows

in the gold market more easily. Finally, in the context of increasing demand on

gold investment, the establishment of the National Gold Exchange will create a

safe and effective investment channel.

2.2. Solutions with respect to the psychology of holding gold:

Incomplete statistics show that approximately half of Vietnamese households

are now hoarding gold. The habit of hoarding gold has been formed a long time

ago and has become popular because of the instability of the domestic currency as

well as a high inflation. Thus, encouraging people to abandon this habit is not

easy, which requires the use of economic measures as follows:

Reorganizing the gold-bar trading network with tighter regulations and

supervision.

Creating an effective mechanism for banks and businesses to draw gold

from households, funding a source of capital for economic development. In the

long run, when the Vietnam currency is stable, along with appropriate policies, it

is sure that gold-bar trade will be narrowed.

2.3. Solutions with respect to the increase in exchange rate VND/USD

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The root cause of gold fever is inflation or, in other words, the serious

devaluation of the domestic currency. Therefore, so as to solve the problem, there

must be effective measures to reduce inflation as well as increase peoples faith in

their national currency, leading to eliminate the habit of hoarding gold and foreigncurrencies. Afterwards, we are able to solve the problem of inflation, which is

worsening the current situation and put a heavy strain on the government.

In short, the government needs to offer a solution package in order to resolve

the relationships among inflation, exchange rate and interest rate. They need to

keep control of the interest rate at a reasonable level so that inflation and credit

growth can be restrained actively. Consequently, the value and attractiveness of

the VND against foreign currencies can be increased, while controlling the credit

shift of VND into foreign currencies. Only by reorientation of monetary policy

can the government attract investors and reduce the fear of savers and speculators.

2.4. Solutions with respect to the government policies:

Narrow the difference between domestic and international gold price. This

can be done by looking for ways to increase domestic gold supply. Although

tightening the management of production and trade of gold is necessary, the

government should not prohibit gold-bar trade immediately, but to provide tighter

regulations in order to reduce the number of personal gold stores. To be licensed

to trade in gold-bar, enterprises should have not only a regular business license but

also a minimum legal capital of 30 billion VND and revenue for the last two years

of 500 billion or more.

Rearranging the market requires a new legal framework, which complies

with the current situation as well as the long run. This framework is designed to

build up and develop the gold-mining industry and to ensure the legitimate

interests of citizens owning gold legally. In addition, the framework must not

create shocks to the market and public opinion and not manage or administer the

market through administrative orders. The reason why the gold market in Vietnam

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has not developed steadily is partly that the current legal framework for gold trade

is not completed. Government's Decree No. 174 on management of gold was

issued in 1999, which is no longer appropriate to the context of international

integration as well as the actual sensitivity of the gold market. Therefore, themanagement and operation of gold market is now somehow confusing, passive,

and mainly based on administrative solution to the situation. Yet it was for no

suitable mechanism, gold-account trade has been developing spontaneously in

recent years, which is a destabilizing factor to the market.

The root cause of instability in the gold market did not come from this market

itself. It is because of the import quotas policy of The State Bank of Vietnam in

the context of macroeconomic instability. Therefore, instead of prohibiting the

gold market, The State Bank of Vietnam needs to change the quotas policy:

The State Bank of Vietnam can take a move from issuing gold import

quotas to authorizing indirectly for the gold-importing companies in order to swap

a portion of foreign exchange reserves into gold reserves. This move will increase

the domestic supply thereby reducing psychological speculation so that the gold

market is stabilized. On the other hand, The State Bank of Vietnam can participate

in gold trade in the market if necessary. In addition, the transfer of a portion of

foreign exchange reserves into gold reserves could limit the risk of the devaluation

of the foreign exchange reserves when the currency was devalued by foreign

inflation.

Quota levels should comply with market demand and capability of

balancing foreign currency of the business. The government should not issue

gold import quotas for a too short time, since it would lead to collecting dollars

for imports, causing a strain on the foreign exchange market. It would also do

harm to businesses because the government would be not able to select the

appropriate import price, which would not promote the role of price stabilization.

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Finally, the government should take a strict control of the gold market by

coordinating with other ministries and provincial People's Committees to inspect

and deal with all cases of speculation, hoarding, and manipulation in the gold

market, illegal tradingand quotation of gold.

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