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Vietnam Halts Gold Trading; Global Imbalances Mount

Economics / Global Debt Crisis Jan 01, 2010 - 04:36 PM GMT

By: Mike_Shedlock

Economics

Best Financial Markets Analysis ArticleCiting speculation and excessive leverage Vietnam to put an end to gold trading.

January 1 2010

Vietnam has ordered all gold trading floors to close by the end of March, putting an end to a business which turns over $1bn a day but which the government feared was spinning out of control.


“Both the owners of the gold-trading floors and traders are doing their transactions on a fragile foundation that lacks legal, economic and technical frameworks and knowledge,” the government said in a statement.

The order also bans using overseas accounts, but does not affect jewelery or retail gold sales.

The government said it was particularly concerned that some investors had been drawn into overleveraging their positions by low interest rates and the ever-increasing price of gold , which has risen from $660/oz when the first trading floor was started in 2007 to almost $1,100/oz today.

The government said that in some cases, investors had only been required to put up 7 per cent of the value of their portfolio.

The regulation will affect around 20 gold trading floors, but it is unclear if the government is intending to re-write the regulations and allow the floors to re-open or if the move is long-term.

The trade has become a lucrative source of income for many of the banks and trading houses which have opened the exchanges, and the ban could hit profits. But analysts say it could free up liquidity that might flow back into the stock markets, lifting the index.

Dong Devalued

In November, Vietnam devalues the dong and raises rates

November 26 2009
Vietnam devalued its currency by 5.4 per cent against the dollar yesterday and raised interest rates by a full percentage point in an effort to cut inflation and underpin the beleaguered dong.

The dong has come under pressure recently as inflation started climbing and domestic demand, driven by the country's $8bn stimulus programme, drove the current account deficit to close to $2bn a month.

"The decision poses further challenges to the central bank's credibility," said Tai Hui, Standard Chartered Bank economist. "The risk is that local investors will pay little attention to official comments going forward, which may exacerbate devaluation pressure on the currency."

For weeks, the government had insisted that it would not give in to pressure on the dong. "Vietnam will not devalue our currency," Nguyen Minh Triet, president, said in Singapore last week. "We will take cautious steps on our monetary policy."

Downward Pressure On The Dong

Please consider Dong weighed down by deficit

December 1 2009

An initial strengthening of the dong on the black market from 19,800 to the dollar to 19,100 has been followed by renewed weakness, with the dong trading at 19,500 on Tuesday, substantially outside the permitted trading band, suggesting that at best the jury is still out on the government’s efforts to put a floor under the currency.

The State Bank of Vietnam made its move after a significant increase in the downward pressure on the dong. The immediate cause was a spike in the gold price: Vietnam is the world’s eighth-largest buyer of gold and when the price started to rise, Vietnamese consumers sold dong to buy in. At one point the precious metal hit $1,362 an ounce, a premium of more than $260 per ounce on the London market price of the time, before falling back in line when the government lifted import restrictions .

Vietnam Strives To Limit Inflation To 7%

Inquiring minds are reading Vietnam Bank to Keep Benchmark Rate at 8%

Vietnam’s central bank will keep the benchmark interest rate at a one-year high of 8 percent in January to help strengthen the economy.

The central bank unexpectedly increased the base rate to 8 percent last month amid signs of quickening inflation, after holding it at 7 percent for 10 months to revive the economy. The government also subsidized corporate borrowing and reduced tax payments to boost gross domestic product.

Average inflation has been below the government’s target of 7 percent this year, according to an announcement on its Web site yesterday. The consumer price index rose 6.5 percent in December, the fastest pace since April, the General Statistics Office said yesterday.

‘Acceptable Pace’

“Inflation is quickening, but still at an acceptable pace, so we don’t need to raise the base rate right now,” Le Xuan Nghia, Hanoi-based vice chairman of the National Financial Supervision Commission, and former head of the central bank’s department for banking strategy, said by telephone today. “It’s also better for businesses.”

Wrong To Be Long The Dong

Inflation of 7% is certainly not better for business.

Moreover, halting gold trading will not solve anything. All it will do is increase the black market price of gold in the Dong, already at a premium.

Global Imbalances Mount

  • Global imbalances are cropping up like weeds in places like Greece, Spain, Vietnam, Iceland, Vietnam, Latvia, and Lithuania.
  • There are massive property bubbles in China, Canada, the UK, and Australia.
  • Japan is in a foolish fight against deflation and sinking further in debt
  • Commercial real estate in the US is on the verge of bringing down hundreds of regional banks.
  • Cities in the US are under massive pressure because of unsustainable pension plan promises.
  • Global terrorism is on the rise

How long this mess hangs together without a huge crisis in a major currency is the question everyone should be asking. Sadly, most are oblivious to the widening structural cracks.

By Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com .

© 2009 Mike Shedlock, All Rights Reserved

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