VZCZCXRO0054
OO RUEHDT RUEHPB
DE RUEHHM #0676/01 3520952
ZNR UUUUU ZZH
O 180952Z DEC 09
FM AMCONSUL HO CHI MINH CITY
TO RUEHC/SECSTATE WASHDC IMMEDIATE 6163
INFO RUCPDOC/USDOC WASHDC PRIORITY 0158
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCNARF/ASEAN REGIONAL FORUM COLLECTIVE
RUEHHI/AMEMBASSY HANOI IMMEDIATE 4058
RUEHHM/AMCONSUL HO CHI MINH CITY 6406

UNCLAS SECTION 01 OF 03 HO CHI MINH CITY 000676 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/MLS, USAID/ANE, EEB/TPP/BTA/ANA 
USDOC FOR 4431/MAC/AP/OPB/VLC/HPPHO 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD SOCI PREL PGOV VM
SUBJECT: (SBU) HCMC'S SURPRISING GOLD MARKETS 
 
HO CHI MIN 00000676  001.2 OF 003 
 
 
¶1. (SBU) Summary.  Not far from HCMC, a huge, 24-karat gold 
plated effigy of the late Ho Chi Minh on display in Vietnam's 
largest Buddhist temple is an interesting metaphor for two 
somewhat incongruous realities: the Vietnamese people's 
reverence for the founder of Communist Vietnam and their abiding 
faith in the value of gold and commerce.  That faith in gold and 
commerce is also reflected in the fact that the 2,000 gold 
dealers located in HCMC comprise what is arguably the most 
efficient, transparent and least regulated market in the 
country.  Ordinary Vietnamese see gold (often hidden away in 
walls or under floors) as an investment, a hedge on inflation, a 
safeguard against unforeseen drastic changes in GVN policy, and 
the most reliable medium of both exchange and storing wealth. 
One HCMC financial analyst calls gold the "ultimate local 
confidence indicator," explaining that when Vietnamese see 
economic policy drifting away from market reality, they trade in 
gold.  Merchants use gold as a way to avoid taxes or to get 
around limitations on the purchase and use of foreign exchange 
and business and individuals alike use the gold markets as the 
"free market" for exchanging between Vietnamese dong (VND) and 
U.S. dollars ($US).  Vietnam's gold trading markets can reach a 
daily turnover of $3 billion, dwarfing the stock exchange which 
often records less than $100 million in turnover.  The 
remarkably versatile role that gold plays in the Vietnamese 
economy is increasing drawing the attention of senior Vietnamese 
officials, who are now talking about ways to limit gold trading. 
 Experts warn that, if enacted, such moves would only drive the 
market underground.  Restrictions on gold trading intended to 
stabilize the value of the VND would almost certainly backfire 
by removing what has emerged as a key safety valve in Vietnam's 
mixed state/private economy.  End Summary. 
 
The Complex Nature of the HCMC Gold Market 
------------------------------------------ 
¶2. (SBU) The price of gold seems to obey strange rules in HCMC. 
At times, gold can be purchased here for less than on the world 
market; at other times, such as the days leading up to the 
exchange and interest rate adjustments announced by the State 
Bank of Vietnam on November 26, domestic prices can exceed world 
prices by as much as 20%.  According to HCMC-based World Gold 
Council representative Huynh Trung Khanh, the perplexing 
behavior of the gold market, especially the divergence between 
the world and domestic gold price is a function of many factors, 
including GVN policies that peg the Vietnam Dong (VND) to the 
USD and limit gold imports in an (eventually unsuccessful) 
effort to manage the country's balance of payments. 
 
¶3. (SBU) The State Bank of Vietnam (SBV) sets import quotas for 
gold and assigns the right to (legally) import gold to roughly a 
dozen privileged companies. The largest of these are Saigon Gold 
and Jewelry Company, Phu Nhuan Gold and Jewelry Company, 
Sacombank Jewelry, Agribank Gold and Silver Company and the Asia 
Commercial Bank.  According to World Gold Council estimates, 
Vietnam's gold-consuming industries use between 20 and 22 tons 
of gold per year, meaning that roughly 70 percent of the 60-some 
tons of gold that Vietnam imported last year went "into the 
mattress."  Official limitations on gold imports serve as a 
narrowing of the pipeline rather than a solid impediment. 
Official limitations on supply mean that local market demand for 
gold often exceeds the supply, pushing the local price above the 
world price.  The difference between the world and domestic gold 
prices is held in check gold smuggling.  The primary smuggling 
route is across Vietnam's border with Cambodia and into HCMC's 
roughly two thousand private gold shops.  Those shops pay for 
the gold using dollars purchased at the "free market" (also 
called unofficial or "black market") rate.  The shops then sell 
it to Vietnamese buyers either for dollars or for the equivalent 
VND price based on the prevailing "free market" rate.  The 
industry best guess, based on gold trade throughout the region 
as well as current and historical consumption patterns, is that 
between 40 and 50 tons of gold per year are smuggled into 
Vietnam, and that the stock of privately-held gold in Vietnam 
ranges from 600 to 700 tons, worth $22-25 billion USD.  To put 
that into perspective, the value of privately held gold easily 
exceeds official national reserves. 
 
¶4. (SBU) "The unofficial currency market is strongly influenced 
by the price of gold," SBV governor Nguyen Van Giau told the 
press when he announced the decision to issue additional gold 
import quotas on November 25.  One former multilateral 
development bank economist seconded that statement in a 
conversation with the Consulate, attributing significant 
pressure on the VND/USD "free market" exchange rate to HCMC's 
2,000 gold shops buying USD above the official maximum VND/USD 
exchange rate to purchase gold in Cambodia.  This drain on the 
already restricted flow of hard currency makes it more difficult 
 
HO CHI MIN 00000676  002.2 OF 003 
 
 
for businesses get the dollars they need for international 
trade, and obliges the SBV to find other ways to provide more 
USD liquidity through the banking system. 
 
Gold is Useful for Getting around Inconvenient Rules 
--------------------------------------------- ------- 
¶5. (SBU) Gold is an important mechanism for getting around 
official currency exchange constraints, said one expat banker, 
and will remain so until Vietnam fully liberalizes the VND/USD 
exchange rate.  While gold shops are legally prohibited from 
conducting foreign exchange transactions, the practice is 
ubiquitous -- so much so that various GVN-owned media outlets 
provide daily (or even up to the minute via SMS) "free market" 
exchange rate quotes.  To maintain a semblance of legality, gold 
shops typically log two transactions when exchanging currency -- 
gold sale for dollars versus gold purchase for VND at a price 
that reflect the "free market" VND/USD exchange rate.  While 
banks are legally required to buy and sell dollars within the 
official trading band, (currently 17,961 VND/dollar plus/minus 
three percent), many also circumvent the rules by selling gold 
for dollars then buying the gold with VND with a service charge 
that just captures the difference between the "free market" and 
official VND/USD exchange rate. 
 
¶6. (SBU) For many Vietnamese looking to make large payments, but 
who don't want to be troubled by paperwork or tax bills, gold 
remains the currency of choice.  While payment in US dollars or 
even VND was gaining increasing acceptance over the past several 
years, the disparity between legal and market dollar rates that 
prevailed for much of 2009 made sellers of real estate and other 
big ticket items reluctant to put up with exchange rate risks if 
they accepted VND or the risk that they would be required to 
exchange their USD for VND at the official rather than free 
market rate.  Gold provides a great, and very traditional, 
alternative.  Except for a few of the larger banks and gold 
companies like Saigon Jewelry Company and Phu Nhuan Jewelry 
Company, gold merchants rarely provide tax invoices for gold 
transactions so the government never needs to know exactly how 
much was bought or sold.  The "off the books" nature of the gold 
business is indirectly recognized by the GVN since, as Khanh of 
the World Gold Council notes, gold shops pay a fixed tax per 
month rather than a tax on the volume of transactions or on 
profit. 
 
Gold is an Expression of Confidence, or Lack Thereof 
--------------------------------------------- ------- 
¶7. (SBU) HCMC bankers and investment fund managers emphasize 
that gold is a good store of value in high-inflation periods 
such as Vietnam experienced in 2008.  They also explained that 
gold prices reflect local anxieties about Vietnam's balance of 
payments and budget deficits, and by extension an expectation of 
long-term strength or weakness in the Vietnam currency.  The 
real value of Vietnam's currency is based on the strength of the 
economy, WGC's Khanh agreed, adding that even without high 
inflation people will buy gold until the currency is fully 
convertible.  Khanh says that although the SBV claims there is 
no shortage of dollars, the free market exchange rate has yet to 
converge with the SBV's official maximum rate, which is 
currently set at 18,479 VND/USD.  (Note: As of December 16, the 
free market rate was 19,400, or roughly 5% above the legal 
limit.)  Until there are enough dollars in the system, that 
situation won't change and people will look for trusted 
alternatives like gold. 
 
¶8. (SBU) The price of gold can also be read as an indicator of 
confidence, Khanh said, as shown by State Bank of Vietnam 
macroeconomic moves on November 26.  Two days earlier, on 
November 24, the price of gold in Vietnam at "free market" 
exchange rates was US$ 27 per troy ounce above the world price. 
(Note: Using the "official" exchange rate yielded a domestic 
Vietnamese gold price a whopping US$ 221 above the world price 
-- a figure that was quoted in some local press articles about 
gold fever.  End Note.)  Two weeks later, on December 7, the 
price of gold in Vietnam based upon the free market exchange 
rate had dropped to US$ 56 per troy ounce below the world price. 
 These dramatic shifts show that the market read the November 26 
exchange rate adjustment as a step toward market reality and 
greater currency liberalization, a local portfolio investment 
manager said.  Many other HCMC analysts tell us gold is the 
leading indicator of Vietnamese confidence in their government's 
economic policies, with several mentioning that the cancellation 
of short-term interest rate subsidy helped cool fears of a 
return to high inflation in 2Q 2010. 
 
Time to Regulate Vietnam's Most Efficient Market? 
--------------------------------------------- ---- 
 
HO CHI MIN 00000676  003.2 OF 003 
 
 
¶9. (SBU) One of the secrets to the success of the HCMC gold 
market is that it largely operates in a legal and regulatory 
vacuum.  A local HCMC equities analyst explained that even 
though gold imports are regulated, once the gold is in the 
country domestic trading is so lightly regulated that a huge 
market has developed in recent years -- a market with daily 
volumes of reported gold transactions sometimes reaching US$ 3 
billion.  In comparison, the HCMC Stock Exchange sometimes 
closes with less than $100 million in daily turnover.  The 
analyst said the lack of rules for gold trading have allowed the 
market to flourish, explaining that "gold is more liquid than 
Vietnamese stocks, gold transactions settle instantly so you 
don't wait three days as with stocks, you can short gold, you 
can leverage gold, ruthless competition minimizes transaction 
fees, and information is virtually transparent.  None of this 
can be said for stocks in Vietnam." 
 
¶10. (SBU) This unregulated activity makes some of Vietnam's 
leaders nervous.  SBV governor Nguyen Van Giau told the National 
Assembly that gold exchanges operate in a "legal loophole" that 
no agency currently regulates.  There is a public discussion 
over regulating gold, with some like former SBV governor and 
member of the National Financial and Monetary Policy Advisory 
Council (NFMPAC) Cao Sy Kiem arguing for strict control over 
gold trading to help the GVN better manage Vietnam's economy. 
Most HCMC analysts believe this would just push gold trading 
underground.  $1.4 to $1.8 billion dollars worth of gold will be 
smuggled into Vietnam this year and the GVN won't be able to 
turn that off overnight, a gold industry analyst stated.  HCMC 
University of Economic professor and NFMPAC member Tran Hoang 
Ngan urged caution, "although gold exchanges have negative 
impacts on the market, the government should facilitate their 
business with better management." 
 
Comment: 
-------- 
¶11. (SBU) The lesson we take from the operation of the HCMC gold 
shops is that free markets can and do work remarkably 
efficiently in Vietnam.  With virtually no regulation or 
oversight, the gold market operates on extremely thin margins; 
trust in the market is so high that ordinary Vietnamese do not 
hesitate to engage in fairly large (in comparison to their 
income) transactions via small gold shops; complaints of 
non-delivery or debasement are so rare as to be almost a 
non-issue; and international financial listing routinely list 
the "SJC" (Saigon Jewelry Company) gold closing prices right 
alongside prices from New York and Zurich.  The broader lesson 
is that the gold market has been functioning as both a safety 
valve and reality check on what is happening in more tightly 
controlled markets such as the official currency exchanges and 
the stock market.  Prior to the November 24 "adjustments" by the 
SBV, the SBV, GVN -- and everyone else -- only needed to look at 
the "free market" VND-USD exchange rate set via HCMC's gold 
shops to understand that the official exchange rate was 
dangerously out of touch with reality.  An attempt to severely 
restrict the operation of the HCMC gold market would almost 
certainly have the perverse impact of further undermining 
confidence in the VND by convincing ordinary Vietnamese that 
they need to increase their golden hedges against economic 
uncertainty. End Comment. 
 
Postscript: A Note on the Value of Gold in Vietnam 
--------------------------------------------- ----- 
¶12. (SBU) Gold prices in Vietnam are quoted in obscure measures 
(like "chi" and "tael" and "luong").  Some reporters quote them 
at official currency exchange rates that, while binding to 
international companies, hold less meaning for ordinary 
Vietnamese while others use free market rates.  The results can 
be confusing.  For this cable, we've taken into account official 
VND/USD exchange rates, "free market" VND/USD exchange rates in 
HCMC, world gold prices, spot gold prices in Vietnam, and import 
tariffs.  Lastly, Vietnamese gold markets also differ from world 
markets in that the most commonly quoted price in Vietnam is the 
delivered price (since Vietnamese traditionally store much of 
their wealth in gold hidden in their homes or elsewhere).  World 
market prices, on the other hand, do not include the cost of 
physical delivery since relatively few world buyers actually 
take possession of the metal they purchase (instead relying on 
large depositories).  We did not attempt to correct for this 
last difference in world and Vietnamese market prices. 
 
¶13. (U) This cable was coordinated with Embassy Hanoi. 
FAIRFAX