Vietnam to ban gold as legal tender

2011-APR-25

Roman Baudzus writes --

The State Bank of Vietnam announced at the end of last week moves to ban gold from being officially accepted as legal tender. Vietnam´s communist leadership is facing far-reaching economic problems. Besides an enormous trade deficit, the country is also suffering from double-digit inflation. In February the central bank devaluated the nation’s currency, the dong, against the US dollar and other major currencies for the fourth consecutive time. Policy makers expect this measure to boost exports, but accept that it will also lead to higher inflation.

Last year, the inflation rate officially reached 12%, though the economy as a whole grew at just 7%, while the trade deficit widened to about $12.4 billion. The country’s inflation problem is prompting more and more Vietnamese citizens to shift their savings into safe havens, predominantly gold and silver. The people’s confidence in the stability of their currency is diminishing all the time. Following the most recent depreciation of the dong to 20,900 against the US dollar, black market prices indicated that the dong´s fourth consecutive devaluation was not likely to be its last.

Last week, the State Bank of Vietnam ordered the country’s commercial banks to cease gold-based credit transactions by May. Within the next two years, banks will also be banned from accepting gold on accounts. Vietnamese commercial banks were prohibited under threat of severe punishment from loaning out gold for the production or the trade of gold bars by a law passed last October. As of May 1 commercial banks will also be prohibited from conducting gold-based loan transactions with the country´s jewellery traders. Market analysts expect the State Bank of Vietnam to make further efforts to regulate the country´s gold market; though the population’s right to own gold should remain unaffected.

The gold price increased for a third consecutive week and reached a new all-time high of $1,517.71 per ounce earlier today. A declining US dollar and growing concerns about the debts of many industrialised countries have contributed to the increase in the gold price. Even more dramatic appreciation has been seen with the silver price, which is going from strength-to-strength on the back of the falling dollar. This morning the spot price of silver reached a new nominal record at $49.79 per ounce.

At the end of the last trading week, the US Dollar Index (USDX) touched a day low of 74.05 and quoted at its lowest level since August 2008. The USDX is an indicator that compares the value of the US dollar against a trade-weighted basket of other important currencies. Besides the euro, the currency basket also contains the Japanese yen, the Swedish krona, the Swiss franc, the British pound and the Canadian dollar.