Gold spirals and domestic monetary policy

Is there something strange happening in the international and domestic gold and money markets recently? The gold price in the global market has been increasing continuously and there is no sign that it will cool down. Though, the gold price in the domestic market has maintained a lower rate than the global price. Also, the US money policy has been different from the money policies of other central banks, so which way should the monetary policy of Vietnam follow?

Gold spirals and domestic monetary policy

Sai Gon Investment had a discussion with Dr. Truong Van Phuoc (picture), member of Economic Research and Consulting Team of the Prime Minister, former Acting Chairman of National Financial Supervisory Commission to further clarify this issue.

JOURNALIST: - The gold price in the global market has been increasing continuously and there is no sign so far if it will cool down. In your opinion, what was the reason? Was there any intervention by the FED or President Trump?

Dr. TRUONG VAN PHUOC: - As you well know, international politics has become further complicated over the last few months, especially with the continuing tension between the US and Iran. Previously, US and Iran has signed a memo on the nuclear program, but President Trump has scrapped that deal. Usually, when there is political tension like this, investors tend towards buying gold as a safe haven to protect their assets. That is the first reason for the continuing increase of gold prices in the global market.

The second reason is that FED has sent the market a signal that the central bank will stop increasing its interest rate in coming times. Accordingly, FED has to consider the other factors like inflation and unemployment rates before making a new move in its monetary policy.

Practically speaking, the monetary policy of FED is based on two factors, the economic condition and the political situation. According to President Trump, while the other central banks have cut their interest rates to support the economic growth, he on the contrary directed FED to increase its rate and the US economy has still been growing well. What he meant is that the talent and experience of his team has been the key driver for the growth of the US economy.

Based on this analysis and argument, President Trump can tell his voters that the US economy would be able to grow better than it has in the past. The market experts expect President Trump to use this argument in his next election campaign.

Usually, when there is political tension like this, investors tend towards buying gold as a safe haven to protect their assets.
If FED reduces its interest rate, the stock market will increase. Recently, the US Dow Jones index climbed to 27,000 points, a historical high for US stock market.

The third reason for the increasing gold price over last times was caused by words used by President Trump on his Twitter account that he can replace the current FED governor by his wife’s economic consultant.

This consultant is the real economic doctor. She has said that it is unacceptable when other countries have manipulated their currencies to support their exports. She suggested US go back to the Gold Standard. Gold price has been trading quietly over the last few years, and sooner or later people will realize that gold is indeed a very important asset.

These are the three main reasons that are leading to continuous rise in gold price over the last two months and I expect the gold price to fluctuate between USD 1,350-1,450/ounce till the end of this year.

- How will the foreign exchange be impacted if gold price increases? And what monetary policy should the State Bank of Vietnam follow?

- Ten years ago, the movement of gold price impacted significantly the foreign exchange rate and foreign exchange market of Vietnam. The reason was because at that time we established several physical gold exchanges and allowed people, financial institutions and banks to trade gold accounts. However, over the last 3-4 years, Vietnam has closed all gold exchanges, and prohibited people and institutions to trade in gold. This helped cool down the domestic gold market.

Hence, currently, I think the movement of global gold price will not impact much on the foreign exchange market and foreign exchange policies of Vietnam. And I think the State Bank of Vietnam will not allow the movement of the global gold price to impact its monetary policy.

However, Vietnam is gradually integrating deeper into the global economy and international financial markets. Hence, people and institutions should well prepare and get used to seeing the big movement in gold price.

The volatility of foreign exchange market and foreign exchange rate is not only dependent on the fluctuation of gold price, but also the status of trade balance, settlement demands, along with flows of FII and FDI. Furthermore, the ongoing escalation of US-China trade war has caused some changes in the global value chain. Some parts of the global value chain are moving towards Vietnam and this may also impact the foreign exchange market significantly.

Over the last 4-5 years, the macro economy and the foreign exchange rate have remained stable, and the inflation rate has maintained low. This made the indirect foreign investors feel confident to move into Vietnam.

Amidst the trend that FED will cut down its interest rate, I think the USD will gradually weaken. 50% of members of FED intend to trim the interest rate. They expect to cut the rate two times from now till the end of this year. Some people said they even plan to cut 0.5% each time. Although this is just an idea of several members of FED, I think it will soon spread over the market and impact the value of USD.

I expect the gold price to fluctuate around USD 1,350-1,450/ounce and if the inflation rate is about 3.2-3.5%, the reference foreign exchange rate should increase 1.5-1.75% or 2%.
Furthermore, in my opinion, this is not just the expectation of the market but also the plan of President Trump. He said clearly that while the other countries have cut their interest rate to support their exports, why should US not learn from them, and this is the reason for FED to cut down the interest rate, to weaken the USD and support the US economy.

I think this is a good condition for the State Bank of Vietnam to adjust its monetary and foreign exchange policies. The State Bank of Vietnam should regulate the VND value in link with the inflation rate. For example, if the inflation rate is 3.2-3.5%, the VND should be reasonably depreciated 1.5-1.75% or 2%.

- What do you think about the policy to cut interest rate of FED? And what monetary policy does it imply?

- FED will be the key institution responsible for the status of inflation, and unemployment in USA. It has to maintain the monetary policy that supports stable inflation and low unemployment rates. However, amidst the ongoing escalation of the US-China trade war, the unforeseen future of the volatile international economy and the complicated movement of global politics, the too-early-tightening of monetary policy may impact badly the US economy.

Many countries across the globe, especially countries in Europe have been losing on their monetary policies to support their economic growth, hence, FED has to consider seriously its next move. FED is observing the market responses and I think FED will cut interest rate at least one time from now till the end of 2019.

Gold spirals and domestic monetary policy ảnh 1
Honestly, although FED is expected to cut the interest rate in December 2019, the interest rate at that time will be still much higher than the interest rate during the 2016-2017 period. If FED cuts 0.5%, the interest rate at the end of 2019 will still be 2% higher than the interest rate two years ago. I think this is a good condition for Vietnam’s monetary policy, and we will not be under high pressure of depreciation of VND.

However, we should not be too optimistic. The market status might be different after the US elections in 2020-2021. At that time, we need to re-evaluate the global market status cautiously before deciding our macro policies. I think, from now till the end of 2019, if the gold price fluctuates between USD 1,350-1,450/ounce, the reference USD/VND rate should increase 1.75-2%.

- Over the last two months, the domestic gold price has been continuously lower than the global gold price. Some people think that the unofficial exports of gold have been happening over the last time. In your opinion, should the State Bank of Vietnam establish a domestic gold-dominated bond market to encourage people keeping gold?

- This is dependent on the supply-demand relationship. This relationship impacts people’s expectation on the movement of the market. We have to find out why the domestic gold price is lower than the global gold price.

I think it is because of people’ s expectation. But it is reasonable. Currently, the VND interest rate is much higher than the inflation rate, the foreign exchange rate is stable, the banks do not offer the gold deposit interest rate, so why should people buy gold? Previously, people could deposit their gold in banks and receive interest rate, but now, it is different, if they want to put their gold into the banks, they have to pay a fee. Hence, most people have moved from holding gold to holding VND or other foreign currencies. Hence, I am not surprised to see the domestic gold price being traded lower than the global price.

While the other countries have cut their interest rate to support their exports, why should USA not learn from them and this is the reason for FED to cut down the interest rate, to weaken the USD and support the US economy.
We should acknowledge that Vietnamese people, with the support of the internet, know a lot about the gold market today, they know which market can offer higher price of gold to sell and get profit. The key thing here is the legal framework. In my opinion, the State Bank does not need to establish a domestic gold-dominated bond to raise the gold deposit, but should re-allow people to officially export gold. We should issue a certificate for people and institutions to export gold to other countries. This activity should help improve the trade balance and Vietnam can receive foreign currencies transparently.

Currently, based on the supply-demand relationship, I think the lower domestic gold price is caused by the increase in the supply. The State Bank should find out how much the gold has been exported unofficially to adjust its governing policies, rather than to apply a penalty.

- Some experts suggest the State Bank should find some tools to raise the gold deposit from residents, what is your opinion on this idea?

- I think, currently, the State Bank should not do that. However, in the future, when the financial market of Vietnam grows to a certain level, we should reconsider this idea seriously.

- What do you think about the policy of the State Bank of Vietnam so far?

- So far, I think the monetary policy of the State Bank has been very clever. Many complicated global issues have happened at the same time, and the State Bank has to adjust the monetary policy gradually. It should not rush as it has to consider many things, including economic issues, social problems and national security target.

The State Bank of Vietnam has been successful in stabilizing the banking system through its period of restructuring, supporting banks to not fall into difficult situations, protecting the benefits of depositors, and maintaining an acceptable interest rate amidst the risk of inflation increase. Frankly speaking, it has been very smart in maintaining an acceptable level of interest rate given the inflation rate of 3.2-3.5%. Furthermore, although the USD has fallen in the global market, the USD/VND reference exchange rate has been gradually increasing.

In the deeper integrated market, the State Bank should move from administrative tools to market tools and adjust the application of these tools based on the actual market conditions.

- Thank you very much.

Thanh Hai, Yen Lam (Interviewers)

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