The lifting of Vietnam's ban on gold imports could have some remarkable effects on the market

Shifting sands in the gold investment market means that European countries are now in the vanguard when it comes to investment bar purchases; with local gold prices doubling since April 2006, will Vietnam now come back to the fore?

LONDON - 

While the IMF and the Reserve Bank of India have been taking up headlines over the first half of November in terms of Official Sector attitudes to gold, the change in the Vietnamese government's policy over gold imports illustrates the fact that demand remains strong at grass roots level in some parts of the world. 

It is well-documented that the jewellery sector has been suffering severe strain this year as demand has almost imploded in some regions in the face of high and volatile prices and that there have been long periods when scrap return has been more than adequate to meet what buying there has been.

Investment bars and coins, however have been a different story and have remained strong, in some cases taking the place of jewellery because of the lower mark-up (and also partly in lieu of jewellery for melting and fabrication at a later stage).

This, therefore, is a very brief review of the fundamental numbers in the market in an attempt to put the Vietnamese move into numerical perspective as well as highlighting the fact that it reflects sustained interest in gold in the region.

Investment bar demand by major investing nation and by quarter, Q1 1999 - Q2 2009; tonnes

The latest figures from "Gold Demand Trends", published by the World Gold Council (prepared independently by research house GFMS Ltd and of which the next edition is due soon) show that Vietnam recorded the world's largest domestic demand for investment bars in the first quarter of 2008, with almost 39 tonnes of gold bars in the period, equivalent to 39% of investment bar demand for the quarter.  When jewellery is added into the equation, Vietnamese demand in that quarter was just 8% of the world's jewellery and investment bar combined, while the lion's share was absorbed by India and China, who between them took up 39% of total.

With falling equity and property markets, plus inflation that was running at approximately 25% in the second quarter of 2008, bar + jewellery demand in Vietnam reached 44 tonnes in Q1 2008 and 37 tonnes in the second quarter.  The government imposed a ban on gold imports in June 2008. The Vietnam Association of Financial Investors had previously proposed rating the import tax to 19-20% in order to try and bring down the very heavy gold import level - imports of approaching 43 tonnes were recorded in the first four months of the year, amounting to approximately $1.2 billion, and equivalent in value to 50% of Vietnamese imports over the whole of 2007.  Although concerned that imposing such a tax would increase smuggling, the VAFI was prepared to take the risk in order to reduce the pressure on the trade deficit, which was obviously expanding rapidly at the time. 

In the event the government suspended all gold imports as of the fourth week of June 2008 in order to try and control the trade deficit and give some support to the Vietnamese dong.

Recorded demand for investment bars slipped, although GFMS records in its "Gold Survey 2009" that the imposition of the import ban in Vietnam was partly responsible for the surge in imports into Thailand in the second half of 2008 with perhaps up to 30% of "Thailand's imports finding its way unofficially into Vietnam".  The GDT figures for jewellery and investment bar demand in Vietnam showed a slippage to an average of 18 tonnes per quarter in the second half of 2008 and the first half of 2009.  The demand in these two sectors in Q2 2009 was 22.9 tonnes, equivalent to just 4% of the world total,

As well as the constraint on demand that stemmed from the ban on imports, Vietnam's reduction in "market share" in the ensuing quarters also reflects the massive increase in demand for these products in Europe.  The LBMA Conference was not the first arena in which, in the gold market at least, Europe has been described as "the New Asia".  Since the start of 1999, through to the third quarter of 2008, the largest individual country in terms of investment bar demand was India with the exception of Vietnam once, as described here, Turkey once (Q1 2003), Japan twice and India once (H2 1999 and Q1 1999 respectively, largely in fear of Y2K).  From the third quarter of 2008 onwards, however, Germany has held pole position as investors hedge against dollar and inflation risk.

The Vietnamese government has now lifted its import ban with the statement "'The State Bank of Vietnam will allow gold imports with a volume sufficient to intervene in the market in order to stabilise the market, combat speculation and prevent an impact on the interests of the people".  This is partly in response to the widening disparity between domestic and international gold prices, which has been causing a surge in demand for dollars as demand has increased once more.  The shift in trade flows in the coming weeks will be instructive.

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