Christian Kamm, president of Kamm
Investment, asks whether the State
Bank’s dollarisation blitz can help get
the gold market in order.
There are many reasons why gold
is essentially money in Vietnam, none more important than the effect of a
consistently debasing currency.
Certainly, holders of dong have
suffered more than enough currency devaluations in recent years. As in Vietnam
and other similar developing countries, an eroding currency affects the
confidence of the currency holders who believe the value of the currency will
continue to decline and therefore be less valuable at some point in the future.
In effect, the holder would rather take the valuation risk of gold falling in
price than that of the eroding currency.
As provided in the left chart of
the gold price from goldprice.org, quoted per ounce, on the world market since
1974, although the gold price appears to be parabolic since 1974, a closer
examination of the price chart indicates volatile pricing at times. For
example, from 1974 to 1984, a span of a mere 10 years, the price of gold increased
from under $200 per ounce, to over $800 per ounce to under $400 per ounce – no
question a wild investment ride.
We can draw the conclusion that
even though gold experiences extreme periods of over-performance and
under-performance, it remains a chosen investment vehicle in Vietnam, partially
due to the “store of value” gold provides. This is a valid assumption since the
US dollar is often utilised for the same purpose in Vietnam. Still another
conclusion can be reached in reviewing the graph. The price of gold has
increased considerably since 1974, certainly exceeding the return of many other
investment alternatives.
The government of Vietnam is
rightly waging a war against the use of the dollar and gold for transactional
purposes (and correlatively against use for savings). If the dong cannot
stabilise, the whole economy and therefore the political stability of the
country could be at great risk. Since private credit has ballooned to 120 per
cent of gross domestic product in 2011, the government is attempting to gain
control over the money, credit and therefore inflation problem.
Since the gold standard no longer
exists anywhere in the world and all currencies are “fiat” currencies (not
backed but anything but the “good faith’’ of the issuing country) it is
imperative a country such as Vietnam maintains the “good faith” part of the
equation or the currency will completely debase and the economy collapse. Being
a developing economy, therefore reliant on foreign direct investment and
indirect investment, stabilisation of the currency is as important as gross
domestic product growth. Without stabilisation of the currency, foreign
investors might not consider investment in Vietnam.
In the case of Vietnam, the
government has instituted significant measures in 2012 to curb both gold and
dollar use as well as the utilisation of both for savings. The State Bank has
reduced the US dollar savings rate to a relatively unattractive level, enticing
holders to convert to dong. The government has limited the use of the dollar in
commercial transactions, essentially providing a mild ban as the dollar of a
medium of exchange.
Additionally, with Resolution 11,
the government and central bank has acted to closely control the gold market
with some significant measures such as controlling the gold traders and
producers as well as the supervision of the import and export of gold.
Tightening regulations may cause many smaller gold traders to close due to
insufficient levels of registered capital. There is concern that these
regulations will promote a “shadow” gold market largely underground since there
is still a relatively high demand for gold in Vietnam.
Although these restrictions are
typically considered detrimental and do take away the individual right to seek
another form of security and guarantee against the economy, they should be
considered constructive for the long term viability of the economy and
stability of the country.
Maintaining a strong
transactional currency is absolutely vital to an economy, especially for a
country such as Vietnam which is highly reliant on imports and exports, as well
as to attract vital foreign investment. And the government does not intend to
restrict local investors from purchasing and selling gold for investment
purposes, but rather ban gold and foreign currencies from transactional uses.
The issuance of Article 22 by the
National Assembly this past December stipulates that “all transactions,
payments, advertising, price quotations, prices in contracts, agreements and
other similar forms shall not be made in foreign currency, except for cases
allowed by the central bank.”
Currently most citizens of the
world are living in a world of debasing currencies. Most countries in the world
have experienced financial crises recently that have forced economic policies
to become defensive and promote a devaluing currency. Often, with a slowing
economy, a country will utilise measures to devalue their currency in an
attempt to make their investment opportunities more attractive to foreign investment
in their country as well as cheaper products for export, bolstering their
economy.
It seems with every world crisis,
countries have acted in their best interest and followed this strategy. And
following this strategy of debasing their currency, in most cases, has been
advantageous in the short term, but it remains to be seen if it is advantageous
in the long term.
Additionally, since we are in a
world of “fiat” currencies, backed by the “good faith” of the issuing country
only, such crises affect the “good faith” of countries around the world more
dramatically than ever before.
Therefore, it is hardly likely
that a long term investment in gold would not be attractive or lucrative to any
investor, anywhere in the world because of these factors. Crises tend to
increase gold prices, whether economic, political, or social in nature.
Will the programmes designed to
curb “dollarisation” as well as “goldisation” in Vietnam have a lasting and
significant effect on cooling the gold market? Certainly, the short term
effects of such measures are significant and will the curb use of and
investment in gold as well as the dollar.
But, in the long term, it is hard
to imagine that any currency not backed by something more than the “good faith”
of a government will not face further devaluations and therefore encourages
holders to hedge through a “store of value” such as gold. From an investment
standpoint, therefore, gold remains an attractive alternative to even the
dollar as gold has the propensity to outperform the dollar over the medium
term.
As the right chart from the
Economist magazine clearly indicates, the value of the dollar has declined over
thirty percent since the United States departed from the gold standard and
allowed their currency to become a “fiat” currency. This indicates that against
other currencies, assets denominated in the US dollar have suffered a fate of
loss of value of at least 30 per cent.
Of course, as gold has increased
in value over the same time period, the dollar has declined, as the dollar and
gold typically are not correlative and act in an inverse fashion. Gold and the
dollar do not move in the same direction since both can act as a “store of
value” as the US dollar, in the past, has been considered a “safe haven” currency.
Additionally, if there is faith in the currency of the US dollar there is less
need to hold gold as a “safe haven”.
Therefore, some investors have
sought investment protection through the purchase of US dollar denominated
assets such as US government bonds, treasury bills, and even real estate and US
corporate bonds and corporate stocks. But, again, as the chart indicates, and
US government policies have continued to promote a weakening dollar, therefore
limiting its “store of value,” make gold preferred as a “store of value” and
investment choice. Simply put, the dollar has been a losing trade since 2002.
It is not always true that there
is an inverse relationship between gold and any given currency. In countries
which import a substantial amount of gold, usually for production purposes, the
currency can remain strong even as the demand for gold and prices of gold
increase. But it is more likely that there is an inverse relationship between
gold prices and local currencies.
As investors in Vietnam enter
2013, opportunities of an improving economy might beckon to other investment
opportunities, such as the stock market or real estate in Vietnam. A sound
investment strategy in a frontier economy such as Vietnam includes
participation in many types of investments. Diversification is a central theme
to any investment philosophy. Diversification essentially will temper returns
but insulate somewhat against asset valuation volatility. Such investments
meant to diversify an asset portfolio should not be considered not an
alternative to gold ownership, but additional to gold ownership.
With debasing currencies around
the world, it is hard to imagine a world where gold prices remain suppressed
for very long. Although many governments around the world have promised to
institute measures to limit government debt increases, such measures appear
acceptable in theory but are difficult in practice and are often politically
unpopular.
Therefore, it is likely, at least
in the medium term, that gold would be an attractive investment to hedge
against further currency declines.
Of course, an unlikely scenario
but one that must be considered is that the euro and yen continue declines
greater than the dollar, and relative to other currencies the dollar
appreciates. This could occur if the economy in the United States makes a
dramatic rebound and the economies of the European Union and Japan do not
rebound substantially. This seems very remote and highly unlikely as most world
economies are economically intertwined and depend greatly on each other for
trade and investment. With the dollar appreciating, gold prices would be under
pressure and likely fall.
But what is the effect on gold of
the other declining currencies? Certainly, there would be inherent interest
from investors seeking a relative out-performance in countries still suffering
from depreciating currencies. Still further, consumer and investment gold
buying in countries such as India, China and Vietnam would likely remain
robust. Central banks around the world may continue to buy gold to help
stabilise their currencies. Therefore, even with a mild appreciation in the US
dollar, the likelihood of a derailment of a continuing advance of gold prices
remains unlikely, and therefore holding gold for 2013 may prove advantageous
for the investor as gold remains in a multi-decade bull market.
vir.com.vn
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