Current State Management of Gold Trading Activities in Vietnam from 2000 to Present

high quality so that it can be resold when needed at a price close to the purchase price. Aesthetic requirements are also present but not the highest.

2.1.2 Subjects of Vietnam gold market

Like any other gold market in the world, the classification of the subjects of the gold market in Vietnam is based on the motivation to buy gold and the reactions of these subjects to the gold price. These subjects are important factors involved in the formation of gold prices in the market, causing prices to be very far from the real value of gold. Accordingly, the Vietnamese gold market can be divided into the following three subjects:

a. Hoarder

These are entities with idle capital, holding gold for the purpose of “protection”. This gold asset is a contract to protect them against socio-economic fluctuations with the characteristic of being easily converted into cash. The hoarders can be workers, civil servants, farmers or anyone else in society. These entities often have the following characteristics: holding gold as a hidden asset in a safe place, holding it for a long time without considering the profit factor when deciding to buy or sell gold and not caring about the ups and downs of prices.

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b. Investors :

Those who buy gold for investment purposes are actually also hoarders but are more “active” than hoarders in the following characteristics: their gold may be in the form of “credit gold” deposited in a bank account, they see gold as a source of profitable investment capital and only keep capital in the form of gold when necessary. Investors often carry out many buying and selling actions, or borrow and lend, thereby increasing their capital. They are interested in the fluctuations of gold prices in both the short and long term and always weigh it against the interest rate.

c. Speculators :

These entities operate similarly to investors, but they can predict and exploit gold prices in the short term and they are willing to take high risks in order to gain more profits by sensing quickly and

React flexibly and sensitively to factors that directly and strongly impact gold prices.

Currently in our country, along with the emergence of more and more gold transactions, the number of investors and speculators is also increasing rapidly. This shows that the Vietnamese gold market is increasingly developing in the direction of increasing professionalism, and gold is gradually becoming an effective investment channel for many people.

2.1.3 Current gold trading network in Vietnam

In the traditional market, where physical gold trading activities (real gold transactions) take place, through a long development process, the Vietnamese gold market has made great strides compared to a few decades ago. The open trend is clearly shown through the diversity of entities participating in transactions on the market. In addition to companies with large proportions and the ability to influence prices such as SJC Gold and Gemstone Company, PNJ, SACOM, ACB, SCB... there are also many commercial banks, thousands of large and small gold shops across the country and a network of individual investors across all regions. The entities approach this potential market for many different purposes, which can be for business, storage, production, payment or simply the need for jewelry... All of these factors form the supply

- The demand for gold in the market is the driving force that helps the market to be "lubricated" and operate.

When mentioning the physical gold trading network, it is impossible not to mention the gold bar producers. In response to the increasing demand of investors, the heat of the gold market has attracted many investors to transfer capital from stocks and real estate to this precious metal. On the other hand, in 2008, although the inflation rate cooled down, it was still high, combined with the impact of the global financial crisis, the trend of people switching from money to gold also increased. In 2008, the State Bank decided to increase the limit on gold bar production for businesses. Specifically, the volume of gold bars produced in 2008 by the Gold and Gemstone Company of the Bank for Agriculture and Rural Development of Ho Chi Minh City

is 1,500 kg; Phu Nhuan Jewelry Company is 2,000 kg and Bao Tin Minh Chau Company is produced with a volume of 700 kg.

Saigon Jewelry Company SJC is the enterprise that produced the largest volume in 2008 with a limit of 50,000 kg; followed by the Vietnam Bank for Agriculture and Rural Development's Gold and Gemstone Handicraft Trading Company with a volume of 9,000 kg. The total volume limit of gold bars produced by the above enterprises in 2008 was 63,400 kg. [23]

The market has more gold bar brands, creating conditions for consumers to choose to buy for reserves as well as for investment. However, that does not necessarily mean that new gold brands will be successful because for a long time, consumers are still used to using familiar brands. SJC is considered the most popular gold bar brand today, with an average revenue of up to 1 billion USD in the past 2 years.

2.2 Forms of gold trading in Vietnam

2.2.1 Gold trading through accounts (gold trading floor):

Before 2010, many banks and gold and gemstone companies were allowed to implement this business, including: Eximbank, Sacombank, Viet A, Asia and Phuong Dong Phuong Nam; Saigon Jewelry Company - SJC, Vietnam Bank for Agriculture and Rural Development Gold and Gemstone Handicraft Trading Company, Ho Chi Minh City Bank for Agriculture and Rural Development Gold and Gemstone Company. This business was allowed to be implemented by the State Bank and the Foreign Exchange Management Department since 2006 and is a very promising business. The first bank in Vietnam to operate a gold trading floor was Asia Commercial Bank ACB, followed by Viet A, Eximbank, and Phuong Nam banks. Due to the lack of specific management regulations, investors participating in the gold trading floor often encounter many difficulties when gold trading organizations change regulations at will. Trading gold through an account requires a small deposit as a leverage factor to trade on a large volume, and the continuous buying and selling at publicly updated prices currently attracts many investors to participate. This form of trading has both advantages and disadvantages. The advantages can be listed as follows:

 The amount of physical gold stored by the population is reduced and the amount of foreign currency in the gold market is also limited.

 Gold mobilization sources are improved.

 Linking prices with the international market, moving closely according to supply and demand, increasingly integrating with gold trading on accounts and derivative products on financial markets around the world.

However, after a period of operation, these gold trading floors have clearly revealed their shortcomings, the most typical of which is that due to the lack of a unified management policy, each floor has its own regulations, leading to investors here often being disadvantaged. According to gold trading statistics of banks in recent times, the profit from gold trading of banks each year is from 20 to 30 billion VND and obviously when banks make a profit, a large number of investors suffer losses. That means that banks have not really supported investors in their business and the goal of banks is not to seek profit in the international market but to seek profit from the difference between international gold prices and domestic gold prices when there are influencing factors. [27]

2.2.2 Spot trading

Gold trading is a transaction carried out at the price at the time of agreement. However, it takes time to make accounting entries and pay for gold, so it can take time if the purchase quantity is large.

2.2.3 Forward transactions

A commitment to buy or sell gold at a specified price and on a specified date in the future. The purpose of a futures contract is to hedge against the price risk of an asset when the investor has that asset in the future.

2.2.4 Option business:

Is the right to buy or sell a quantity of gold within a specified period of time in the future at a price determined at the time of the transaction. There are two options: Call option and Put option. There are two types of options:

 American option: Allows the buyer the right to exercise the option at any time during the term of the contract.

 European style options: options can only be exercised on the expiration date.

2.2.5 Golden Credit

To ensure payment needs, gold credit is used to ensure the value of money. For example, in real estate transactions, when a buyer has not paid or has not bought a house, he will buy gold and deposit it in the bank to keep it in case the gold price increases. On the contrary, when a seller has not received the money and is afraid that the gold price will decrease, he will borrow from the bank the gold he is about to receive and sell it to the outside to collect the money in advance, and when he receives the buyer's money, he will return it to the bank. However, the current credit activities of banks rarely serve this purpose but mainly serve the business needs of customers.

Suppose an investor predicts that the price of gold will increase, and will borrow money from the bank to buy gold for savings. The loan amount is obtained by mortgaging the gold just purchased to the bank, then the loan amount from the bank will be paid to the gold shop that brought the gold to sell.

On the contrary, if investors predict that the price of gold will decrease, they will go to the bank to borrow gold to sell to the store. The gold store brings money to buy, and this money is put into the bank first to be used as collateral for the borrowed gold. Thus, investors only spend a small amount of money, equal to 1/10 or less, depending on the bank's rate regulations, to be able to carry out this transaction. The bank simply performs credit transactions, but the customer makes investments. This transaction is risky for both sides. If the direction is wrong, the investor will have to lose a lot of assets, because they use their capital as financial leverage. On the contrary, if the bank buys gold at a high price and lends it out for sale without recovering it, or cannot buy it when the price of gold is low because it has lent money to keep the gold, the bank has suffered a loss. At the same time, when the gold price fluctuates, assuming that gold loans are secured by cash, when the gold price increases, there is a risk that the collateral will not be enough to pay off the debt. On the contrary, when lending gold in VND, if the gold price decreases, the bank will be at risk because when customers sell gold, they will not be able to pay off the amount of cash borrowed from the bank. Because of the large profits, this business attracts many investors.

2.2.6 Direct buying and selling – brokerage

Banks buy and sell gold to secure funds, so this activity is similar to brokerage and gold trading businesses, this activity does not bring much profit to banks.

2.2.7 Status trading

The buying and selling of gold by the bank does not take place at the same time, it is called a status because it will show a positive balance in the account (if buying gold) and a negative balance in the account (if selling gold). The negative account is not a short sale but the bank can take advantage of the mobilized resources from customers, on the contrary, the bank can buy gold reserves to serve lending or to resell at a time when the price is higher. Because this activity, the bank must eventually balance the status, so it is different from short selling, that is, there is a movement of goods and currency, buying and selling gold and currency also means that the bank is conducting investment activities. Because there is a difference between the time of buying and selling, there will be a very large price risk, and it is this difference that creates a very large profit or loss for the bank. Therefore, if the bank is able to predict the fluctuations of gold prices in the world, this activity is very profitable. Currently, this activity is rare and if it does occur, it will last for a relatively short time to avoid risks. Banks have a great advantage because of the large amount of capital mobilized from the population in gold. Banks can sell to investors and buy it back at another time when the gold price drops. Conversely, banks can buy gold when the price is low and solve this inventory by lending to customers.

2.2.8 Cold closing, buying gold for customers

The bank performs this business because it has the advantage of gold import quota and available foreign currency to make profit. Due to the difference in time between gold import and gold stamping, there is a delay and the bank sells at high prices and chooses to import at low prices from international markets.

2.2.9 Joint business

This activity is a combination of activities that are allowed to be carried out to make a profit and reduce risks for the bank. For example, the bank can sell the gold savings mobilized from customers to investors, then, to balance the status, the bank

The bank will execute a Spot contract on account or a Forward contract for the foreign market. Thus, the bank has insured its risk position. Conversely, the bank can buy domestic gold and sell gold on account or execute a Forward contract to balance the position.

In addition, when the interbank gold options market exists, when domestic customers want to execute an option contract with a bank, the bank will re-sign this option contract to the international market.

Gold trading coordination demonstrates the level and class of the bank to maximize profits with the lowest risk by coordinating the permitted activities.

3. Current status of state management of gold trading activities in Vietnam from 2000 to present

3.1 Regulatory body

Article 5 of the Law on the State Bank of Vietnam issued in 1997 stipulates the duties and powers of the State Bank of Vietnam. One of the duties and powers of the State Bank of Vietnam stipulated in Point h, Clause 1 is “management of foreign exchange activities and management of gold trading activities”. Gold trading activities include many areas, from production, processing, and crafting of gold jewelry, fine arts, and gold bars to the purchase, sale, import and export of raw gold, gold jewelry, and fine arts. [1]

In addition to the State Bank, which is the direct management agency responsible to the Government for implementing state management of gold trading activities, there are also ministries, ministerial-level agencies, government agencies, and People's Committees of provinces and centrally run cities responsible for management within their scope and authority.

Decree 63/1998/ND-CP on foreign exchange and gold management has a whole chapter, Chapter VI, to regulate the management of international standard gold. Article 31 of this chapter clearly stipulates the tasks and powers of the State Bank regarding the management of international standard gold:

 Develop and submit to competent authorities draft laws and other projects on international standard gold management, and issue legal documents on international standard gold management under authority.

 Grant or revoke international standard gold trading licenses domestically and abroad for credit institutions and gold trading enterprises.

 Organize and operate the domestic international standard gold market

 Grant or revoke international standard gold import and export licenses for credit institutions and enterprises licensed to trade in gold.

 Inspect and examine the implementation of legal regulations on international standard gold management.

 Carry out the purchase and sale of international standard gold in the domestic market, import and export of international standard gold for the purpose of national monetary policy; purchase and sale of international standard gold in the international market and carry out other international standard gold transactions in accordance with the provisions of law.

 Perform other tasks and powers on international standard gold management as prescribed by law.

The Governor of the State Bank may authorize the Directors of State Bank branches in provinces and cities to perform within the scope of their management the tasks and powers prescribed in the regulations. [4]

3.2 Legal system

Implementing the renovation policy, regulations on gold and silver trading activities have also been increasingly improved in a favorable direction for business organizations and investors. The main and basic legal documents regulating gold trading activities can be mentioned here as Decree 63/1998/ND-CP on gold and silver trading management and trading, Decree 174/1999/ND-CP also on gold trading management, Decree 63/1998/ND-CP on foreign exchange management, Foreign Exchange Ordinance 2005. Currently, the State recognizes the legal ownership of gold of all organizations and individuals in the form of gold bars, gold ingots, gold nuggets, gold leaves, placer gold, gold base, and jewelry. Domestic and foreign enterprises, organizations, individuals, and foreign-invested enterprises are entitled to store, transport or deposit gold at banks.

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