Saturday, January 2, 2010

Viet Nam's Decision To Close Its Gold Trading Floors

I have yet to see a credible "official" reason for the closing of the Viet Nam gold exchanges.  I just got off the phone with a colleague, however, who does business with some Cambodians.  The person he deals with told my colleague that there is significantly more demand for gold in Cambodia and Viet Nam than there is supply and that most of the gold that is sold to the citizens in those countries is smuggled in.  This account is consistent with the excellent reporting on Viet Nam gold trading provided on a daily basis to the Midas report at http://www.lemetropolecafe.com/ by John Brimelow.  Viet Nam has quietly become one of the largest gold importers of gold in the world.  Apparently, as per the Cambodian source, the voracious appetite for gold is now endemic to all of Southeastern Asia.  Even more interesting, this source told my colleague that Honk Kong and Singapore are slowly usurping London as the nexus for global physical gold trading.

I have postulated for a while now that part of China's long term goal is to become the largest owner of gold and to control the global gold trading market as part of its plan to become a global economic superpower.  All the indications are there that this is now occurring, including its recent move to allow - and even encourage - its citizens to accumulate gold and silver.

Getting back to Viet Nam, I suspect that the Government's decision is an attempt to increase control and regulation of the gold market, as Viet Nam was actually the largest importer of gold in 2008.  Apparently this large amount of buying has put downward pressure on the dong (Viet Namese currency), as citizens have been en masse dumping the sovereign currency in exchange for gold.  Ultimately, I believe this will put upward pressure on the global price of gold, as investors in Viet Nam rush to buy as much gold as they can before the end of March, which is when all 20 gold trading floors are required to stop operations.

9 comments:

  1. It always strikes me funny that Americans use their paper money to buy asian made gadets and then the asians turn around and spend the paper on personal gold. Better hope the dollar stays the reserve currency!

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  2. The dollar is toast - it's just a matter of time. If you notice, China uses US dollars for every natural resource/mining company acquisition they make. I think they've done a lot more to hedge out their downside risk to holding $800 billion Treasuries that anyone realizes.

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  3. By the way, it will help the Broncos if the Pats roll over for the Texans tomorrow LOL

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  4. Yes, that's the scuttlebutt, that the Chinese are using their dollar holdings as collateral for their numerous resource deals.

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  5. "If you notice, China uses US dollars for every natural resource/mining company acquisition they make." Good observation.

    The fact that the S&P500 has been inversely correlated with the value of USD tells a lot as well. That they are exchanging the Dollars for real assets which could rise with (hyper)inflation.

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  6. Jim Willie made the same statement about the Chinese holding less Treasuries than anyone realizes.

    He also said when they get down to $500 billion they will consider that an acceptable loss and probably pull the plug on the west.

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  7. Interesting Joe - I had no idea Willie had that theory, but I've been thinking for awhile now that the Chinese have some level of accetable loss on their dollar holdings once they've hedged out to a certain level.

    BUT, I have a view that they also have a lot more gold than anyone realizes and eventually they will roll out a gold-backed currency and simultaneously revalue gold up my many multiples. They will establish gold as the measure of sovereign wealth and that reval will be their mechanism by which they "clawback" wealth they lose from pulling the plug on the dollar.

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  8. The Chinese have a lot more silver than most realize, and that is the volcano that is really going to blow. The folks who argue against a gold standard have a big problem with their stance in that the dynamic duo of silver and gold has the sort of impressive track record that a solo gold standard does not.

    I agree with Willie about there being a level of dollar holdings at which The Chinese will be inclined to engage in some game changing behavior. However, I think there may be more to The Chinese strategy than simply dollar divestment. I believe they want and need to develop (to a certain level) other markets than the U.S. for consumption of their goods before they will take "the next step."

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  9. Edwardo, I agree. There will be several variables the Chinese will consider before pulling the plug on the dollar. 1) the degree to which they can hedge out their dollar holdings 2) the degree to which they can develop sustainable trade away from the U.S. and within their own system 3) the point at which they decide they can no longer tolerate using devalued dollars in trade settlement.

    The 24 karat, .9999 question is, "when does this occur?"

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