The story behind the US$1-billion revenue of gold trading floors in Vietnam

Not All That Glitters Is Gold
By Hai ly
Friday, October 30,2009,00:55 (GMT+7)


A gold trading floor with healthy liquidity should enable investors to place and match orders equal to thousands of taels each when gold prices jump or plunge

The story behind the US$1-billion revenue of gold trading floors

For the first time in history, gold prices exceeded US$1,050 an ounce, prompting the international and local media to predict that they may climb to US$1,100-1,200. Many individual investors on gold trading floors have incurred losses by betting on falling prices. “When prices first rose, a number of investors did not attempt to cut losses, but continue selling gold. However, a prolonged period of price increase has eroded their endurance. When global prices underwent a correction phase, investors could no longer withstand the losses. At that time, banks also started to step in. Together with owners of gold trading floors, they have dealt with the accounts of these investors,” said Nguyen Duc Thai Han, deputy general director of the Asia Commercial Bank (ACB).

Reaching US$1 billion

Unlike the sale of gold bars, the operations of most gold trading floors currently fall under two categories. Some gold trading floors such as those operated by SBJ (Sacombank Jewelry) and ACB allow investors to engage in mutual transactions. Others, meanwhile, require investors to place their orders with the owners of the trading floors, who will, in turn, place these orders with international trading floors. Their revenue is hard to measure. Both investors and management agencies should be concerned about the actual liquidity of domestic gold trading floors. Some trading floors put their daily order-matching volumes at 200,000-300,000 taels, or even 400,00 taels. The total revenue reaped by gold trading floors reaches US$1 billion per day, which far outshines that of the stock market.

Reality, however, is not so shiny. A close look at order-matching volumes at some gold trading floors has provided some surprising insights. In general, the value and volume of gold traded soars when gold prices fluctuate drastically. This also holds true for stocks and many material commodities. However, at many gold trading floors, trading volumes actually surge when global gold prices vary little. It is possible that owners of gold trading floors have placed orders worth hundreds or thousands of taels apiece when price disparity is insignificant, so as to generate staggering revenue. This, in turn, makes gold trading floors more competitive and appealing to investors. Investors may then open accounts at gold trading floors which capture their attention.

Should this be the case, are the actual trading volumes at domestic gold trading floors as enormous as many people think? A gold trading floor with healthy liquidity should enable investors to place and match orders equal to thousands of taels each when gold prices jump or plunge. How many gold trading floors actually satisfy this criterion? Or are they manipulating their revenue to lure investors?

It is vital for the authorities, especially the State Bank of Vietnam (SBV), which compiles and implements regulations governing gold trading floors, to accurately evaluate the scale of these floors. What is the appropriate deposit for gold trading? How much gold should banks keep to ensure liquidity? What about trading gold on accounts held by credit institutions? These are all controversial issues. There should also be regulations concerning the financial capabilities and business skills of both owners of gold trading floors and investors. At present, local gold prices move in tandem with their global counterparts and are also influenced by international speculation. Gold trading, therefore, comes with both high returns and high risks. Is this activity suitable for all investors? Unless the authorities can provide a satisfactory answer to this question, effectively managing gold trading floors is an uphill task.

On the other hand, the revenue which banks reap from gold trading floors also varies as gold prices fluctuate. The turnover comes from three sources:
1. trading fees of some VND2,000 per tael (or VND4,000 per tael if they are collected from both buyers and sellers);
2. overnight loans of gold and the dong, offered to gold trading accounts at gold trading floors (this activity is not related to mobilizing and lending loans as credit);
3. trading gold, domestically or otherwise, via accounts or purchase of gold bars.

For instance, ACB’s revenue generated by gold trading topped VND1 trillion last year, including VND1.4-1.5 billion of daily trading fees. ACB has been a member of the Dubai gold trading floor for three months, where the bank carries out its own transactions rather than those requested by its individual investors. This move has also sheltered ACB against drastic changes in the domestic gold market.

In developed countries, individuals access international stock, bond, foreign currency and gold markets, from the U.S. and Europe to Australia and Japan via brokers. This is not yet the case in Vietnam, where the necessary conditions have not been in place. Still, the proliferation of domestic gold trading floors makes it important for the Government to manage such activity efficaciously when it is allowed. Misleading revenue figures posted by gold trading floors will ineluctably trigger unhealthy competition and hamper the interest of investors.


http://english.thesaigontimes.vn/Home/business/trade/7199/