Vietnam: Gold and dollar prices escalating, no one benefits

Last update 09/11/2010 04:59:02 PM (GMT+7)

Gold and dollar prices escalating, no one benefits

VietNamNet Bridge – The gold and dollar prices have been increasing continuously, threatening businesses. Especially, the weaker dong does not benefit exporters, even making their business worse.

At 9:45 am of November 9, the gold price jumped to 38.2 million dong per tael, increasing by 2.5 million dong per tael compared with the opening prices (one tael is equal to 1.2 oz). Meanwhile the dollar price soared to 21,250 dong per dollar, the highest level so far.

The dollar prices quoted by commercial banks have been stable, at 19,495-19,500 dong per dollar at Vietcombank, and 19,470-19,500 dong per dollar at Eximbank.

The Japanese yen has also appreciated against the dong. At 8:20 am, the yen price was quoted at 246.63 – 253.99 dong per yen, an increase of three dong per yen in comparison with the week’s opening price. The euro is now trading at 28,101.00 dong per euro.

In principle, the dollar appreciation will benefit exporters, because the weak local currency will make domestic products cheaper, thus more competitive in the world market. But in fact, export companies are now like cats on hot bricks. 

Tran Quoc Manh, Chair and General Director of Sadaco, said the dollar price increases have pushed the prices of input materials, transport fees and labour costs high up.

Manh admitted that the company has earned more money thanks to the dollar appreciation, but the profit is not big enough to cover the higher production costs. Especially, Sadaco, like many other producers in Vietnam, have to import input materials to make final? products in Vietnam. Therefore, they now have to pay more money for the import materials due to the more expensive dollar. Manh stressed that when policy makers think of the monetary solutions to encourage exports, they should consider of the fact that Vietnamese producers have to pay for imported input materials in dollars.

Besides, export companies complain that though they sell foreign currencies to banks, when they need money to make payment for material imports, they cannot buy foreign currencies from banks at the prices at which they had sold themto banks before.

Nguyen Thi Cuc, Deputy General Director of Phu Nhuan Jewellery Company (PNJ) said in September, her company earned $300 million from gold exports and sold the sum to banks. However, her company now cannot buy dollars from banks at the quoted prices.

“The banks, though admitting that PNJ is a loyal client who should get priority in dollar purchases, still refuse to sell dollars to us, saying that they cannot sellat such low prices,” Cuc complained.

In fact, banks still have dollars to sell, but at the prices set by banks, not the prices quoted by clients. 

Le Dang Minh, Managing Director of Gimeno, a fashion company, said that he has just bought dollars from a bank. Though the quoted price was 19,500 dong per dollar, in fact, Minh had to pay 20,100 dong per dollar. Minh said that he still does not know how to “legalise” the gap of 600 dong per dollar. As the input materials cost 70 percent of the values of his products, the dollar price increases have made the company suffer losses.

However, Minh believes that those who suffer the most now are labourers, whose salaries do not increase in proportion with increases in the goods prices.

Minh does not think that export companies deliberately refuse to sell dollars to banks, thus causing the dollar shortage. He said that only the companies which have profuse capital can keep dollars on their accounts. Meanwhile, small companies like his have to sell dollars to banks right after they earn the money, because they need money to continue production.

Thanh Van

http://english.vietnamnet.vn/en/business/1282/gold-and-dollar-prices-escalating--no-one-benefits.html

Is cash really king?

Buffett makes another prediction, but one that the world’s media did not pick up on. He said that “the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts”.

Buffett’s point is that the only way that the US – and other Anglo Saxon governments for that matter – is going to get itself out of its debt hole, is by inflating its way out.

In a best case scenario, this only entails sharply rising interest rates and substantial dollar depreciation.

In the worst case, a loss of confidence in banking systems and gold, assuming it is not outlawed, perhaps at $10,000 per ounce.

In both cases, holding cash would be a very bad idea.

In an inflationary environment, as Buffett says, it is best to hold stocks. Just make sure they are ones that will survive.

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Is cash really king?
By Hugh Young
19 November 2008

Holding cash in an inflationary environment is a very bad idea.

On October 17 Warren Buffett wrote in The New York Times that “equities will almost certainly outperform cash over the next decade, probably to a substantial degree”. Amid all the confusion, such a clear and bold prediction is jolting. Cash is king, right? How can Buffett be so sure that equities will mount a royal coup?

Buffett makes another prediction, but one that the world’s media did not pick up on. He said that “the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts”.

What! Inflation? Wasn’t that yesterday’s story? Oil prices have halved, as have the prices of many other commodities. And anyway, commodity prices never stayed high enough to trigger wage spirals. All they did was cause demand to fall.

Buffett’s point is that the printing presses have been turned on, following years of reckless monetary expansion, and that all the hundreds of billions of extra dollars recently created to prop up the banking system will ultimately feed through to rising prices (remember that inflation is really about money supply. Rising prices are the effect of inflation, not inflation itself).

Taking into account unfunded social security and Medicare obligations, the total US federal debt in 2006 was $49.4 trillion, equivalent to $160,000 for every American. Fast forward two years, during which there was an acceleration of government debt accumulation, and you get close to $300,000 for every working American. If Americans were to set aside, say, 3% of their average annual household income of around $48,000, it would take more than 200 years to pay off the debt.

The conjuring trick here required to create this debt mountain has been to convince people, Americans and foreigners alike, that the dollar, dollar deposits and federal debt are worth something. Spin is provided by implicit government guarantees, and continual reference to the dollar as the world’s de facto reserve currency. As long as there was confidence in the currency, debt (relative to economic activity) could rise forever.

We take for granted that bits of paper (bank notes) and electronic records in computer chips (bank deposits) have “value” to such an extent that it is impossible to imagine it any other way or, worse, the entire system collapsing. Article one, section 10, of the United States Constitution states that “no state shall…coin money; emit bills of credit; make any Thing but gold and silver Coin a Tender in Payment of Debts”.

Why were the founding fathers so against paper money (fiat currency)? Because they were aware that, throughout history, every single state-controlled fiat currency system had ultimately failed. The temptations to create money out of nothing could never be resisted, leading to the corruption of politicians and the elite and unsustainable wealth disparity between rich and poor.

George Washington had noted in 1787 that “paper money has had the effect to ruin commerce, oppress the honest, and open the door to every species of fraud and injustice”. Later, in 1798, Thomas Jefferson wrote that the federal government has no power “of making paper money or anything else a legal tender”, and he advocated a constitutional amendment to enforce this principle by denying the federal government the power to borrow.

In days gone by money or, as it is also known, “IOUs”, developed naturally in the market. The best medium for these IOUs was gold coins as they were difficult to fake (gold is heavy, sufficiently scarce, expensive to extract and impossible to synthesise below its market value). But governments soon took control, often by guaranteeing the quality and purity of the coins. As governments outspent their revenues, they found ways to counterfeit the currency by reducing the amount of gold in the coins, hoping their subjects would not discover the fraud. But the people always did, and they tended to react badly.

What is happening today is no different. For money to be considered legal tender it must have a maker (person that will make the payment), a payee (person that will receive the payment), an amount to be paid, and a due date. Dollar bills used to state that the bearer would be paid on demand. In 1963 these words were removed.

By the same token the creation of bank deposits involves even less work than notes and coins, which at least require machines with moving parts. To create bank deposits, a bank simply needs to find someone to lend to, then punches a number into a computer. Boosh! A bank deposit! Even if the borrower spends the money such that it ends up in another bank, it’s still in the system.

When President Nixon closed the gold window in 1971, refusing, as promised under the Bretton Woods Agreement, to exchange dollars for one thirty fifth of an ounce of gold (there was not enough gold in the coffers), the stage was set for massive and unconstrained monetary expansion. Under Bretton Woods, credit as a percentage of GDP had been maintained at around 150%. From 1980 to 2007, it rose from 162% to 334%. The last 30 years have been one huge, credit-fuelled party. But the booze has now run out and the hangovers are just beginning.

Buffett’s point is that the only way that the US – and other Anglo Saxon governments for that matter – is going to get itself out of its debt hole, is by inflating its way out. In a best case scenario, this only entails sharply rising interest rates and substantial dollar depreciation. In the worst case, a loss of confidence in banking systems and gold, assuming it is not outlawed, perhaps at $10,000 per ounce. In both cases, holding cash would be a very bad idea. In an inflationary environment, as Buffett says, it is best to hold stocks. Just make sure they are ones that will survive.

Hugh Young is the Singapore-based managing director of Aberdeen Asset Management Asia.
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