Gold serves as a tool for central bank to regulate capital supply

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Some Gold serves as a tool for central bank to regulate capital supply15 tons of gold has been sold by the State Bank of Vietnam through bidding. It is estimated that VND15 trillion has been taken back from the gold sale.

In late 2012 and early 2013, the central bank bought foreign currencies continuously. The net purchase of $5 billion was made just within a short period. The central bank reportedly bought $3.18 billion in the first quarter of 2013 after balancing the purchase and sale, for which VND66 trillion was put into circulation.

The moves of the State Bank partially explained why the total money supply M2 keeps increasing steadily. By April 29, the M2 had increased by 4.8 percent in comparison with the end of 2012.

Since a big amount of dong has been put into circulation to buy foreign currencies, the State Bank now needs to call dong back to ease the influences of the dong supply increase and ease the pressure on the inflation.

There are several instruments for the State Bank to use to obtain that goal. In the second half of 2012 and the first quarter of 2013, the central bank repeatedly issued bonds to recall dong.

However, the situation has become quite different since April, which needs another solution to fulfill the task.

On March 28, the first bullion gold bid was organized. Since then, bond issuance has not been considered any more. The State Bank has used another tool to attract dong. It is estimated that VND15 trillion has been called through the bidding.

This is for the first time in the last several decades, gold has been used as a tool for the watchdog agency to regulate the capital supply, even though the agency did not mention the function of the gold bidding.

Experts believe that the State Bank would continue organizing gold bids in the time to come with more gold to be put into sale. The total gold supply may reach 20 tons, which means that VND20 trillion would be called back.

A source has said that the abundant money in the national economy may reach VND20-25 trillion a day. Therefore, if the State Bank puts 20 tons of gold on sale, it would help much in attracting dong.

Especially, the State Bank, in its plan to stabilize the market, may consider organize gold bids at bigger scale, provided that it respects the limitations in the foreign currency reserves and gets the nod from the Government.

Experts have said that the central bank should consider the possible impacts of the gold sale in large quantities on the dong interest rates. Once dong is withdrawn from circulation, the dong supply would be shorter, which means that the dong interest rates would be more attractive. If so, people, who can see the bigger benefits in holding dong, and may consider selling gold for dong.

In this case, experts say the gold sale may make the expectations on the interest rate reductions hopeless.

However, the State Bank might have considered all possible scenarios before it put gold on sale. At present, the strong liquidity of the banking system is supporting the gold bidding. In this case, gold bidding is compared as the blotting paper which helps absorb the redundant capital.

Selling gold is believed to be a less costly method than the bond issuance. If the state bank issues bonds, it would have to pay 4-6 percent for the bond interest rates.

TBKTVN

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