Vietnam cracks down on Gold smuggling in the midst of red-hot demand

Gold demand has reached such a fevered pitch in Vietnam that the government is taking aggressive measures to crack down on smuggling.

I often talk about the fact that gold is money. In Vietnam, consumers are using it that way. According to a report by Nikkei Asia, “The metal is so popular that locals have quoted the prices of motorbikes and homes in gold instead of dong.”

Now, Hanoi is trying to “cool the gold fever” that has pushed significant demand into the black market.

Vietnam ranks as Asia’s third-largest gold market behind China and India.

Gold prices are higher in Vietnam because, up until December, the government maintained exclusive control over the market.

In 2012, the government ended the exclusive production rights of state-owned enterprises and centralized gold bar production under the State Bank of Vietnam (SBV). A combination of the government monopoly and strong demand has pushed gold to a premium in the country.

The government surrendered its monopoly in December, replacing it with a licensing regime that allows qualified banks and private enterprises to produce and trade gold bars and participate in import/export. The reforms should ease supply shortages and bring prices closer to global averages; however, it will take time for the price to respond.

Unsurprisingly, people are trying to avoid higher prices and shortages by smuggling.

Under the new regulations, anybody caught smuggling gold across the border faces a 100-million-dong fine (around $3,850). Buying gold from unlicensed sellers carries a 20-million-dong penalty.

The Vietnamese government learned a lesson on monopolies the hard way.

Last year, a former Saigon Jewelry Company director received 25 years in prison for embezzlement and abuse of power. According to the VietNamNet news site, the government monopoly "provides the perfect conditions for power to morph into unchecked privilege.” In an opinion article responding to the verdict, the news organization wrote, "Where there is no competition, oversight becomes ineffective, and profiteering opportunities flourish."

The Vietnamese people have a cultural affinity for gold, much like the Chinese and Indian people. A World Gold Council survey found that 80 percent of Vietnamese people consider gold "a good safeguard against periods of political/economic uncertainty," and a hedge against inflation.