Additionally, with Resolution 11, the government and central bank has acted to closely control the gold market with some significant measures such as controlling the gold traders and producers as well as the supervision of the import and export of gold. Tightening regulations may cause many smaller gold traders to close due to insufficient levels of registered capital. There is concern that these regulations will promote a “shadow” gold market largely underground since there is still a relatively high demand for gold in Vietnam.

Although these restrictions are typically considered detrimental and do take away the individual right to seek another form of security and guarantee against the economy, they should be considered constructive for the long term viability of the economy and stability of the country.

Maintaining a strong transactional currency is absolutely vital to an economy, especially for a country such as Vietnam which is highly reliant on imports and exports, as well as to attract vital foreign investment. And the government does not intend to restrict local investors from purchasing and selling gold for investment purposes, but rather ban gold and foreign currencies from transactional uses.

The issuance of Article 22 by the National Assembly this past December stipulates that “all transactions, payments, advertising, price quotations, prices in contracts, agreements and other similar forms shall not be made in foreign currency, except for cases allowed by the central bank.”

Currently most citizens of the world are living in a world of debasing currencies. Most countries in the world have experienced financial crises recently that have forced economic policies to become defensive and promote a devaluing currency. Often, with a slowing economy, a country will utilise measures to devalue their currency in an attempt to make their investment opportunities more attractive to foreign investment in their country as well as cheaper products for export, bolstering their economy.

It seems with every world crisis, countries have acted in their best interest and followed this strategy. And following this strategy of debasing their currency, in most cases, has been advantageous in the short term, but it remains to be seen if it is advantageous in the long term.

Additionally, since we are in a world of “fiat” currencies, backed by the “good faith” of the issuing country only, such crises affect the “good faith” of countries around the world more dramatically than ever before.

Therefore, it is hardly likely that a long term investment in gold would not be attractive or lucrative to any investor, anywhere in the world because of these factors. Crises tend to increase gold prices, whether economic, political, or social in nature.

Will the programmes designed to curb “dollarisation” as well as “goldisation” in Vietnam have a lasting and significant effect on cooling the gold market? Certainly, the short term effects of such measures are significant and will the curb use of and investment in gold as well as the dollar.

But, in the long term, it is hard to imagine that any currency not backed by something more than the “good faith” of a government will not face further devaluations and therefore encourages holders to hedge through a “store of value” such as gold. From an investment standpoint, therefore, gold remains an attractive alternative to even the dollar as gold has the propensity to outperform the dollar over the medium term.

As the right chart from the Economist magazine clearly indicates, the value of the dollar has declined over thirty percent since the United States departed from the gold standard and allowed their currency to become a “fiat” currency. This indicates that against other currencies, assets denominated in the US dollar have suffered a fate of loss of value of at least 30 per cent.

Of course, as gold has increased in value over the same time period, the dollar has declined, as the dollar and gold typically are not correlative and act in an inverse fashion. Gold and the dollar do not move in the same direction since both can act as a “store of value” as the US dollar, in the past, has been considered a “safe haven” currency. Additionally, if there is faith in the currency of the US dollar there is less need to hold gold as a “safe haven”.

Therefore, some investors have sought investment protection through the purchase of US dollar denominated assets such as US government bonds, treasury bills, and even real estate and US corporate bonds and corporate stocks. But, again, as the chart indicates, and US government policies have continued to promote a weakening dollar, therefore limiting its “store of value,” make gold preferred as a “store of value” and investment choice. Simply put, the dollar has been a losing trade since 2002.

It is not always true that there is an inverse relationship between gold and any given currency. In countries which import a substantial amount of gold, usually for production purposes, the currency can remain strong even as the demand for gold and prices of gold increase. But it is more likely that there is an inverse relationship between gold prices and local currencies.

As investors in Vietnam enter 2013, opportunities of an improving economy might beckon to other investment opportunities, such as the stock market or real estate in Vietnam. A sound investment strategy in a frontier economy such as Vietnam includes participation in many types of investments. Diversification is a central theme to any investment philosophy. Diversification essentially will temper returns but insulate somewhat against asset valuation volatility. Such investments meant to diversify an asset portfolio should not be considered not an alternative to gold ownership, but additional to gold ownership.

With debasing currencies around the world, it is hard to imagine a world where gold prices remain suppressed for very long. Although many governments around the world have promised to institute measures to limit government debt increases, such measures appear acceptable in theory but are difficult in practice and are often politically unpopular.

Therefore, it is likely, at least in the medium term, that gold would be an attractive investment to hedge against further currency declines.

Of course, an unlikely scenario but one that must be considered is that the euro and yen continue declines greater than the dollar, and relative to other currencies the dollar appreciates. This could occur if the economy in the United States makes a dramatic rebound and the economies of the European Union and Japan do not rebound substantially. This seems very remote and highly unlikely as most world economies are economically intertwined and depend greatly on each other for trade and investment. With the dollar appreciating, gold prices would be under pressure and likely fall.

But what is the effect on gold of the other declining currencies? Certainly, there would be inherent interest from investors seeking a relative out-performance in countries still suffering from depreciating currencies. Still further, consumer and investment gold buying in countries such as India, China and Vietnam would likely remain robust. Central banks around the world may continue to buy gold to help stabilise their currencies. Therefore, even with a mild appreciation in the US dollar, the likelihood of a derailment of a continuing advance of gold prices remains unlikely, and therefore holding gold for 2013 may prove advantageous for the investor as gold remains in a multi-decade bull market.

Source: VIR.