Cash to flow into stocks, real estate on back of gold rally, low interest rates

While gold prices have been climbing sharply, deposit interest rates remain low, and the stock market has experienced recent corrections, so where should people put their money to make a profit? The Investor spoke with Pham Manh Hung, vice head of the Research Institute for Banking, under the Banking Academy of Vietnam, about this issue.

Gold has traditionally been considered a safe haven rather than a lucrative investment channel. However, gold prices have suddenly surged. How do you assess this rally?

Both haven and defensive financial assets can be flexible. Importantly, when the profitability of an asset is evaluated positively, cash flow tends to gravitate towards that asset. In my opinion, there are several reasons why gold prices have increased sharply recently.

First, world gold prices have climbed significantly, reaching $2,200 per ounce and consistently hitting new highs. The gold rally is being fueled by signs that the U.S. Federal Reserve (Fed) will cut interest rates in 2024 and geopolitical tensions, which have heightened global investor concerns and boosted gold reserves.

Second, the gold rally has been propelled by strong local demand for hoarding and weddings at the end and beginning of the new year. Meanwhile, the supply from Saigon Jewelry Company (SJC) is limited, resulting in a sharp rise in gold prices, especially for SJC gold bars.

Third, a sharp drop in deposit interest rates has also influenced people’s gold-buying behavior. Specifically, data from the Research Institute for Banking shows that from mid-August 2023 to end-March 2024, the average deposit interest rate at domestic commercial banks slumped. As of March 29, 2024, the rates for terms of one month, three months, six months and 12 months were 2.39%; 2.64%; 3.68% and 4.55%, respectively, representing a decrease of about 1.64-2.12 percentage points compared to rates set on August 15, 2023. With low interest rates, cash tends to flow toward more profitable investment channels such as stocks, real estate, and precious metals, including gold.

Besides gold, the USD/VND exchange rate has surged rapidly recently. What are the reasons behind this rise? Is there any correlation between exchange rates and gold prices?

The recent USD/VND exchange rate rise can be attributed to the following factors.

First, the Fed has yet to give a specific date for loosening its monetary policy and lowering interest rates. Forecasts about the timing and extent of interest rate cuts have been consistently pushed back, which has greatly affected the international foreign exchange market, fueled USD rallies, and exerted pressure on other currencies, including the VND.

Second, the significant decrease in Vietnam’s interest rates has widened the interest rate differential between the VND and USD. Consequently, pressure on the USD exchange rate has intensified.

Third, Vietnam’s imports increased positively in the first quarter of 2024, leading to a corresponding jump in demand for foreign currency compared to previous years. General Statistics Office (GSO) data shows that the domestic economic sector recorded a trade deficit of $4.49 billion in Q1. Although foreign direct investment disbursements were positive, they were insufficient to offset the demand for foreign currency.

Co-integration between exchange rates and gold prices remains a common occurrence. When the USD/VND exchange rate hikes, domestic gold prices typically follow suit due to the conversion effect. However, this correlation may not always hold true. There are instances when gold prices fluctuate due to specific factors, as mentioned above.

If the aforementioned factor persists, I think that the uptrend in both gold and the USD/VND exchange rate will continue. In the global gold market, prices have broken long-term resistance levels, indicating an expected continuation of the upward trend in the medium and long term. The position of the USD relative to other currencies in the world hinges largely on the timing of the Fed’s official interest rate cuts.

What are the solutions to curb the rise in the USD/VND exchange rate? From your perspective, should the State Bank of Vietnam sell off USD or continue to attract money through T-bills? Regarding gold, what measures can limit gold speculation? Is taxation viable?

To control the strong rise of exchange rates, attracting money through T-bills has become a common strategy. In the near future, the odds for the State Bank of Vietnam's (SBV) intervention in the market by selling USD directly on the foreign exchange market cannot be ruled out.

Whether selling off USD or attracting money through T-bills, both solutions have their own advantages and disadvantages. Depending on the specific situation of the market, the SBV will assess the appropriate option and may take both measures. In addition, the SBV may need to take further actions, such as inspecting foreign currency trading at commercial banks or issuing policy directions on a regular basis.

Regarding gold prices, transparency and adherence to market principles should be prioritized to narrow the gap between domestic and global gold prices, rather than attempting to suppress gold rallies.

Gold prices have increased for the reasons I mentioned above, especially because of the huge hikes in gold prices globally. Technically, gold prices have not shown a trend in medium- and long-term adjustments.

Importing gold to increase market supply requires substantial foreign currency reserves, which could impact reserves needed for more critical purposes. In such cases, the SBV should periodically determine a gold import quota based on macroeconomic balances to maintain ongoing control of the exchange rate.

Furthermore, the central bank should consider imposing import taxes on gold imports. Additionally, diversifying investment channels into stocks, real estate, and investment funds can alleviate market pressures.

Savers currently face a significant disadvantage compared to gold and USD reserves. Given this context, should investors continue to save money or explore alternative investment channels?

Deposit interest rates have decreased to historic lows, resulting in a decline in deposit inflows. Data from the GSO shows that, as of March 25, 2024, capital mobilized by credit institutions decreased by 0.76% from end-2023. In the last week of March 2024, deposit interest rates at some banks were poised to jump again. Despite their modest increases, they indicate a potential easing of excess money and liquidity at banks.

In the challenging times of 2022 and early 2023, people predominantly allocated their cash to traditional and safe investment channels such as deposits or real estate, especially in high-demand urban apartments. With deposit interest rates going down, deposits seem less attractive than other investment options such as stocks, real estate, or gold.

With deposit interest rates remaining low, more money will flow into real estate and the stock market. In addition, I believe the wage reform policy is an important factor that will stimulate the stock and real estate markets this year.

Historically, land fever or sharp increases in stock prices are often associated with robust salary reforms in Vietnam. Regarding the real estate market, land segments that have yet to increase strongly or are more speculative, particularly land up for auction and properties in outlying areas, may recover by the end of 2024 and early 2025, following the inflation of apartment and inner-city land prices to new levels.