April 11, 2012
Hoi An, Vietnam[Editor’s note: Sovereign Man Chief Investment Strategist Tim Staermose is filling in for Simon today.]
Here’s something you don’t see every day: Banks in Vietnam will actually pay YOU to store your gold in one of their safe deposit boxes. I was pretty surprised to find this out for myself; neither Simon nor I have seen it anywhere else in the world except here.
This is actually how banking used to be. The original bankers were goldsmiths– big burly guys who worked with gold on a daily basis. They had the security systems already established, and, for a fee, they were willing to let you park your gold in their safes.
Eventually, goldsmiths got into the moneylending business; instead of charging a security fee, they would pay depositors a rate of interest for the right to loan out the gold at a higher rate of interest.
Goldsmiths’ reputations lived and died based on the quality of their loan portfolios, and their consistency of paying back depositor savings.
Today that’s all but a footnote in history. Except in Vietnam.
Vietnam’s economy enjoyed a strong boom in the mid-2000s thanks to economic liberalization and foreign capital inflows. Within a few years, the economy overheated and inflation became rampant. Then came the global financial crisis.
The Vietnamese government’s response, as it has been with governments all over the world, was to print more money. This further exacerbated the inflation problem and undermined confidence in the currency.
The unfortunately named Vietnamese dong has been devalued to the point where it now has an absurd number of zeros. Over the past 3 years it has lost some 30% of its value against the US dollar– it now takes about 21,000 dong to buy just one US dollar.
Against stronger currencies such as the Aussie dollar and Canadian dollar, the dong has plunged even further.
As such, it comes as no surprise that the Vietnamese people don’t trust their government’s paper money. They prefer to earn dollars and keep their savings in gold. Banks have jumped on board, encouraging gold deposits by offering attractive interest rates.
Property prices are frequently quoted in gold as well. It’s cultural– the average guy on the street is very aware of gold and probably knows the price.
The government doesn’t like this at all because it can’t print dollars or gold. So, it is discouraging their use, forcing non-tourist business owners to exclusively use the dong.
The government has also introduced regulations to discourage gold hoarding. Technically, it’s not permissible now for Vietnamese banks to pay interest on gold deposits anymore, but it still happens in practice.
So much for Warren Buffet’s assertion that gold is just a silly cube that doesn’t pay any yield.
It’s ironic that places like Vietnam are considered poor, backward, and undeveloped by the West… and yet it’s precisely these same people who are smart enough to culturally reject worthless government-issued paper currency in favour of something that is naturally scarce and lacks counterparty risk.
We should all be so wise…
Until next time,
Tim Staermose, Chief Investment Strategist
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