(Staff article from The FRONTIER MYANMAR on 20 July 2022.)
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| Captured gold bars at India-Burma border. |
Traders have deserted the market since mid-May due
to a series of arrests and other interventions by the military regime aimed at
controlling the trade and fighting rampant smuggling, speculation and hoarding.
In Myanmar, gold is a popular hedge against economic downturns. Sales have spiked since the February 2021 coup d’état, which sparked widespread resistance and crushed confidence in the economy.
Banks have been
forced to limit withdrawals, GDP has shrunk by close to 20 percent and the
embattled regime has rolled back some of the key economic reforms of the last
decade. Many consumers who rushed to withdraw savings from banks or had spare
cash in hand were therefore keen to invest in ever-valuable gold.
Another popular
hedge is US dollars but on April 3, the junta-controlled Central Bank of
Myanmar introduced a new policy effectively freezing most foreign currency held
at domestic banks.
The Central Bank also ordered the banks to convert
those foreign currency holdings into kyat at the fixed rate of K1,850 to the US
dollar – below the then-market rate of about K2,000. These dollar restrictions
created havoc for importers of fuel and edible oil and left those markets in
chaos.
The Central
Bank’s surprise moves also sent shockwaves through the business community more
generally and further undermined confidence in the kyat. With dollars suddenly
harder to come by, spooked investors turned to the gold market instead.
“People were in
shock after the announcement and the amount of gold being traded doubled
overnight,” U Aung Ko, a gold trader based on Shwe Bon Thar Street, told
Frontier. “There were also speculators in the market, and both of these factors
pushed prices up.”
U Myo Myint
heads the Yangon Gold Entrepreneurs Association, a Shwe Bon Thar Street-based
body that issues gold prices four times a day and runs the wholesale market. He
confirmed to Frontier that the Central Bank announcement sparked a surge in
gold sales. “People were withdrawing cash from the bank and queueing up to buy
gold,” he said.
Although Myo Myint refused to give the overall volume of trade, he said bullion sales had doubled in the wake of the foreign currency controls. In normal times bullion typically accounts for at least 80pc of gold sales, Myo Myint said, with the rest being for jewellery and industrial use.
Many buyers
appear to have been turning to gold to protect against kyat depreciation, or to
speculate on future price movements. But the fixing of an artificially high
official exchange rate for the kyat also led to gold being undervalued, and
prompted what industry sources described as a massive surge in smuggling to the
Indian border.
The gold-buying frenzy came to a screeching halt on
May 16, when the authorities arrested nine gold traders. They have not publicly
announced the arrests, let alone the specific charges, but Myo Myint said the
YGEA was told that the traders were detained for allegedly manipulating the
gold price and smuggling gold from Myanmar to India.
Industry sources
approached by Frontier refused to speak on the record out of fear of
retribution. Frontier understands that Central Bank Deputy Governor Daw Than
Than Swe has forbidden anyone except Myo Myint from talking to the media about
the gold market, in order to “control misinformation”.
The arrests,
along with the introduction of a new licence for bullion trading, seem intended
to take the sparkle out of the gold market by instilling fear in traders. If
the quiet shops on Shwe Bon Thar are any indication, the measures have done
their job. Aung Ko has little doubt about the regime’s ultimate intentions.
“They want to control the entire gold market,” he said.
The ‘air’ market
A significant
proportion of gold and jewellery sales have shifted online in recent years due
to the COVID-19 pandemic. Shops and individual traders hold sales over Facebook
Live, showing off their wares in an effort to drum up business. Famous
entertainers are often paid to promote these sales, helping to create a
thriving market.
Myo Myint, the
YGEA chair, claimed online sales had been used to “manipulate” gold prices in
recent months. He explained that some traders would search for gold buyers
online who were willing to pay above the YGEA price, and after agreeing a price
with a buyer they would then buy gold from the association and sell it on to
them for a profit. He added that this practice was known as lay pat kar, or “verbal trading” (“lay”
literally means air).
In this type of
trading, gold (and money) actually changes hands. But traders told Frontier the
Central Bank announcement also sparked an increase in another, more speculative
type of lay pat kar, in which two
parties agree to buy and sell gold at a particular price at a particular time
and date. The traders are essentially making a bet on whether gold will rise or
fall – known in finance as a “forward” contract – and usually no gold actually
changes hands.
Traders said lay pat kar normally increases during
times of volatility, adding that record-high global gold prices and the April 3
foreign exchange controls, along with Myanmar’s general economic instability,
had created a perfect storm. “All of these factors created a favourable
environment for the lay pat kar market,”
said Aung Ko, the gold trader. “It’s hard to say exactly how much this trading
increased, but it was significant.”
Although lay pat kar is well-established in
Myanmar – and extends to other commodities, from currencies to rice and even
cars – authorities traditionally view it as a trigger for harmful currency
instability and have periodically tried to crack down on it.
Traders who bet
on movements in the gold price have been accused of manipulating it to their
advantage by either buying or selling large amounts of gold, kyat or dollars.
Gaming the market this way would be impossible in most countries, but Myanmar’s
foreign exchange market is unusually thin, and one or two large transactions
can move the kyat up or down.
In late 2018,
the authorities arrested gold and currency traders suspected of market
manipulation after a sharp fall in the kyat, which they believed was being
exacerbated by lay pat kar.
Some dispute
that lay pat kar actually causes
volatility, instead seeing it more as a symptom. The junta, however, seems
convinced. In December last year, it formed a Monitoring and Steering Committee
on Gold and Currency Market to “inspect and prosecute market manipulation,
check if there is compliance with payment rules or not, and proceed against
those unscrupulous traders”.
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| Gold mining in KIA-controlled Sezine Village near Pharkant. |
‘If you come, they’ll run away!’
Gold traders
told Frontier that between April 3 and May 16, speculation was less of a
problem than smuggling. And the rampant smuggling was a direct consequence of
the regime’s foreign currency policy, particularly its attempt to peg the kyat
at the artificially high rate of K1,850 to the US dollar, when it was trading
on the black market for more than K2,000.
The gold and
currency, particularly US dollar, markets are intrinsically linked. Typically,
if the kyat rises or falls, the local gold price follows. If it doesn’t, then
it can create arbitrage opportunities that encourage smuggling. But this
phenomenon also normally self corrects; if the price is too low, increased
demand for gold quickly pushes it back up.
After setting the currency peg, the Central Bank
ordered the YGEA to base its gold price on the K1,850 exchange rate, and the
association obliged. Myanmar gold usually trades at a premium to the global
price, which is quoted in US dollars, but the official local price was suddenly
on par with most of the world.
This soon
created parallel prices for gold: the official rate, and a higher market rate.
At a May 4 meeting, the YGEA ordered retailers and traders to transact within
K5,000 of the YGEA price per tical (a local measurement equivalent to 16.33
grams, 0.576 ounces and 0.525 troy ounces). This order, unsurprisingly, went unheeded.
Any visitor to
the YGEA Facebook page would have quickly noticed the problem. Each day, the
YGEA posts the daily gold price. Through April and the first half of May, these
posts regularly featured comments either mocking the association or pointing
out the disparity.
On April 27, for example, one user wrote that while
the association’s gold price was K2,044,000 per tical, gold shops were selling
for K2,056,000, and they wanted to know which was correct. Another user simply
commented, “Do you really need to ask?” On May 11, one user asked in apparent
jest if they could come to the association’s office and buy at the day’s rate.
One person replied, “If you come, they’ll run away!”
On Saturday May
14, the YGEA did not issue its daily price, suggesting something was happening
behind the scenes. And when the market re-opened on May 16 – the day the
traders were arrested – the local gold price was almost K90,000 higher, despite
the global gold price having fallen. The YGEA had flipped to using the market rate.
Asked about the
switch, Myo Myint confirmed that the Central Bank had initially told the
association to base the gold price on the official exchange rate, but he said
this had become impossible due to the large difference between the resulting
local price and what gold was being bought for at the border. “So now we are
calculating the index price on the actual market exchange rate,” he said.
A smuggler’s paradise
Although
Myanmar’s gold price tends to be slightly higher than the global rate, it’s
nearly always lower than neighbouring India. One of the world’s largest gold
markets, India levies a tax on imports that pushes up its gold price relative
to many countries – and thus incentivises smuggling.
When the COVID-19 pandemic shut down air travel,
Myanmar displaced the Middle East as India’s main source of smuggled gold,
accounting for 69pc of all seizures in the 2020-21 financial year, according to
the annual report of the country’s Directorate of Revenue Intelligence.
Gold from
Myanmar is usually smuggled from Chin State and Sagaing Region into India’s
Mizoram and Manipur states, and from there distributed by road to major demand
centres elsewhere in India.
While there had
been some “spectacular” seizures in 2020-21, including one haul of almost 83
kilograms in December 2020, the DRI said a “huge quantity” of gold was being
successfully smuggled in from Myanmar through these land routes.
Between April 3
and May 16 this year, when Myanmar’s gold price was artificially low, smugglers
had more incentive than ever to send gold across the border to India. The
Indian price was routinely 10-12pc higher, the equivalent of around US$200 an
ounce.
Indian media reported a number of major seizures
during this time, including 16 kilograms of gold from Myanmar concealed in
three vehicles travelling together between Manipur and the neighbouring state
of Assam.
Gold traders confirmed to Frontier that smuggling was rampant then and pointed the finger at those well-connected enough to access the official price through the YGEA. They said most of those who had been detained on May 16 were association members.
Myo Myint denied
those responsible were members but acknowledged that the low price the YGEA set
had led to a surge in smuggling. “Many were caught after buying at the YGEA and
selling at the border. If you look at arrests in Tamu, you can see it is all
‘Academy’ branded gold – it is clearly from the YGEA,” he said, referring to
one of the country’s major refiners. “Actually, everyone in the gold industry
wants the local gold price to fall, and when it happens, they buy gold at the
YGEA and smuggle it across the border.”
The scale of smuggling appears to have been so great
that there were concerns of an impending gold shortage. A day before the
Central Bank pegged the kyat at K1,850, state media had quoted Myo Myint as
saying that gold sales were sluggish due to high prices.
But barely a
month later, the YGEA was forced to call an emergency meeting, at which it
decided to import gold from abroad during the June-to-September rainy season,
when domestic gold mining normally declines, in order to avoid a possible
shortfall. Myo Myint was quoted at the time as saying that the association also
wanted the Central Bank to sell gold on to the domestic market.
Myo Myint told
Frontier that if the YGEA had continued to set the price based on the K1,850
exchange rate, Myanmar’s gold stocks would have disappeared. “We would have
been left with nothing – it all would have gone across the border (to India),”
he said.
The YGEA chair
declined to reveal exactly who was able to buy at the official price during
this period, or even where the gold the YGEA was selling had come from.
Although the YGEA maintained records of sales during this period, Myo Myint
said it was not allowed to disclose them, even to its members.
Gold traders
also refused to identify those involved, but said they were well known in the
industry. “Those arrested have been working in the business for a long time.
They were working together with other people who weren’t arrested. No one is
more guilty than anyone else; it’s just that some were unlucky enough to be
arrested,” said U Aung Aung, a major gold trader.
Aung Ko said
that because YGEA had switched to calculating the local price based on the
market rate, smuggling had declined. He suggested this had also contributed to
the sudden drop in gold sales.
“You know how it
works – if traders can’t make a profit, there’s not much incentive to trade,”
he said. But that’s not the only factor. At the same time as profits have gone
down, the risk of trading gold has risen exponentially.
Resuming Exports
A day after the
May 16 arrests, the YGEA issued a seven-point notification. For the first time,
it made mention of a licence to trade in bullion. Previously, the only two
licences linked to the gold business in Myanmar were for mining and running a
gold shop. “Nobody has ever needed a licence to trade in pure gold bars before;
they only needed a gold shop licence,” said Aung Ko.
The notification
also said that transactions outside gold shops could only take place at the
YGEA office, and payment should be made immediately. Border trade could only
take place with the association’s permission, while shops and traders were now
required to maintain inventories and record sales. It warned that action would
be taken in response to any violations, including online sales without a
licence.
The arrests and
the new rules have devastated the market. Trade in bullion, as well as online
trading and lay pat kar, have almost disappeared, three traders told Frontier. “People
who have accumulated pure gold bars can’t sell them because they don’t have a
licence. As a result, the market is very quiet,” Aung Ko said.
Myo Myint said
anyone wishing to sell bullion could get a letter of recommendation from the
YGEA that they could use to support an application to the Yangon City
Development Committee, the commercial capital’s municipal authority, for a gold
bar trading licence.
As of late June,
the association had issued 70 letters. “Those who apply for new licences also
have to pay one year’s tax in advance. After that, YCDC will issue licences,”
he said.
Initially, YCDC
refused to accept applications for bullion licences on the grounds it was
awaiting instructions from “the authorities”, an apparent reference to the
junta, one gold trader told Frontier, asking not to be identified.
Another
anonymous online gold trader said he was fearful of doing business because of
concern about licences and the May arrests. “I was buying and reselling online
gold jewellery that had been left at pawn shops, but now I’m too afraid,” he
told Frontier in mid-June.
In late June, YCDC started processing applications.
Aung Ko said a few had recently been issued, but sales were still slow, and
most traders were waiting to see what would happen next.
Traders told
Frontier that the regime seems intent on wresting control over the gold
business, even at the cost of depressing the market. One theory is that it
wants to be able to resume exports at a time of high global prices. This would
enable the junta to earn foreign currency, which is apparently in short supply.
The National
League for Democracy government started permitting gold exports in January
2018, and some sales to Japan and South Korea were reported. At the time, some
in the industry believed exports could reach as much as 20 tonnes a year – the
equivalent of around $1 billion at current prices.
However, after
the global Financial Action Task Force placed Myanmar on a watchlist in 2020,
amid concerns about money-laundering by transnational drug traffickers and the
weak regulation of Myanmar’s financial system, the NLD government banned
exports again.
Late last year
the junta green-lighted gold exports, subject to earnings being changed into
kyat. Its Ministry of Commerce said on December 30 that gold up to a value of
$50,000 could be exported with the use of telegraphic transfers, and exports
exceeding $50,000 could be effected through letters of credit.
Myo Myint said
the YGEA was in consultations with business owners on commencing exports, and
that he expected official trade to resume early next year.
Traders ‘living in fear’
Myo Myint talks
approvingly of the calm that has returned to the gold market in the wake of the
nine arrests. “Now there are only genuine traders left in the market,” he said.
“And we don’t see people queuing up in front of the gold shops anymore.”
But for most
traders, and those seeking a financial haven in turbulent times, the
restrictions on the gold trade are further evidence of the regime’s desperate
attempt to control the economy for its own benefit, regardless of the cost.
Meanwhile, the
arrests are not the only development to have sent a chill through the gold
market. Some of the country’s most prominent tycoons have been detained in
recent months, including Eden Group of Companies owner U Chit Khine and
Zaykabar owner U Khin Shwe.
Before them, U
Zaw Zaw of Max Myanmar had reportedly been questioned, and his status remains
unclear, while unconfirmed reports emerged recently that Shwe Than Lwin Group
owner U Kyaw Win had been arrested.
This has left
many people in the business community wary of doing anything that might attract
attention from the regime, said Aung Aung. Yet, despite its heavy-handed
tactics, the regime has been unable to maintain confidence in the kyat.
Since the arrest of the gold traders, Myanmar’s
currency has steadily lost value against the dollar on informal markets,
sliding from K2,033 on May 13 to K2,290 on July 18 – a fall of 12.6pc. It is
unclear if this is tied to the restrictions on the gold market, but local
factors do seem to be responsible. Over the same period the US dollar index,
which tracks the dollar against a basket of currencies, rose only 2.7pc.
The kyat fell so
quickly on July 18 that many gold traders simply suspended sales, because they
were unsure how to price their goods. Speaking ahead of the latest sell-off,
Aung Aung said the political situation and lack of trust in the banks would
likely push the kyat down further. “When people no longer trust the banks,
money needs to be pumped into the economy … the kyat will depreciate further,”
he said.
Several traders
told Frontier that because gold was now largely off limits, investors were
instead turning to other sectors, such as vehicles and real estate. Under
previous periods of military rule, when trust in the authorities and banking
sector was similarly low, these were popular ways in which to store wealth.
“The result will be higher vehicle and real estate prices,” said Aung Ko.
Even if
restrictions are eased, he said that the arrests had shaken the confidence of
gold traders. “The nine traders are yet to be released … we are all worried,”
said Aung Ko. “Everyone in the gold business is living in fear, wondering when
it will be their turn to be arrested.”
