Even after allowing unlimited gold imports, Vietnam is likely to face supply shortages as the country also exported around 36 tons of the precious metal in the first six months of this year.

According to Vietnam Gold Business Association there will be a shortage in gold supplies for production in Vietnam.

In a statement, the Association said country's central bank meant to resume gold imports, but a recent trade deficit figure of nearly $7 billion may have made the bank hesitant.

The current price gap between local and international gold prices was because local demand exceeded supply, it said.

Vietnam's trade deficit widened to $6.73 billion in the first half from $2.26 billion in the same period a year earlier, according to the General Statistics Office.

However, analysts said the gap is also driven by psychological factors, not merely by demand and supply mechanics.

Vietnam central bank earlier this month decided to lift restrictions on gold imports, allowing local traders to import unlimited volumes of gold in an attempt to bring local prices down.

The gap between local and international gold prices narrowed to around VND200,000 per tael on Saturday, compared to VND700,000 a week ago. A tael is approximately equal to 1.2 ounces

In Vietnam, gold can be imported only when the State Bank of Vietnam grants licenses to import gold. However, the central bank always tries to restrict the imports, which explains why illegal imports have been so developing.

Every time when the domestic gold price is higher than the world price, dollar traders try to store up dollars and raise the dollar price, because they know that gold traders will have to collect dollars to import gold illegally.

Therefore, it was not by chance that the State Bank last week announced that it will allow importation of gold with no limit in import volume.

However, in fact, the State Bank does not wants gold to be imported, because this will lead to the more serious trade gap and put hard pressure on the dong/dollar exchange rate. This may be the reason why the State Bank has been slow in granting licenses.

Precious metal Gold