HANOI (Commodity Online): Days after the Vietnam government announced the closure of some 20 gold exchanges operating in the country, investors have abandoned the gold trading floors and turnover in the bourses has plunged.

Early this month, Vietnam's central bank-the State of Bank of Vietnam-asked all the gold exchanges to shut shop by March 31. Vietnam has around 20 gold trading floors where investors could deposit a small fund and then trade 14 times the value of their initial investment.

The government felt this kind of trading was creating a huge risk to both investors and the country's financial system and thus took the decision to shut down the gold exchanges. Vietnam central bank officials said that the decision was an attempt to stabilize the country's foreign exchange market.

Two weeks after the government announcement, several gold exchanges said they are reporting a big drop of as much as 70-80 percent in trading volumes. We are in the process of closing down our gold exchange. But trading volumes in the exchanges have drastically come down, as traders and investors have abandoned us, said Nguyen Huy Duong, deputy general director of the Hanoi-based IGI Exchange. The IGI Exchange has some 1,000 gold trading accounts.

SJC-Eximbank Gold Trading Floor in Ho Chi Minh City said its gold trading floor is getting depleted with virtually no traders. In SJC, investors could once borrow up to 14 times the amount in their margin accounts. The exchange has now reduced loans to VND10 billion (US$540,000) per investor from VND30 billion ($1.6 million) earlier.

Exchanges such as SJC and IGI have warned speculators from manipulating gold prices as they said they are under the process of cleaning up the bullion business.

As Vietnam's gold exchanges are heading for closure, the daily trading action has shifted to gold shops and bullion markets across the country. Vietnam is Asia's second-largest gold investor after India, with gold consumption surging 49.4 percent in 2008 to 115.8 tons.

Bullion trader Vo Thi Kim said that there is a sudden frenzy in the physical bullion market in Vietnam. All those who used to trade in the gold trading floors have come to the physical market for gold selling and buying. Volumes of gold business have suddenly zoomed with several bullion traders, Kim said.

According to him, the government decision to shut down the gold trading floors will only benefit bullion business in the country. What was happening in the gold trading floors was illegal, strictly speaking. There have been so much speculation and malpractices happening in the gold floors that it has not helped the bullion industry in Vietnam, he said.

Investors have for long preferred to trade gold at the exchanges since they only need to pay around 7 percent margin on their investments, a requirement that experts feared posed ma risk to the entire financial system.

The State Bank of Vietnam felt that the closure of the more than 20 gold exchanges in the country was a must to eliminate this risk. It said though transactions have begun to come down, outstanding loans given to investors at the floors are more than VND2 trillion ($108.3 million).

Gold trading at the exchanges did not create new value for the economy, but merely sucked in capital from other sectors, Nguyen Van Binh, the central bank's deputy governor, told reporters.

Tran Huy Hoang, head of the banking department at the HCMC Economics University, said gold exchanges may look like stock exchanges but are in fact completely different.

While stock exchanges attract funds for the economy, gold floors work just like casinos where the demand and supply are not real, he said.

It is not just economists but also many investors who support the government's decision to close the gold exchanges. Tran Trong Nghia, an investor who is locked in a lawsuit with Asia Commercial Bank's gold exchange since 2008, said the ban is right since there are no rules right now and investors have to suffer all the disadvantages.

Nghia filed for compensation of more than VND58 billion ($3.1 million) in his suit which came to the HCMC People's Court last week. Binh of the central bank said the establishment and operation of gold exchanges have no legal basis.

Gold imports in Vietnam in 2009 also led to a shortage of dollars in the country, with foreign exchange reserves down to more than $16 billion early this month in central bank's estimate, from $22 billion at the end of 2008.