Borrowing a page in the history books from the United States in 1933, the Vietnamese Communist authorities suspended all gold imports in June. This marks the first time a Southeast Asian country has barred gold imports amid skyrocketing inflation, soaring interest rates and an overvalued currency – the Vietnamese dong.

Seventy-five years ago, the United States under Franklin Delano Roosevelt (FDR), legislated Executive Order number 6102, confiscating all privately held gold in the United States on April 5, 1933. Unlike FDR’s edict, however, Vietnamese can still hold or own physical gold.

This shocking development, revealed to me by my good friend in Zurich – Robert Vrijhof of WHPV – depicts a new trend among emerging market economies to stop gold hoarding as local inflation transitions into Weimar Germany-style double-digit or possibly, triple-digit consumer prices.

Asian Inflation Out of Control

It comes as no surprise that another dollar-linked or semi-pegged currency has collapsed vis-à-vis gold. Gold prices are rising against all currencies since 2005, including the euro.

Spot gold prices have averaged $910 an ounce in 2008 compared to $659 twelve months ago. From an average price of $295 an ounce in 1998, gold prices have gained a cumulative 214%. But compared to its peak in January 1980 at $850 an ounce, spot prices are up just 8.8%.

As Asian inflation continues to soar in 2008 hitting a 9 ½ year high averaging 7.5% in April, dollar-pegged currencies are coming undone. Other peripheral currencies in the region that follow the Federal Reserve’s monetary policy are also under threat as inflationary pressures soar. This phenomenon is also occurring through the Gulf region where dollar-pegged units are unraveling amid rising inflation.

Vietnam’s Biggest Challenge: Wrestling 27% Inflation

Introduced in 1978, the Vietnamese dong is another project in fiat money gone wrong. Inflation is now clearly out of control, soaring 27% over the last 12 months through June and still accelerating as crude oil and other commodities prices continue to hit new highs. The dong, down just 3.7% this year versus the dollar, remains severely overvalued and has recently breached its government-imposed trading band.

The Vietnamese economy, which I visited in 2007, is severely overheating; a natural consequence of strong economic growth is inflation and high interest rates. And high rates and inflation threaten financial assets like equities. The VIN Index, the country’s largest stock-exchange in Ho Chi Minh City, has collapsed more than 60% since hitting an all-time high last year and real estate prices are now in a downtrend following a big boom since 2005.

The Vietnamese economic miracle, averaging a stunning 7.3% GDP (gross domestic product) growth rate this decade, now risks coming undone if the State Bank of Vietnam fails to thwart surging consumer prices.

The World’s #1 Gold Importer

The Vietnamese government’s decision to ban gold imports follows an unprecedented surge in ownership whereby locals have lunged into gold bullion, surpassing India and China as the world’s largest source of demand. Gold production is already approaching net supply deficit as South Africa and Australia continue to struggle to bring new supply to the market this decade.

Demand destruction, the code-word for declining consumption as prices for a commodity rise exponentially, has not occurred in Vietnam. Fabrication demand has fallen sharply in India as gold prices raced through $750 an ounce last fall; but despite a surging price since last August, the Vietnamese continue to absorb imports at a record clip – until now.

According to the World Gold Council, Vietnam’s first quarter gold imports were 36.8 tons – up 71% from the first quarter in 2007. And 31.5 tons of that total supply, or 86%, was purchased as investment gold for protecting one’s wealth against rising inflation and a weak currency.

Since June, the Vietnamese can no longer buy gold. Officially, the government claims this new policy is to temper booming imports, which resulted in a record trade deficit for the first half of 2008. First-half imports surged 64% to $45 billion dollars while exports had risen only 27%, or $28.6 billion dollars. Yet the value of gold imports prior to the June suspension was $1.7 billion dollars, 3.8% of total imports. That’s hardly a dent compared to heavy industrial machinery and machine tool imports used for manufacturing and suggests the government is targeting gold in an effort to thwart demand.

Thus far, the Vietnamese Communist government has not confiscated gold ownership. FDR made gold ownership illegal in the 1930s as the United States suffered a devastating deflation until WW II. The U.S. also revalued gold to $35 an ounce during this period.

If Vietnam continues to lose control of inflation, and possibly, the economy, gold confiscation becomes a real possibility in a country with a short history of fiat money.

All paper money, including the euro, the yen and even the resource currencies, continue to buy less gold compared to just three years ago. I imagine gold prices will benefit enormously from the new global inflation spike the latter half of this decade and break its inflation-adjusted high of $2,200 an ounce in 1980.