-- Posted Thursday, 21 May 2009 | Digg This Article | | Source: GoldSeek.com

The total turnover in Dubai gold contracts has reached $128 billion since they were first launched on the Dubai Gold & Commodities Exchange, with the volume of contracts passing three million for the first time in May.

A statement from the DGCX said that with volumes surpassing three million contracts the exchange had ‘entered a new phase of development’.

CEO Malcolm Wall said: ‘Despite the uncertainty of the global market, participants continue to favor futures contracts to hedge and balance their portfolios. The understanding of derivatives in the region, their usage and benefits is continuously improving’.

City of Gold

In the current year the volume of contracts has exceeded 410,000. Dubai is known as The City of Gold and chose to launch derivative trading with its favorite precious metal, but a broad range of commodity futures contracts are now listed on the DGCX.

Seasoned gold industry observers might be amused to hear that Dubai has been discovering derivative trading during a period when such practices have come in for severe criticism for their role in leveraging up markets prior to the global financial crisis.

It is unknown how many of the Dubai contracts are used by local jewelers to hedge the upcoming price of gold, but there is a large physical market for gold in the emirate which handles more than 20 per cent of the world gold trade.

Dubai also launched its own gold exchange traded fund earlier this year, and this is also gaining in popularity with local investors, particularly institutional investors. It has the advantage of being Shariah compliant and settled locally.

Position size

It is a matter of speculation as to what the size of positions held in gold might be on the DGCX as contracts are clearly being rolled over, and the headline sum of turnover, while impressive, does not give this away.

Could the Saudi Arabians who bought $3.5 billion in physical gold last autumn also achieving similar levels of exposure to the precious metal on the DGCX? It is perfectly possible, although the Dubai-based ETF has certainly yet to show this level of ownership.

But as the gold market looks poised to take off to the next level beyond $1,000 an ounce, sooner rather than later, and this autumn at the latest, all Dubai gold-based assets are going to see very much larger volumes.

Failure of GCC monetary union to boost gold

Now that the UAE has decided not to participate in the monetary union of the GCC states the way is cleared for increased gold buying by thier central banks to diversify away from the US dollar.

Gold purchases may have been on hold pending further progress on GCC monetary union, and a decision over what kind of currency basket – which was the most probable outcome – would prevail. Gold might, or might not have been included in this basket.

Gold not on hold

Now this uncertainty is removed and the six central banks of the GCC can get on with managing their own affairs. Saudi Arabia has amassed considerable gold reserves and could well decide to buy more to spread its risk now that it is most likely going to keep its dollar pegged currency.

And the UAE which holds no gold might decide that this would be a very good time to get on and do so, before prices hit the roof, and the opportunity to diversify away from the dollar is lost.

Certainly Gulf central bankers are suddenly freed from a policy straight-jacket that has inhibited their thinking for some years. The argument has always been that with a single currency around the corner that new ideas like stocking up on gold or silver could be postponed.

Swift action

The GCC central banks will need to move swiftly now if they want to diversify their reserves away from the US dollar which looks to be facing a structural decline due to mounting deficits, enormous new borrowings that need to be funded with bonds as well as quantitative easing or money printing and the threat of inflation.

There are plenty of good reasons to exit the dollar at this moment, as commentators like Jim Rogers and Dr Marc Faber have elucidated recently. Gold is a way to do so quietly without having to sort out new currency baskets, which might take too much time and prove controversial.

So expect to hear in future months that the Saudis and perhaps even the Emiratis have emerged as surprise buyers of gold. They will want to spread their risk away from the US dollar just like any other investor.

-- Posted Thursday, 21 May 2009 | Digg This Article

About Peter Cooper:
Oxford University educated financial journalist Peter Cooper found himself made redundant by Emap plc in London in the mid-1990s and decided to rebuild his career in Dubai as launch editor of the pioneering magazine Gulf Business. He returned briefly to London in 1999 to complete his first book, a history of the Bovis construction group.

Then in 2000 he went back to Dubai to become an Internet entrepreneur, just as the dot-com market crashed. But he stumbled across the opportunity to become a partner in www.ameinfo.com, which later became the Middle East's leading English language business news website.

Over the course of the next seven years he had a ringside seat as editor-in-chief writing about the remarkable transformation of Dubai into a global business and financial hub city. At the same time www.ameinfo.com prospered and was sold in 2006 to Emap plc for $27 million, completing the career circle back to where it began a decade earlier.

He remains a lively commentator and columnist as a freelance journalist based in Dubai and travels extensively each summer with his wife Svetlana. His financial blog www.arabianmoney.net is attracting increasing attention with its focus on investment in gold and silver as a means of prospering during a time of great consumer price inflation and asset price deflation.

Order my book online from this link

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