Source: WSJ – Dubai to Add Spot Gold Contract
Dubai has been a gold-trading center in the Middle East for decades, but the market’s size has increased exponentially in recent years as the trade has expanded from traditional “souks” to the Dubai Gold & Commodities Exchange.
The exchange is planning to launch a spot gold contract next year, the first of its kind in the Middle East, which it hopes will help take the emirate from being a regional to a more international trading center for the precious metal.
About a quarter of all the physical gold traded around the world already passes through Dubai, the commercial hub of the United Arab Emirates, but DGCX, as the exchange is known, is looking to continue expanding this trade, which has grown from $6 billion in 2003 to $70 billion last year, according to data from the Dubai Multi Commodities Centre. This is part of a trend that is seeing the volume of gold passing through established gold-trading venues in the West—London, New York and Zurich—gradually shifting eastward, to Dubai, Singapore, Hong Kong and Shanghai.
The emirate, which has adopted the title “City of Gold,” is well-situated to facilitate trading of the precious metal—between producers in Africa and consumers in Europe and Asia. Around a quarter of the gold that passed through Dubai in 2012 made its way to India, which in 2012 accounted for nearly a fifth of global physical demand, according to data in a World Gold Council report.
The DGCX currently serves as a gold futures-trading platform, but it needs spot contracts to complement the robust physical market that already exists in Dubai, Chief Executive Gary Anderson said in an interview.
“Physically, we are looking to provide traders with a spot market, where at the end of every day, people can either deliver gold from vaults in Dubai or take delivery of that gold,” Mr. Anderson said. “It will complement the gold market in the region itself and also the global market, making it easier to trade gold.”
Souks—literally traditional market places in Arabic—are still hives of gold-trading activity in Dubai, which boasts around 300 gold retailers. Industry participants estimate that at least 10 metric tons of gold is available to be traded at any given time in the emirate’s souk.
The exchange is consulting with bullion banks and refineries to design a spot gold contract that will suit the needs of the industry, Mr. Anderson said.
Some locals are hoping for a system that can combine the flexibility of a souk with the dependability that an established exchange can bring to the table.
Nimesh Shah, a gold dealer at Richcomm Global Services in Dubai, said the spot contracts need to account for relatively small quantities of gold, smaller, say, than the indivisible kilograms that are traded as futures on DGCX. Mr. Shah says the point of a spot contract is to make it possible to “buy or sell just 25 ounces of gold.” A kilogram is equivalent to just over 32 troy ounces of gold.
UAE residents are currently able to trade spot contracts on an over-the-counter basis, but according to Mr. Anderson, the DGCX gold contract will simplify matters, as it ” will eliminate that need for offshore credit and collateral.” Meanwhile, the underlying gold will be stored in vaults within the UAE, he added.
Gerhard Schubert, head of precious metals at Emirates NBD Wealth Management, said the planned gold contract allows “customers to be much closer and aligned to the spot price.”
Traders of futures contracts often want exposure to the physical commodity but don’t actually want the obligation to deliver it or take delivery. Spot contracts aren’t for such traders. India’s National Spot Exchange began winding down operations in August amid a probe of regulatory violations, which included allowing customers to settle trades more than a month after they were made. The exchange’s rules required all trades to be settled within 11 days.
This is less of a concern in Dubai, Mr. Schubert said, noting an “affinity of the population in the UAE for taking physical delivery.”
Refineries in the region are boosting their capacities, providing further support for the expanding trade.
The UAE already has six gold refineries with combined annual refining capacity of more than 1,250 tons. Kaloti Jewelry Group, which has a refinery with a capacity of 450 tons, has announced plans to set up a new refinery that will add 1,400 tons of annual refining capacity at a cost of $60 million. The refinery is expected to be completed in late 2014, the company said.
Vaults operated by the Dubai Multi Commodities Centre, the DGCX’s majority shareholder, are also an important part of the gold ecosystem. There has been a “marked increase in gold stored and enquiries from new customers in recent months,” Mr. Anderson said.