Middle East Seen Gaining Share of Gold Demand as Trading Expands

Jul 22, 2014 5:44 am ET

July 22 (Bloomberg) -- The Middle East will take a bigger share of gold demand as buyers from Kuwait to Saudi Arabia to the United Arab Emirates diversify investments and Dubai nears offering a contract for immediate delivery bullion.

MKS (Switzerland) SA, a Geneva-based bullion trader and refiner, expanded into Dubai three years ago and employs 25 people there, with the gold trade an “important market,” said Frederic Panizzutti, chief executive officer of MKS Precious Metals DMCC in the emirate. A spot gold contract due to start on the Dubai Gold & Commodities Exchange this year will draw business from London, said Gerhard Schubert, head of gold and commodities at Arab Banking Corp., a Bahrain-based bank.

“We believe the Middle East has a lot of potential to catch up with the rest of the world,” Panizzutti, 42, said in an interview in Dubai last week.

About 40 percent of the global physical gold market passed through Dubai last year, Ahmed Bin Sulayem, executive chairman of the government-owned Dubai Multi Commodities Centre, said in April.

The Middle East’s share of gold consumption was 6 percent last year, compared with 7.8 percent in 2010, World Gold Council data show. China’s usage climbed to 28 percent from 19 percent and the U.S.’s dropped to 4.9 percent from 7.6 percent. While central banks purchased about 544 tons in 2012 in the largest accumulation in about five decades, Saudi Arabia last expanded its gold reserves in February 2008, International Monetary Fund data show. The U.A.E. has no gold holdings.

Precious Metals

MKS, which employs about 650 people in precious metals and owns the PAMP refinery in Switzerland, doesn’t have a refinery in Dubai. Panizzutti started in the gold business 18 years ago at MKS after working in equities and foreign exchange at UBS AG.

Schubert began his career trading gold in Frankfurt in 1979, and worked at Fortis and ABN Amro Markets (U.K.) in London before becoming head of precious metals at Dubai-based Emirates NBD, the U.A.E.’s second-biggest bank by assets.

Iraq said in April it bought 60 metric tons of gold in the previous two months to diversify reserves and support the value of the Iraqi dinar. There are at least 10 tons of the metal in windows at Dubai’s gold souk, a traditional Arab-style market, making it the “one of the most significant in the world,” Schubert said in a July 20 interview in Dubai.

“I would say the biggest physical markets are Hong Kong and Dubai, but in Hong Kong it’s on a wider area, it’s not as concentrated like it is in Dubai,” Schubert said.

Bullion Center

Dubai still needs a bullion bank, a bank with clearing facilities and an institution that can store gold to become a global bullion center, Panizzutti said. The Dubai Good Delivery standard was developed by the DMCC in 2005 to increase confidence in the industry.

“The gold souk is not regulated, and that’s got to be regulated,” Schubert said. “There are so many hand carriers, with people who have 20 kilograms coming from whatever country. If the customs would have a better documentation of where this gold is coming from, and why would people come with 20 kilos and where does it go, then that would change. And it can’t just be Dubai. It has to be U.A.E. federal customs rules.”

The emirate should focus more on trading gold with China, the largest buyer, Schubert said. Dubai refineries process gold bars that are 99.5 percent purity, while Chinese consumers favor 99.99 percent gold fineness. “Dubai shouldn’t be complacent and look only in the Middle East-North Africa region. Dubai refineries are good and they should be able to be recognized by the Chinese authorities.”

Gold Market

About $18 trillion of gold circulated globally last year, according to CPM Group, a New York-based researcher. Bullion for immediate delivery rose 8.8 percent this year to $1,307.79 an ounce, according to Bloomberg generic pricing. Prices, which reached a record $1,921.17 in 2011, slid 28 percent last year.

The metal will probably fall to as low as $1,050 by the end of this year as expectations of higher U.S. and U.K. interest rates curb demand, Panizzutti said. Goldman Sachs Group Inc. also sees prices retreating to that level by year-end.

More mining companies will probably want to hedge production to lock in prices if gold falls further, according to Panizzutti. Schubert is more optimistic, predicting $1,400 by the end of this year and $1,200 in 2015.

Bullion’s biggest annual price slump in three decades spurred more jewelry to bar purchases in Asia last year. The DMCC has said the U.A.E. will grow as a precious-metals trading hub partly because of the free zone’s location near the largest consuming nations.

“The infrastructure for the gold business in Dubai is phenomenal,” Schubert said. “This government has to ensure that Dubai gold products will be accepted in China because this will be the biggest market for the next 10 or 20 years.”