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Dubai's gold market expects impulse
"After Ramadan", is the key word for gold market in Dubai as jewellery
sales have plummeted reflecting a drop in the number of tourists and a
drying up of investment and luxury indulgence appetite.
Gold
traders at Dubai's Deira Gold Souq, arguably the largest retail
jewellery trading hub in the Middle East, point out a definite drop in
sales -slightly more than what they saw in the same period the last
year. However, they are confident of a post-Ramadan pick up in volumes
when the tourists and the traders will be back.
"Trade volumes are of course low these days," says a manager with a chain that has 16 retail outlets at the Deira Gold Souq.
"Dubai
has given us a lot in the past 30 years. We should not complain about
low sales now. After all similar is the trend in the markets of all
other commodities," he says.
There are no official estimates of
a drop is sales. However, recent news reports pegged it at 40 per cent.
Gold jewellery sale volumes in Dubai fell in July as compared to sales
a year ago, as the economic downturn and summer heat deterred tourism.
Even though several traders debate the recently estimated drop of 40
per cent, everyone associated with gold trade accepts the fact that
sales have dropped.
"You cannot deny that fact. The tourists are
not coming," a jeweller said, requesting anonimity. But then retail
jewellery sale in Dubai suffering in the month of August is an annual
phenomenon.
What's essential to differentiate here is that a
less attractive retail trade has not dented Dubai's ambition of being a
re-export hub.
The Dubai Multi Commodities Centre (DMCC)
announced recently that gold trade through Dubai reached $14.69 billion
(Dh54bn) in the first half of 2009, an increase of 12 per cent from
$13.07bn during the same period in 2008.
From January to June
2009, a total of 300 tonnes of gold was imported into Dubai, an
increase of 13 per cent compared to 265 tonnes in the same period of
2008.
In the first half of 2009, gold exports from Dubai reached
213 tonnes, up 19 per cent from 179 tonnes in 2008. Gold price averaged
$922 per ounce during the first half of 2009, up from $910 per ounce
during the same period in 2008.
In the second quarter of 2009,
gold trade grew by 21 per cent to reach $7.2bn from $6.01bn in the same
period in 2008. During this quarter, Dubai imported 160 tonnes of gold,
12 per cent more compared to 143 tonnes during the same period in 2008.
Dubai exported 97 tonnes of gold in the second quarter of 2009, 52 per
cent more as compared to 64 tonnes during the same period in 2008.
So,
it's the retail jewellery sale that has suffered. Even though arrival
of ETF has changed the outlook of individual gold investments,
jewellery still determines the performance of gold markets. According
to data published by London-based analyst GFMS, at 83,600 tonnes of
over the ground deposit, jewellery accounts for more than half of gold
stocks across segments like ETFs and official gold holdings.
The Ramadan factor
Reasons
differ for why is the mood upbeat for post-Ramadan sales. Though the
pattern in which an exchange traded fund (ETF) attracts investments
differs from the jewellery markets, various analysts have recently
pointed out gold holdings of ETFs have dropped recently.
Sameer
Meralli, Managing Director of Dubai Commodity Assets Management (Dcam),
a company that has been marketing the Dubai Gold Securities (DGS) the
world's first Shariah-compliant gold ETF, cites two reasons for his
expectations that he will be able to attract more investors from the
month of September and onwards.
"We expect that people will
focus on their investment portfolios after Ramadan and this should
logically call for an enhanced allocation to gold. Secondly, we expect
the Islamic scholars in the board of various financial institutions in
the Gulf to take effective decisions after Ramadan," he said.
The
prime reason for an expected surge in demand is the falling in of
several festivals - across different religious communities - beginning
with Eid. The Indian festivals of Dussehra and Diwali that are being
considered a key to a revival in worldwide demand can also drive the
markets in Dubai considering the large Indian populace.
Jewellers
in Dubai had announced a boost in sales after the Indian festival of
Akshay Tritiya. Christmas sales, driven both by expatriates living in
the country and tourists is also expected to significantly propel
demand.
"There are logical reasons for demand to rise from
September to December this year. Retail sector should improve. If you
look at the volumes at the Dubai Gold and Commodities Exchange (DGCX),
it's already improving," said Sajith Kumar PK, CEO of JRG International
Brokerage DMCC.
Tourists have always constituted a major chunk of the market for Dubai's tax-free yellow metal.
The economic downturn, however, has slashed disposable incomes and reduced the number of tourists coming to the emirate.
It
has worsened the seasonal downturn in visitors as desert temperatures
rose. Post-August, as the mercury drops more tourists are expected to
visit Dubai.
Gold steadied recently after hitting a two-month
high with investors pondering whether to push prices up if the dollar
weakens further as they become more wary of high price levels.
After
breaking above a key resistance level that had held for most of this
year and with other commodities such as oil and base metals gaining
strongly while Asian stocks and the euro hit year-highs, gold is on an
uptrend as funds pour money into a broad range of assets. By some
technical measures, such as gold's relative strength index (RSI), the
market is becoming top-heavy while players are growing cautious about
liquidity thinning out during the summer holidays, which could mean
sharper swings in prices.
The dollar is hovering near its 2009
low against the euro. The euro hit a year-high of $1.4445 earlier in
the week. Investor demand for gold-backed exchange-traded funds
remained weak, with holdings at the worlds largest such fund, the SPDR
Gold Trust, steady at 1,072.87 tonnes as of August 4. Holdings at the
world's largest silver-backed exchange-traded fund, the iShares Silver
Trust (SLV), fell 3.47 tonnes or 0.04 per cent to 8,824.67 tonnes as of
August 4 after hitting a record 8,828.14 tonnes on July 31.
Gold's price trends in 2009
The
yellow metal's price edged slightly higher in Q2 09, ending the quarter
at $934.50 an ounce compared with $916.50 an ounce at the end of first
quarter 2009.
Even though signs of inflation arising out of
monetary stimulus packages injected across the world including the GCC
countries is not yet visible, the bullion, a hedge against inflation
has behaved as an alternate currency most of the year round.
Its price has primarily depended on how the greenback has fared.
"The
gold price fixed as high as $981.75/oz on 1 June, coinciding with the
quarterly low in the dollar, which was pressurised, among other things,
by growing questions about its future as the world's reserve currency.
More broadly, gold was supported by increasing signs that the worst of
the global recession might be behind us and a corresponding uptick in
investors' fears about future inflation. Oil, the commodity complex in
general, and equities all outperformed gold during the quarter,
however, on a year-on-year basis the situation was very different, with
gold posting a small gain and the other assets sharp declines," the
World Gold Council (WGC) said in its second quarter report.
Investors
did increase their gold holdings via exchange traded funds in the
second quarter, though at a slower pace than the first quarter of 2009.
Retail
investment in coins and small bars also slowed in the second quarter,
according to the anecdotal reports from dealers, while investors
marginally increased their holdings of gold futures, WGC said.
Market and economic influences
The
second quarter was dominated by a growing sense that the worst of the
global recession may trigger a rally in equity markets and commodities.
Prices of crude, base metals and precious metals all ameliorated in the
second quarter. "The dollar declined on a trade-weighted basis as
investors sold US Treasuries in favour of higher yielding assets,
supporting gold which has long been a dollar hedge," said the WGC.
"Also,
traditionally an inflation hedge, the yellow metal was underpinned by
growing concerns about central banks' exit strategies and the
implications for future infl ation if they are too slow to reverse
quantitative easing measures," it said.
Gold market trends
After
a difficult first quarter, there have been some encouraging signs in the
jewellery market in Q2 09 in India (the country imported two tonnes of
gold in the first quarter of 2009 registering a significant drop),
although this may be due to Akshaya Trithya and the April/May wedding
season.
On the other hand, the US Congress has finalised the
process allowing the IMF to sell 403.3 tonnes of gold. The IMF has
clearly stated that the sales will be conducted in a manner that will
not destabilise the broader gold market.
Several Dubai based
precious metals analysts have repeatedly predicted a long term outlook
of the bullion touching $1000 an ounce by the end of this year.
However, they have turned cautious off-late.
"Typically light
summer volume is hampering momentum and with early signs of increased
scrap flows emerging the yellow metal still has a lot of work to do to
threaten the $1,000 barrier," said Jeffrey Rhodes the CEO of Dubai
based INTL Commodities.
The gold price edged up slightly in Q2
09, ending the quarter at $934.50 an ounce, on the London PM fix,
compared with $916.50 an ounce at the end of the first quarter of 2009.
The average gold price also rose modestly, to $920.90 an ounce from
$907.80 an ounce in the previous quarter.
The gold price fixed as high as $981.75 an ounce on June 1, having been on an upward trend for much of the quarter.
The
quarterly peak in the gold price coincided with the quarterly low in
the dollar, which was pressurised, amongst other things, by growing
questions about the dollar's future as the world's reserve currency.
More broadly, the yellow metal was supported throughout the quarter by
increasing signs that the worst of the global financial crisis might be
behind us and a corresponding uptick in investors' fears about future
inflation, said the WGC.
Overall investment in the global
over-the-counter market is reported to have been positive in the second
quarter, according to GFMS. The new net long positions established over
this period by investors being smaller than it was in the first quarter
2009. GFMS puts the somewhat weaker buyside interest (and a certain
amount of liquidation of previous longs) down to the better performance
of the stock market in April, May and early June and the downward trend
in the gold price in June.
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