THE gold trade in Dubai goes back generations but it's real heyday was in the 1970s when capital controls in India and Pakistan, a surge in bullion prices as inflation and the Vietnam War decimated the dollar, political turmoil in Iran and Lebanon all converged to make the Creek one of the nodal points of the bullion business, the successor to Beirut and Istanbul.

By The Dgcx And The Dubai Gold Trade

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Published: Sun 27 Nov 2005, 10:02 AM

Last updated: Wed 1 Nov 2023, 3:49 PM

Dubai's gold traders were some of the most influential private dealers in the Swiss and London spot bullion market and a Pakistani bullion dealer still based in Dubai was a member of COMEX as far back as 1971, the year President Nixon decoupled the dollar from gold and doomed the Bretton Woods monetary system. It is therefore no coincidence that some of the biggest exporters of physical gold and silver bullion into India are based in Deira even though the age of ten tola bars "reexported" on wooden dhows via the Creek is now historical folklore. Dubai's goldbugs were once so powerful in the bullion business that Texan billionaire Nelson Hunter Hunt flew down to the emirate to get real time market intelligence on the ancient silver trade between the Gulf and India before he tried to corner the world silver market in 1980.

When the silver bubble burst, its shock waves hit Arabia and the mightiest banks on Wall Street.

So, it is yet another milestone for the City of Gold that the Dubai Gold and Commodities Exchange (DGCX), the first electronic futures commodities exchange in the Middle East, has already attracted dozens of member and trade brokerage firms across the region.

DGCX, unlike other pie in the sky regional financial market business models, has a specific value proposition designed for the gold merchants, hedgers and investors in the Middle East.

As the only gold futures trading market place between Singapore and London (it's joint venture shareholder MCX trades gold futures in Mumbai, but in rupees, not dollars), DGCX offers local physical deliverability, an invaluable advantage for the gold merchants of the Middle East.

The DGCX also expands the market trading hours for gold hedgers and speculators worldwide, with its weekend trading.

While liquidity is the lifeblood of any exchange and the DGCX will be forced to build critical mass trading volumes and broaden its product menu of new contract, the omens for the first week are favorable enough.

The experience of the Multi Commodities Exchange, which revolutionised the precious / base metals and soft commodities trading business in India, will prove invaluable to the DGCX as it introduces new futures contracts in areas as diverse as steel, fuel, oil, freight rates etc.

A commodities contract cannot be successful without solving the chicken and egg equation between turnover and new users, without embedding its products in the supply and risk management food chain of its client businesses.

So DGCX's core mission will be to provide more efficient and varied hedge vehicles to Dubai's jewelry wholesalers and bullion importers.

The fact that DGCX started with 50 member firms, which include some of the biggest names in the Gold Souk, shows the careful, incremental ambitions of the exchange. Even now, Dubai is the hub for India, the world's largest gold importer.

It does not hurt that gold is in a cyclical bull market, with prices having doubled since 2001 and now just short of $500 an ounce.

While many analysts dismissed the gold rally above $270 as a Pavlovian market response to the dollar devaluations (the geniuses at the Bank of England actually dumped Her Majesty's gold reserves below $300 an ounce!), gold has now begun to rise in Euros, Yen and Swiss Francs.

The bull run in gold has survived twelve Fed rate hikes and the rise in dollar in 2005. Reduced forward hedging by mine producers , higher reserves mix in Arab and South East Asian central banks, a quantum increase in physical demand in China's hyper growth coastal provinces, a closure of marginal mines in South Africa, the sheer disappearance of excess capacity after a 20 year bear market- the gold story is powerful indeed.

DGCX gold and silver options should be followed by CFDs on gold mining shares. This could be a huge opportunity for DGCX as the CFD could well fill the void for the liquidity tsunami that made the DFM among most expensive stock markets on earth.

CFDs are an excellent vehicle to buy and sell international gold mining shares, which have lagged the performance of bullion. One possible strategy is to buy the HUI gold mining shares on AMEX (the unhedged gold bug index, not the XAU) which Monish S. Advani, gold specialist at Dubai Bank estimates could have another 25 per cent upside before the end of 2006.

The HUI does not have hedged gold mining shares like Barrick or Placer Dome. Silver has broken from a critical wedge pattern and can well rise to $10 per ounce in the next twelve months. The best play on silver is SSRI (Silver Standard on NASDAQ), a silver hoarder that could double from 15 (How many investors in Dubai know that SSRI traded at $1.5 in 2001?).

Seabridge Gold (SA) is the stock most leveraged to bullion in the world. It was $0.60 cents four years ago. It's price now is almost $7 on the AMEX. If gold goes to $550 per ounce next year, Seabridge doubles again.

This is not a prediction, it's a mathematical certainty because SA is a high delta call option on gold with no expiry. If DGCX enables the gold investors of Dubai to trade and hedge their gold mining portfolios with its futures contract, it could transform the investment landscape in the UAE.

After all, Cisco Systems commands a greater market cap than the market cap of all gold and silver mining companies combined in the world.

Monish and I agree that gold and silver mining shares are the Cisco, Dells and Intels of the early 1990s. This is such a multiyear fabulous investment opportunity that DGCX could well sponsor a "Goldbug Investor's forum" in Dubai to enable us all to exchange ideas and strategies.

MAN Group's bid for Refco demonstrates the nexus between commodities futures brokerage and hedge funds. This is a lesson that Dubai Inc. understands, given its own bid for Refco.

DGCX should court hedge funds who give a quantum boost to its global brand and liquidity. Hedge funds are eager to deploy capital in "uncrowded" markets and DGCX has a classic opportunity to contribute to the ecosystem of global finance by designing unique products, not generic contracts where COMEX and Tokyo rule the roost.

If, the US dollar gold price is heading eventually into four-digit territory, the best thing about DGCX is the timing of its launch.

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