gold bar
With gold prices at the levels they are in, these contracts become iro-clad short-term funding deals. Image Credit: Bloomberg

Dubai: Use gold to raise short-term funds? Licensed bullion traders at Dubai’s DGCX can do that with the launch of 'Physical Gold Futures' and 'Spot Gold Contracts' by the exchange.

What this means is that traders can use the gold contracts to tap money from banks or other lenders for their immediate cash requirements. A deal using these contracts would work somewhere along these lines:

  • The bullion trader is holding gold but wishes to borrow cash in the short term. The trader can use that gold holding as collateral.
  • The lending bank will buy the physical gold in the spot market and then sell it back to the bullion trader in 10-, 20- or 30 days into the future on return of their cash.
  • Both parties enter the transaction with certainty due to the protection of Dubai Gold & Commodities Exchange’s clearing house acting as the central counterparty.
  • All prices for the trades are agreed ahead of time.

The contracts will initially be aimed at players in the UAE. Given the way that gold prices have been holding up in nearly three years, cash-for-gold effectively comes shorn of risks.

As for DGCX, the spot gold and futures contracts products plug a gap in the market for lending using gold as collateral. (The physically-settled gold spot contract also complements the existing one for Sharia gold contracts.)

In a statement, Ahmed Bin Sulayem, CEO of DGCX, said: “Over the last year, gold has become a solid top tier asset class globally as banks have increasingly started to accept it as collateral from traders and institutions looking for liquidity in the markets. Commodities trading, especially gold, is a crucial asset driving volumes in the markets.

“By launching new physical gold futures and spot gold contracts, we are offering greater choice to participants that operate in the commodities market.”

The first transactions using these contracts are going to be between DGCX member Paloma Precious DMCC and one of the banks in the UAE. They become the first bank and trader to benefit from access to short term liquidity using the newly launched products The physical gold bars changing hands in this transaction are ‘Emirates Gold,’ part of the UAE Good Delivery standard.

The contracts can be traded on the DGCX EOS Trader platform, where traders manage risk, protect value and grow portfolios by buying and selling commodity and currency derivatives. “We expect more such transactions with banks and financial institutions as we continue to bring products that can provide liquidity for traders to the markets,” said Bin Sulayem.