Local trade craves stability

Dubai's gold industry is more worried about volatility than the rising price of the metal. Industry players remain uncertain about market stability because gold prices are in fact driven by a variety of factors, not just the demand-supply equation.

The market is experiencing the continuation of the volatility seen in the last quarter of 2007, driving retail sales down by 20 to 25 per cent in the first two months of this year, said Moaz Barakat, managing director of the World Gold Council (WGC) in the Middle East, Turkey and Pakistan.

"The high price of gold is not bad in itself. The question is of price stability more than the price itself. If there is too much fluctuation, it will hurt the market," Barakat said.

Indeed, Dubai gold traders have taken steps to protect themselves against violent price movements. "Most are using hedging tools against high prices. That is why there is no problem in the souk now," Barakat said.

Haji Mohammad Rafiq, vice-chairman of Al Ghurair Giga gold refinery, said Dubai's bullion trade could be adversely affected if gold demand falls in India, the world's biggest gold-consuming nation. Indian gold imports are already slightly down.

The impact of price fluctuations on different segments of the trade in Dubai is varied.

The low-workmanship jewellery segment is more affected because high prices discourage budget-conscious buyers. The fashion and designer jewellery segment is least affected because it attracts buyers with high incomes.

Rafiq said his refinery is getting more recycled gold for processing from outside the UAE.

According to WGC, the amount of jewellery being recycled has gone up slightly as people are trading in old gold for new designs, but gold holders are not cashing in on high prices by selling off their possessions for money.

In Dubai tourists are 50 per cent of total buyers, and this segment is seen as supporting local gold sales.

In fact, a lot of demand for gold is non-physical, which is helping to push prices to record levels globally.

The launch of exchange-trade funds (ETF) in precious metals has also created options for investors similar to equities, said Rolf Schneebeli, an economic advisor to Dubai's ARY gold firm. ETFs in gold have to be supported by the possession of physical gold or gold papers.

As for the outlook, Schneebeli too is bullish. "The long-term tendency is that gold is definitely going up," he said.