On Agenda: Offloaded UAE gold reserves could fetch more

Whenever the price of gold rises or falls, it produces its share of delights and disappointments. For those who have bought at lower rates, a price increase brings a sense of gain, though notional, just as the sellers might rue their poor sense of timing. And when the quantity is in tonnes, the loss would indeed be substantial.

If one were to position the UAE Central Bank, as the holder of the country's official gold reserves, in this guessing game, the place is surely among the losers.

In May this year, the Central Bank is on record to have offloaded 6.1 tonnes of gold from its reserves, reducing its holding of gold to half of what it used to be in the previous years.

The average gold price at that time was $314 per ounce; but today it is hovering around $400 as the metal breached a seven-year high in the wake of a persistent weakness in the dollar and some uncertainties about the recovery in the US economy.

Central Bank gold sales are not necessarily based on the market price prevailing on the day on which the sale is effected. Still, a comparison of the price ranges provides an idea about the difference it makes to the kitty.

For instance, the sale of about six tonnes of gold would have fetched over Dh50 million more at the prevailing rates, compared to what it did in May this year. But how could the Central Bank have foreseen that the prices were set to rise! In fact, the current run of gold bullion has caught everyone wrong; this includes analysts, specialist bullion banks and gold investment entities.

The latest Reuters poll on the outlook for gold this year and the next, conducted around the middle of this year, put the most optimistic price projection for the end of 2003 only at $372 per ounce. The poll, which included 12 forecasts, produced an average price estimate of $345, the lowest estimate having been $350 by the end of the fourth quarter.

Banks covered by the poll included Deutsche Bank, Bank Paribas, Barclays, HSBC, Merrill Lynch, SocGen, UBS, Gold Avenue etc. The forecasts for the end of second quarter next year has the average price estimate at $350, with the lowest estimate at $320 and the highest at $380 per ounce.

There was only one estimate that touched $400 for 2004 and that happened to be from Sprott Securities. Deutsche Bank's highest price estimate for next year, according to the latest poll, is only $372.

A weakening dollar has made gold cheaper for those who hold currencies that have appreciated and this has added the lure of the yellow metal to investors across the world. Triggered by unstable global conditions and persisting geopolitical uncertainties, the domestic demand for gold has gone up in many countries, particularly Asia, which has contributed to the price increase.

Of particular interest in this regard is the opening of gold as a business for banks in countries like South Korea. In July this year, Seoul allowed its banking institutions to offer gold-linked products, and the response from private investors to the change is said to be overwhelming.

Security

Korea had made good use of its gold stocks at the height of the Asian financial crisis, clearly demonstrating the high security value of the metal to the new generations of investment professionals and financial planners.

In 1998, Korea bolstered dwindling foreign exchange reserves by collecting 280 tonnes of gold jewellery and ornaments from its population and selling it on the international market. The Asian financial crisis thus re-established gold's role as a reserve against uncertainties.

This brings one back to the issue of the reserves of the UAE, which has of late shown an anti-gold bias in favour of dollar assets. At the end of July this year, the UAE's total financial reserves were reported to be at about $15 billion, but this was excluding the value of the gold reserves. About ten years ago, the size of the reserves was only a third of this figure.

The value of gold assets, held by the Central Bank, however, was put at Dh166 million in May this year, compared to Dh333 million in the months before that. The UAE has one of the lowest proportions of gold in its total asset holdings.

When one finds that the assets offloaded are gaining in value while the ones retained are actually losing, the feeling is far from comforting.

The writer is a UAE-based journalist.