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First with Financial Comment from Arabia

UAE investors should turn to gold and forget revaluation

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The UAE central bank is now to be saying that there is no chance of a revaluation of the dirham before a GCC currency union in 2010. Logically anybody who has been holding dirhams hoping for a revaluation to correct the 37 per cent loss in value since 2002 should now be looking for an alternative.

Step forward gold, and in particularly the timely news that the Dubai Multi Commodities Centre and World Gold Council is about to launch a shariah-compliant gold ETF. What is that some might ask?

Essentially this is a certificate backed by gold deposited in Dubai by the DMCC and in London by HSBC. The Dubai gold will be held in a giant vault under the Almas Tower in the DMMC’s new headquarters in New Dubai.

Shariah-compliant

It will also be the first ETF in the world to be fully shariah-compliant, something likely to be very attractive for Islamic financial institutions and retail customers who prefer Islamic banks.

Once the Dubai Financial Services Authority has given its approval, the world’s newest gold ETF will be traded on the Dubai International Financial Exchange just like any other share. This easy liquidity and the absence of storage is one reason why gold ETFs have become popular among global savers, and the Dubai version joins nine others listed on stock markets around the world.

The unique selling point for Dubai exchange-traded gold shares is that they will be shariah-compliant. The DMCC has recently taken a stake in London-listed Shariah Capital which will be taking care of this compliance.

Chief Shariah Officer Shaykh Yusuf Talal DeLorenzo said that anybody buying the Dubai gold ETF could be sure that an actual bar of physical hold was held on their account in the DMCC vault. In short, all gold will be held in physically allocated form. No other ETF can give this physical guarantee and it makes the Dubai gold ETF unique.

Other gold ETFs have been known to use futures contracts to meet sudden surges in buying, and financial techniques which would not meet strict Islamic standards. But the main reason for buying the gold ETF is probably for protection against the devaluation of the US dollar and therefore the UAE dirham.

It is a matter of statistical fact that gold and the US dollar move in opposite directions. If the dollar goes down, then gold goes up, and vice-versa; and as the dollar has sunk towards $1.60 to the euro, the price of gold has recently surged above $1,000 an ounce.

Now with some analysts now seriously suggesting that the US dollar will fall to $1.65 this October, and bullion experts targeting $1,200 an ounce for gold at some point this year, this might not be a bad time to be investing in gold, and the Dubai gold ETF is an attractive new way to do it.

It is all very well for the Governor of the UAE central bank to argue that the US dollar rose for a decade until 2002 and has now been falling for three-and-a-half years. But who is to say that this decline is about to come to a halt and reverse?

The Federal Reserve continues to pump more and more liquidity into the US economy, precisely the same medicine that caused the decline in the US dollar in the first place. Indeed, by devaluing the dollar, the US is effectively exporting its economic troubles to other countries and spreading its pain.

There will come a point when these trading partners begin to buckle under the strain. The pound sterling could be an early casualty. But in a real US dollar crash the greenback could head much lower, and there is presently no sign of an end to falling house prices which caused the US sub-prime crisis.

WGC ETFs

The new Dubai gold ETF will form an integral part of the World Gold Council’s $24.2 billion family of ETF products around the world. At the end of March a total of 806 tonnes of gold worth was held in these ETFs and more than $1 billion a day was traded in gold ETFs.

This is clearly a timely new financial product, and it will appeal to the retail investor who wants to buy as little as one-tenth of an ounce of the yellow metal, right up to Islamic financial institutions buying gold by the tonne.

But as an insurance policy against dollar weakness and global financial instability there is nothing better than gold, and this is hardly a new commodity to Dubai, already dubbed ‘The City of Gold’. Last year Dubai imported 559 tonnes of gold and handled around 10 per cent of the global gold trade.

The price of gold also has considerable potential upside. Merely to return to its inflation-adjusted high of 1980 the gold price would have to hit $2,400 an ounce, and few commentators argue that gold is about to top out anytime soon. Perhaps therefore it makes more sense to put your money into gold than keeping it in dirhams in the hope of a revaluation.

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Written by Peter Cooper

April 8, 2008 at 6:16 am

Posted in Gold & Silver

One Response

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  1. […] ABOUT wrote an interesting post today onHere’s a quick excerpt The UAE central bank is now to be saying that there is no chance of a revaluation of the dirham before a GCC currency union in 2010. Logically anybody who has been holding dirhams hoping for a revaluation to correct the 37 per cent loss in value since 2002 should now be looking for an alternative.   Step forward gold, and in particularly the timely news that the Dubai Multi Commodities Centre and World Gold Council is about to launch a shariah-compliant gold ETF. What is that some might ask? […]


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