First with Financial Comment from Arabia

Dubai gold sales crash as prices jump and economy slumps

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The City of Gold is reeling from a collapse in demand for the yellow metal brought on by higher prices, the world’s worst property crash and lower spending by fewer tourists.

New figures for the third quarter from the World Gold Council reveal a 39 per cent slump in demand for gold for jewelry in the UAE of which Dubai is the commercial capital. Demand for gold for investment dropped by an even bigger 52 per cent.

Crisis hit economy

‘The weak result for the latest quarter reflected the combination of the very high gold price, reduced tourist inflows, fewer expatriate workers (in particular workers from India) and the flow-on effects of the property downturn,’ said the report.

It forecast business failures in the city’s large jewelry sector: ‘Left with cash flow problems, jewellery retailers have been forced to liquidate inventories to meet margin calls and make repayments on gold loans. As yet, there have not been any notable closures of jewellers, but this is probably inevitable if demand conditions do not improve’.

This crisis in the City of Gold seems at odds with high investment demand for the precious metal in global markets. But it is a reflection of the depth of the economic contraction in Dubai, formerly the city with the fastest rate of growth in the world.

The real estate crash since last September, triggered by the sudden contraction of credit in the global financial crisis, has impacted on all business sectors. And perhaps very sensibly some of the money from real estate was being invested in gold, and that flow of funds has now dried up.

The Indian construction workers who used to buy gold to send home have also been mostly sent home themselves, so are no longer buyers. Indian gold buyers are also traditionally buyers at low and not high gold prices.

At the other end of the scale rich local investors find themselves strapped for cash to meet their existing debts and financial obligations and do not have money to invest in gold whatever their opinion about its prospects.

Gold price outlook

Does this portend the end of the gold boom around the globe? Will economic depression cast a long shadow over the now bouyant global gold market? Some think it might.

However, the Dubai gold market has always been mainly focused on the retail jewelry sector that was resilient in bad times for the price of gold, and it may just be that the reverse also holds true and that a high gold price is not necessarily good for Dubai jewelers.

On the other hand, gold jewelry is a demand fundamental for the yellow metal. But as gold becomes increasingly used as a currency and medium of financial exchange the demand from this source is going to completely overwhelm any loss in demand from jewelers.

So this news from Dubai should be seen as a positive for the gold price as it is leaving its old customers behind and finding much richer buyers all over the world.


Written by Peter Cooper

November 25, 2009 at 8:10 am

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