A golden alternative to the dollar

A golden alternative to the dollar
By Peter Cooper on Wednesday, April 9 , 2008

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. 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 DIFX just like any other share. This easy liquidity and the absence of storage is a reason why gold ETFs have become popular among global savers, and the Dubai version joins nine others listed on stock markets worldwide.

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 that will be taking care of this compliance.

Chief Shariah Officer Shaykh Yusuf Talal DeLorenzo told Emirates Business 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 that would not meet strict Islamic standards. But the main reason for buying the gold ETF is 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 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 well for the governor of the UAE Central Bank to argue 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 this decline is about to come to a halt and reverse?

The Fed continues to pump 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 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.

The new Dubai gold ETF will form an integral part of the World Gold Council’s $24.2bn family of ETF products around the world. At the end of March, 806 tonnes of gold worth was held in these ETFs and more than $1bn 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-10th 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 gold is about to top out anytime soon. Perhaps it makes more sense to put your money into gold than keeping it in dirhams in the hope of a revaluation.


Related Articles
No revaluation, says Al Suwaidi
Dollar fall may lead to dirham revaluation
UAE minister faces questioning on revaluation
GCC fears loss from currency revaluation


More in Opinion
Pop out for a near-death experience
US Treasury in protectionist mode?
Economic threat that haunts UAE
Take note: lenders hate unpleasant surprises
P&O debacle was a blessing in disguise
Sovereignty can save oceans from being fished out
Investing in a climate for change
Be bold – hold the new IPOs
Public offerings on the DIFX to be keenly watched
No signs yet that economic train heading for crash



Last Update at 7:42 pm on April 9, 2008