Spotlight on the UAE
Chapter 4 - Investment and Finance
Gold Banking Products
Over the past decade, bullion banking in the Emirates has gained some traction. Although only offered by a handful of banks to private, institutional investors and the trade, this will cover both Shari’ah compliant and more traditional vehicles. Specifically, for those investors in the UAE looking to store gold locally (perhaps as part of a multi-location strategy), one option, through the UAE banking system, is to utilise warehousing facilities in the free trade zones. In addition, and specifically from a B2B standpoint, one of the most widely used gold banking products are gold loans utilised by local gold market participants for trade finance.
UAE-based institutional and high-net-worth investors also work directly with overseas banks and trading houses, for example, for precious metals settlement, arbitrage, trading futures or buying precious metal ETPs.
Three types of gold contracts can be traded on the DGCX: gold futures, “daily gold” futures and Shari’ah gold. Taking each in turn, there is one gold futures contract, which is traded in 32oz lot sizes and settled in dollars. There is also one “daily gold” futures contract, the 400oz (Dubai Good Delivery) contract, which is a hybrid contract, because it must be settled on a physical delivery basis. Finally, there is the 32oz Shari’ah gold contract, which must also be physically settled. However, trading in all three is extremely modest, although kilobar trading is a little more prevalent. Turning to silver, the exchange also features a 1,000oz dollar settled silver contract. Overall, annual turnover on the DGCX, which averaged 300t annually for the past five years for both metals, fell by 74% y/y in 2021 to 99t.
The low volume on the exchange reflects the preference for gold market participants to trade in the OTC and also because it is not compulsory to register gold bullion imports at the DGCX. This contrasts, for example, with Turkey’s Borsa Istanbul’s (BIST) Precious Metals Market, for which it is mandatory to register bullion imports, In addition, Turkish banks are only allowed to trade precious metals at the BIST and cannot otherwise trade with other bullion dealers or refineries in the OTC market.
The gold bar and coin market in Dubai is important on two counts, in part reflecting a key characteristic that all of these products are Shari’ah compliant. In its role as a gateway for the region, Dubai acts as a distribution hub for bars and coins for the wider region. There is also a market for these products in the UAE in part due to the prominence of expatriates, most of whom originate from South Asia. Although annual UAE demand has averaged less than 6t over the past five years, against 10t at the start of the last decade, after emerging from COVID and taking advantage of the pullback in gold prices from their 2020 peak, physical investment jumped by 48% y/y to 7.7t in 2021. This year, the market has continued to strengthen, helped also by recent price weakness and as the economy continues to recover from the pandemic. As a result, Metals Focus forecasts a 10% gain for 2022, generating an eight-year high of 8.5t.
Unlike Turkey and Iran, the UAE does not issue legal tender coins (these being the only two countries in the Middle East to do so). As a result, the retail investment market is dominated by small minted and cast bars. Bar sizes vary between 1g to 10 tola (approximately 117g). Over the past decade or so, locally produced bars have been gradually taking market share from imported pieces due to improved quality and availability and low labour charges. However, bars produced by Swiss refineries still dominate physical investment in the Emirates