Gold Continues To Shine Bright

Gulf investors are plying more investment into commodities as the equity markets remain shaky and the property market ekes out a modest recovery.

Gulf investor interest in commodities has encouraged local firms to introduce commodities products and services, especially in gold, which is viewed as a safe haven asset class and a hedge against inflation when the economy falters.

The interest in gold is not based on mere speculation. Gold prices have increased every year since 2001, one of the longest-bull runs for any commodity, although current prices hovering over $1,600 per ounce are down from the peak of $1,920 per ounce reached in September 2011. Other commodities – silver, platinum and palladium – also ended 2012 with a price increase.

Dubai-based Emirates NBD is one local bank seeking to take advantage of the bull-run. “It (increase in prices of precious metals) is not a bubble and it has been driven by fundamental issues and the mistrust in reserve currencies, mainly the US Dollar and the Euro,” said Gerhard Schubert, head of precious metals, at Emirates NBD. “Central banks, sovereign wealth funds and pensions funds are all looking to diversify their risk portfolios and they continue to define gold as an asset class in its own rights.”

The bank started selling gold saving certificates in 2010 in response to requests from clients and has seen demand rise annually. It also plans to introduce silver and silver-related products in response to client needs.

The certificates are backed through physical delivery, giving customers the option to hold the bullion, which mainly attracts retail investors. The firm also has a gold digital account, a non-deliverable and non-interest-bearing account for customers interested in the price of gold, which attracts more savvy institutional investors who invest for trading purposes.

Interest in gold is expected to continue in 2013 as central banks in several Western countries implement aggressive monetary stimulus policy, such as the US Federal Reserve’s third round of quantitative easing that was launched in 2012, to lift their economies out of economic slowdown or recession.

Such measures drive investors into the arms of gold because they worry about the ramifications of currency printing and its impact on the value of currencies. The hiccups in resolving the European sovereign debt crisis will also bolster investment in assets such as commodities, while commodity-hungry China and gold-buyer India help maintain physical demand.

The violence in the Middle East, from unrest in Arab Spring countries to the standoff between Palestinians and Israelis, has also helped prop up the price of gold and other commodities in 2012. In countries such as Iran, where the local currency has crashed under the weight of Western and UN sanctions, the purchase and trade in gold has increased.

Meanwhile, the poor performance of the Gulf equity markets since the 2008 financial crisis and the slump in the Gulf property markets has put the
spotlight on the advantages in investing in commodities.

“The advantage of the forex and commodity markets is the fact that they are very liquid and you don’t have the same issue when you invest in certain shares in the local market, where there are very low levels of liquidity,” said Matteo Legler, chief operating officer of ADS securities, an Abu Dhabi-based forex and commodities brokerage.

On a sovereign level, Qatar has been quite outspoken about its interest in commodities and its bullish views on prices. Qatar, whose sovereign wealth fund is estimated to have about $100 billion in assets, held talks last year about buying part of the commodity business of Morgan Stanley. The bank is looking at selling this unit as regulatory changes under the US Dodd-Frank Act financial reform law could slap limits on some types of commodity trading.

“Because of the financial crises, people are not investing enough in commodities,” Qatar’s Prime Minister Sheikh Hamad said in October last year in Doha. “That might create a gap between 2016 and 2017 and might push the price even higher.”

Local firms such as Emirates NBD and ADS securities are competing with international banks, which in the past were the main players in commodities trading and investment business.

While international banks usually rely on traders outside the Gulf region, local firms and banks market the advantage of being close to their client base and the Gulf’s time zone between the closing of Asian markets and opening of Europe.

“Changes in regulation, in both the US and Europe, the development of the required infrastructure in Abu Dhabi and the geographical position of the UAE, opened up this opportunity which ADS Securities has taken,” said Legler.

“Most of the international banks operating from the region do not have full trading desks in the UAE. They rely on traders and analysts based in their head offices in, for example, London, New York or Tokyo.”

ADS Securities set up its electronic trading platform for gold, silver, platinum and palladium in 2011. In 2012, it set up a global desk to meet hedging, financing and investing needs of its clients for commodities, and over-the-counter and physical deliveries transactions.

Both retail and institutional investors are attracted to gold and other commodities for different investment purposes.

“Some investors include commodities as part of their trading strategy, buying and selling electronically based on a detailed technical analysis of the market. Other clients will move a percentage of their investment portfolio into physical gold, as part of a longer-term strategy,” said Legler.

“When you are building a portfolio for a family office, or a client looking for long-term capital appreciation, the price of the commodity is not as important. It is all about the long-term performance of the commodity, and its performance in relation to different asset classes. The investment will almost certainly be part of a risk diversification strategy, investing in different asset types.”

However, both Emirates NBD and ADS Securities recommend that investors allocate only five to 10 per cent of their multi-asset portfolios in gold to maintain a diversified mix.