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Is Dubai set to become the dominant gold loco market by 2020?
News and views from the third Dubai Precious Metals Conference, by Ahmed Bin Sulayem
May 14, 2014 9:34 by kippreport
Dubai recently announced its gold trade figures for 2013, which showed annual trade valued at $ 75bn, with almost 40 per cent of global physical trade passing through Dubai. This announcement was made at the third Dubai Precious Metals Conference (DPMC), which attracted more than 500 global industry experts to discuss the latest changes and trends in the precious metals sector.
I participated in a panel focusing on a comparative analysis of “Loco Markets”. Loco is derived from the Latin word Locus and literally means ‘at’ or ‘place’; hence, Loco Markets refers to the trading of precious metals available and priced in a specific location. During the panel discussion two questions were posed to the expert audience: ‘Which is the most significant loco market today?’ and ‘Which would be the most significant loco market in 2020?’. The answer to the first question was straight-forward, as currently London is the main loco market (70 per cent of the audience believed so); the interesting result came from the answer to the second question, where 39 per cent viewed Dubai to be the future significant market, with London getting 36 per cent of the votes. The question reflected as much the changing nature of this market moving from west to east as it did the growing presence that Dubai is experiencing.
Dubai has cemented its position as a strategic hub that connects all trading activities in the gold supply chain and provides competitive value-added services. India, the world’s second largest consumer of gold in 2013, receives a large part of its gold bar imports from Dubai; the Emirate also serves as a trade partner to Turkey, China and Europe. One of the themes of DPMC was to discuss the increase in trade flows towards the East and the way in which Dubai participates in this trend. If it continues, which experts seem to agree it will, it suddenly seems reasonable to assume Dubai will play a more significant role in the market.
When DMCC started with its ‘gold project’ aimed at growing precious metals trade flows through Dubai, it already had a strong local market in the gold souk, which had more than 300 retailers and large bullion dealers supporting local and regional trade. The challenge 12 years ago was to convince these traders to upgrade their practices, professionalise their services and more actively participate in the global industry. Some of the participants that welcomed these changes became the advisors that supported DMCC’s efforts to attract the global market to Dubai. DMCC facilitated the construction of gold refineries, established DGCX to provide world-class hedging tools and set-up vaulting facilities for safe storage of metal.
So what would be required for Dubai to become a more significant hub than London by 2020 as the conference predicted?
· Physical trade – Dubai already supports 40 per cent of global trade flows and supplies mostly to the 1 kilo 995 market which represents the consumption demand from India and Middle East. Increased production and trade with China (1kg 9999) and larger 400oz bars for investment purposes would have to be present as well.
· Refining capacity – Whilst Dubai and Lugano (where the major Swiss refineries are located) are important trade partners, it will be advantageous for the Emirate to continue to build its own capacity and trade networks with other refining centres such as Johannesburg.
· Storage and logistics – Subject of an earlier blog entry, Dubai probably has excess storage capacity today and one of the most efficient logistics operations for air freight globally. However, to continue to lead in this area development, such as Dubai World Central (and its airport – Al Maktoum International) will continue to play a key role. Efficient and robust oversight from Dubai Customs authorities will also continue to be critical.
· Bullion banking – today, the large global banks involved in the gold business are not present in Dubai. For Dubai to be comparable to London a local bullion banking sector has to develop. The efficiency and history of bullion banking in London has not allowed for this to significantly develop in other areas; most international banks not based in the UK still run their bullion desks from London. Local and regional banks will have to support the market and may have a greater incentive to do so now that trade patterns are changing and new international regulations are levelling the playing field for new entrants to participate.
· OTC trading – As explained at the beginning of this article ‘Loco’ is a transaction ‘at’ a location. OTC trading is at the heart of what an efficient Loco Market should do: to provide liquidity and competitive price quotes for buyers and sellers of gold to get cash or metal on a readily available basis. London, the largest OTC market today, is a self regulated market where price quotes are obtained from the five clearing banks (directly or through intermediary brokers) who run the market. In June DGCX is launching its Gold Spot Contract, an electronic market that will allow any licensed trader to buy or sell gold and clear its transactions through the exchange. Price execution will be transparent and determined by the market which means large and small traders will be able to buy or sell without being exposed to counter-party risk. This is not only a significant development for Dubai but also for the gold market globally which needs to find properly regulated mechanisms to adhere to emerging regulatory guidelines.
Dubai is not standing still and neither are some of the other established and emerging loco markets. In 2020 the global industry could look very different to what it looks today and new hubs such Mumbai or Singapore could become very significant if they continue to develop. The Dubai Precious Metals Conference has for another year proven to be an extremely valuable forum to discuss ideas and listen to the experts attempt to explain what has happened and what is going to happen next! We see global industry players increasingly aware of developments in Dubai. This is a very positive sign and we are encouraged to understand how we can continue to support the development and growth of this industry.