Glittering prize

Constant geopolitical jitters, war, terrorism, and nuclear threats have meant that global financial markets are now more volatile than ever, with investors unsure of where to head to next. Gold however, continues to benefit from its safe-haven status during times of instability and has risen considerably in price in the last five years. CEO Middle East speaks to the experts and examines why you should set aside a portion of your portfolio to invest in the yellow metal

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By  James Bennett Published  September 7, 2006

|~||~||~|2006 has so far been a year of financial woes and violent blows in the Middle East. Regional stock markets have hit new lows, the insurgency has escalated to the brink of civil war in Iraq, Israel and Lebanon have renewed clashes with devastating consequences, and Iran has continually refused to comply with the West over its ‘civilian’ use of nuclear power. All this combined has left investors scratching their heads at where to look to next to place their funds and private investments. On the bright side, however, gold has continued to perform solidly and has maintained an average price of US $590 (AED 2167) per troy ounce throughout the first two quarters of 2006, according to Dubai Multi Commodities Centre (DMCC) figures. This is nothing new. Over the years gold has been, and continues to be, a safe bet and, according to the experts we spoke to, always will be. Despite a low during the post 9/11 period to US $255, the yellow metal has pushed itself to today’s price of around US $625 an ounce and consistently risen for five years in a row. In 2002 prices averaged at US $310, 2003 (US $364), 2004 (US $409) and 2005 (US $445). Gold also plays a significant part in the everyday lives of people in the Middle East with Dubai one of the world’s largest gold hubs importing and exporting US $10.7 million worth of the precious metal in 2005. Diamonds are also playing a significant role with Arab nationals spending Dhs7.3 billion (US $2 billion) a year on the precious stones making the Gulf the fourth-largest market in the world, with Dubai taking the major slice of the business. According to Jonathan Chippendale, marketing director for Gulf markets at the Diamond Trading Company (DTC), the diamond marketing arm of the De Beers Group of companies, the diamond jewellery market in the GCC region has increased by 47% in the past four years. The DMCC is at the forefront of the field in an attempt to put Dubai at the very top of the gold chain. Colin Griffith, executive director of gold and precious metals at the DMCC and chairman of the Dubai Gold and Commodities Exchange (DGCX), says that “more exciting times” are to come, and he wouldn’t be wrong. The heavy investment of additional petro-dollars in gold has given the local industry a major boost, while the DMCC itself has seen a staggering rise in membership from 225 at the beginning of last year to 830. During its short life it has introduced a US $200 million Sharia-compliant five year financing package, with the opportunity for investors to be repaid in six monthly intervals in gold; leading international rating agency Standard & Poors awarded the body an “A” rating — the first of its kind in Dubai; it launched ‘Dubai Good Delivery’ — a standard to ensure that the quality of gold bars meets high international levels; and unveiled the Dubai Gold & Commodities Exchange (DGCX) in November last year — a state-of-the-art electronic exchange providing market participants with all the products they need to hedge price exposure, arbitrage against other international markets or deliver or source products from an efficient and transparent market geographically perfectly placed between east and west. The future of gold in the region is, without sounding obvious, bright, with the construction of DMCC’s 200-hectare development set to be completed in mid-2007. This will include the Al Mas (diamond in Arabic), Au and Ag Towers (the respective chemical element symbols for gold and silver), in addition to plots of land allocated for special manufacturing operations located in close proximity to Dubai’s emerging projects and developments in the Jumeirah Business Bay. The Al Mas Tower will house the region’s only diamond trading exchange along with the latest hi-tech security systems and secure vaulting facilities for its valuable occupants. Last but not least, the DMCC has completed a purpose-built jewellery gemplex comprising of three buildings of 12 floors each for the fabrication of jewellery, coloured stones and precious metals giving the regional industry a further boost. Griffith says the towers will give companies who operate on the gold market the opportunity to transact from a “business cluster that is unique to the world gold market”. “Dubai is the sixth largest consumer of gold and the largest consumer per capita. Not only that, it is also the gateway to India, the world largest consuming country, he says. Griffith adds that even though the precious yellow metal is not valued as highly as it was 12 months ago, analysts still consider it to be a good investment. “Because of a weak US dollar, continuing political tensions and other factors gold is still a strong investment option,” he adds. EXPERT Q&A Jeffrey Rhodes, regional head of resource banking at Standard Bank — the largest gold bank in the world gives his top tips: How was the gold market when you first started in 1978? During the gold high the market was very illiquid. If you had gold in London you could sell it. There were virtually no derivatives and trading was done over the phone or via telex. How have times changed? Today’s market is much more mature, well-rounded and totally transparent. You can walk into the Gold souk in Dubai and see the gold price on a screen, there are a whole host of new products and services and virtually anyone can get involved in gold. It is a much better investment vehicle and is very easy to enter and very easy to exit. Should you invest in gold today? Any novice to the market should exercise a high degree of caution as the market is naturally exposed to extreme volatility and can deter investors. It is very good for hedge funds that want the market to move but for the more prudent investor gold can be erratic. You should look at the market historically and see whether you want to fit in or not. For example, in 2001 gold hit a 25-year low at US $255 and now it is around US $630 compared to this year’s high of US $730. That’s US $100 below the all time high, so price fluctuates, but today’s market is definitely worth investing in. Prices will rise until the end of the year and for the next two to three years. How much of your portfolio should you set aside for gold? It should be part of anyone’s portfolio. The Swiss method and the one I abide to is 5% of your portfolio. Your approach should be that you hope it doesn’t do too well, this then means that the rest of your portfolio is doing well. Your gold investment is a hedge against inflation, a safeguard during times of uncertainty and above all, insurance. Gold is a lifetime investment and everyone should have some kind of investment in gold. What is your prediction for the future price of gold? Should CEOs start investing? The high was 21 January 1980 when gold hit US $850. I was there when it happened and bought it when it reached its highest point. For a long time I thought that record would never be threatened but in the next two to three years I can see that being broken. The factors in play today closely resemble those at the end of the seventies and early eighties. In those days there were oil price shocks, inflation was random at 18 to 20% and there was geopolitical instability with the Russians in Afghanistan. Today you have political tension in Israel and Lebanon, Iraq and the threat of global terrorism. THE MIDAS TOUCH - HOW TO INVEST IN GOLD: THE TRADITIONAL METHOD Open an account with a bullion bank. You will be allocated a gold account and will be able to trade and use it in exactly the same way as a normal core deposit account. You can then go to your private banker and use it in the same way as a paper account. Every gold jeweller has a gold account. GOLD MINING SHARES You can acquire gold mining shares from companies that operate in that field. This not only gives you exposure to gold but also to the company you are buying the shares from and where they are located, for example. These factors will also determine the price. In essence you are buying equities rather than actual gold assets. EXCHANGE TRADED FUNDS (ETFs) Essentially this is an equity that mimics the price of gold with each ETF backed by one physical ounce of gold held in deposits around the world. In the past many pension funds, for example, prevented investors from investing in gold and other commodities, however the advent of ETFs over the past two years has enabled a greater number of investors to put their money into the precious metal. As Rhodes says, “ETFs have brought gold investment to a much broader audience and have discerned a much wider focus to gold as a successful investment vehicle”. “Gold has previously been overlooked because certain investors were unable to access world markets as they could only deal in equities, this has now changed and ETFs have become an important driver in the rally of the gold price,” he adds.||**||

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