Dubai stakes claim as gold futures hub
Tue Nov 22, 2005
By Miral Fahmy and Richard Dean
DUBAI (Reuters) - Dubai staked its claim as a major gold futures market on Tuesday with an exchange designed to help the Gulf emirate cash in on the metal's growing allure for investors.
As gold closed in on a new 18-year peak of $500 an ounce, Dubai's key February contract closed its first trading session at $496.30 an ounce, just off an earlier high of $496.9 an ounce in trading on the exchange, which officials hope will soon become one of the top three in the world.
In total, 126 lots were traded across all contracts, with the most active February contract trading in volume of 112 lots.
Dubai is a hub for the physical gold industry in the Middle East and India, the world's largest consumer. Officials say the Dubai Gold and Commodities Exchange (DGCX), set up with Indian partners, will play to these strengths.
"We're thinking big with this one and it's going to be even bigger," said Sultan bin Sulayem, head of the Dubai Metals and Commodities Center, a co-owner of the exchange.
The exchange opened at 10 a.m. local time (0600 GMT) and the 13-hour trading day spans the gap between business hours in Tokyo and London, something traders said would open arbitrage opportunities. The DGCX closed its first session at approximately 11:05 p.m. local time (1905 GMT).
"I can see arbitrage opportunities between other futures markets and the DGCX," said Jeff Rhodes, general manager of Standard Bank Plc's Dubai representative office.
"There could also be currency arbitrage opportunities between other regional exchanges."
Physical traders said improved hedging opportunities offered by locally traded derivatives would let them devote more time to their main operations.
"It can't take out price risk completely, but it will help reduce it. That will allow us to concentrate on our core business, which is jewelry," said Karim Merchant, managing director of Pure Gold, one of Dubai's leading retailers.
New York and Tokyo are the world's biggest gold futures markets, with London the center for spot, but other players are muscling in on their business.
Electronically traded gold at the Chicago Board of Trade captured a monthly market share of 7.5 percent of U.S.-listed exchange-traded precious metals futures after just one year of trading.
The three-year-old Shanghai Gold Exchange plans to launch evening trade in Southern China to allow domestic firms to trade the precious metal when London and U.S. markets are open.
Dubai, commercial hub of the United Arab Emirates, has signed a technical agreement with CBOT and set its sights on eclipsing Tokyo as the No. 2 gold futures market behind New York in two to three years.
PHYSICAL TRADE
What sets the DGCX apart is that buyers are more likely to take advantage of Dubai's "City of Gold" reputation and actually take delivery of the underlying physical gold.
Although traditional demand for gold in the jewelry market has eased, the metal is rapidly gaining a reputation as an investment.
Global "identifiable" investment demand for gold -- either bullion or instruments backed by physical metal -- surged 56 percent in the third quarter of this year, to 118 tonnes, the World Gold Council said last week.
In the UAE, investment in bullion rose 33 percent to two tonnes, the council said.
In 2004, Dubai imported 503.5 tonnes of gold and is expected to import 525-540 tonnes by year end.
Jewelers buy wholesale gold but often face a delay of several weeks before selling it to the public.
"It could assist gold traders to protect and hedge their positions in this volatile market," said Firoz Merchant, chairman of Pure Gold.
The Indian gold futures market is restricted to local individuals and domestic corporates. Non-resident Indians, banks and foreign institutions are not allowed to take part.
"Most major Indian gold and jewelry traders are represented at the DGCX," said a trader at the city's biggest bullion dealer. "There are more arbitrage options open to the people here."
The exchange will initially be open Monday to Friday with a 1 kg gold futures contract. Seven-day trading will start in the first quarter of 2006.
The electronic exchange will operate on a T+1 settlement basis with a subsidiary, the Dubai Commodities Clearing Corporation, acting as the clearing house.
Contracts are identical in format to those on the London Metals Exchange and New York's NYMEX, traders said.
The DGCX already has 50 members but many cautioned that it would take time for trading volumes to pick up.
"This will create a lot of activity in the gold market and we are expecting substantial buying volumes," said Yavuz Karadag of metals traders Capital Assets.
(Additional reporting by Naveen Thukral in New Delhi)
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