Bright future for Dubai exchange as gold trading set to shine

Investors will be able to buy and sell physical gold on a UAE exchange under a plan by the Dubai Gold and Commodities Exchange.

The Dubai Gold and Commodities Exchange’s plan to introduce a spot gold contract is expected to further underpin Dubai’s importance in the global gold trade Above, gold jewellery is melted down at the Cara Jewellers workshop on Sheikh Zayed Road in Dubai last week. Pawan Singh / The NationalShow less

The Dubai Gold and Commodities Exchange (DGCX) is planning to launch the first-ever spot gold contract in the country, meaning UAE investors will be able to buy and sell physical gold on a domestic exchange for the first time.

The spot gold contract is in the planning stages but is expected to be launched before the end of the year, according to the DGCX chief executive Gary Anderson.

A spot gold contract is used to buy and sell physical quantities of the precious metal on an exchange. Today only gold futures contracts are available in the UAE, contracts based on the price of a quantity of gold at a set point in the future.

The move to introduce a spot gold contract is expected to further underpin Dubai's growing importance in the global gold trade as almost a third of all the physical gold traded in the world passes through the emirate.

"We are looking at a spot gold contract to launch this year," Mr Anderson said.

"We will literally be trading gold on a T+1 delivery. It is a very physical orientated contract which we are looking to launch. I think realistically it will be in 2013, but there are still many things we need to do."

Traders on the DGCX welcomed the news. Gaurav Kashyap, the head of the DGCX desk at Alpari, a foreign exchange trading company, said a spot gold contract was "fantastic news" not just for commodities dealers but also for the UAE market as a whole as it will more than likely lead to an increase in liquidity across the board.

"Right now to trade in spot gold you have to do it OTC [over the counter]; ultimately it is traded in a foreign jurisdiction," Mr Kashyap said. "To do this you must have lines of credit and of collateral based offshore. But if spot gold is tradable here in the UAE all of that capital can stay in the market, which increases liquidity for everyone. It is a very good thing. We are very excited about the prospect of the launch of this contract."

Mr Anderson stressed, however, that there was still much for the exchange to do before the contract could be launched.

"We are still very much a cash settlement exchange, and in terms of the deliverability of the gold, we want to have the right infrastructure in place to enable us to do that," he said.

"Also we need the buy-in from the local banks here in Dubai, the international banks and also the producers and the refiners of gold itself. We try to work with everyone to try to get the best information we can to get a product that is a requirement for the industry."

For a spot gold contract to function an exchange must have adequate physical gold on hand to settle all deals. Gold for the contracts will be stored in vaults underneath the Dubai Multi Commodities Centre (DMCC), already used for precious metal storage.

It is not known how much gold is stored under the DMCC but Mr Anderson said the spot gold contract would lead to more gold being kept in the vaults.

"We are obviously an entirely separate entity to the DMCC, regulated by SCA [Security and Commodities Authority], but we work very closely with DMCC and they have the vaulting facilities. They also have a product called Trade Flow which enables our members to register their physical gold within the Trade Flow system and use that for delivery purposes," Mr Anderson said.

DGCX members will also be able to use gold as collateral by putting it in the DMCC Trade Flow system in exchange for warrants enabling them to use their physical gold assets more efficiently.

DMCC is the majority shareholder in DGCX with a 53 per cent stake. The Multi Commodity Exchange of India, (MCX) and a company called Financial Technologies (India) own 45 per cent of DGCX and private investors own 2 per cent. DMCC was established in 2002 and DGCX was formed three years later in 2005.

In the UAE today, physical gold is traded over the phone with foreign exchanges. The majority of gold is bought and sold in London through the London Metal Exchange. But in recent years there has been a big rise in the physical gold coming in and out of Dubai, which has led to a large number of precious metals firms opening offices in the emirate.

"They are becoming a big part of the market," Mr Anderson said. "We play no part in those transactions; at present it is all done off-exchange, or OTC."

"Spot gold adds to our gold product so we can offer a full range of gold trading products to the trading community in Dubai," he added.

Approximately US$70 billion (Dh257.1bn) of physical gold passed through Dubai last year. Some Dh53bn worth of the precious metal left the emirate, making it the biggest export. Meanwhile, $29.4bn of gold futures traded on DGCX in the same period, an increase of 42 per cent on 2011.

In the first month of this year more than $3bn of gold futures have traded on the DGCX, an increase of 89 per cent on the same month last year.