Some Interesting Energy & Gold Dynamics

Recent budgetary estimates of GCC countries vividly illustrate the extent to which energy prices have transformed their fiscal deficits into surpluses – whether it is in Saudi Arabia or in the UAE. Indeed, the UAE has been identified as a single largest beneficiary of high oil prices; although it has always had a manageably low fiscal deficit – caused by the levels of contributions to the federal budget by Abu Dhabi and Dubai. Quite apart from this, the UAE is also perhaps the most diversified economy in the GCC; what with Dubai bringing up growing slices of GDP from tourism, travel, hospitality and the realty / construction sectors. All of these have been buoyant (nay, on the boil!) for some time. Energy prices have also had a favourable impact on Qatar and Saudi Arabia’s budgetary health. Qatar derives sustenance and now quality from associated gas prices; to generate which, it had invested on significantly to ramp up capacity and infrastructure. All the past investments are now beginning to bear fruits.

The low U.S. Dollar and other interest rates,  and the relatively benign outlook for inflation in Europe, Japan and in the U.S., have reinforced the feel-good factors in the GCC that loom large on the horizon to disturb this hubris. It is a pity that Bahrain and Oman are not benefiting to the same extent as the UAE, Qatar & Saudi Arabia, but given their limited / falling oil production, this was perhaps inevitable. While this may be true for Dubai, it has systematically and strategically mitigated the adverse impact by finding alternate revenue streams in place of oil. 

GCC economies over this decade, are poised to enter a tertiary phase of growth; with light manufacturing, downstream / upstream energy-related activities and aluminium / base metal (Dubal & Alba). Hopefully, the countries will converge towards a common currency and market; although they need to address other critical issues that will arise in its wake e.g. the employment of GCC nationals within their countries and across the borders.

It is in this context that service sectors (banking, financial, insurance, technology and to an extent, the hospitality sector) will be large employment generators and capable of absorbing the ever-growing job expectants. A number of graduates and school-leavers are expected to join the jobs market and would have received training in polytechnics and in the higher colleges of technology. Therefore, it is not surprising that pressures have begun to build up on the private sector to recruit UAE nationals more systematically.  The 2% quota recommended by Tanmia is the outcome of a previously less than enthusiastic adoption of this national objective, on a strictly voluntary basis.

That would be a major challenge for the GCC economies; as their oil prices and production provide a firm foundation, but also raise expectations. A basis for financial fulfilment and aspirations that need to be fulfilled, will be supplemented by their significant accumulated foreign exchange reserves. Interestingly, the aggregate GCC foreign exchange reserves amount to about US$ 80-odd billion, which relatively is smaller than that of India’s and certainly a fraction of  the Far East accumulation; if one were to combine Japan, Taiwan, Singapore and China. Of course, one should not compare apples and oranges. The official GCC foreign exchange reserves do exclude large surpluses of individual emirates, managed through their own investment authorities, which perhaps do not get added up in the numbers compiled and published in the regional press. The actual wealth and accessible reserves may in fact be much higher; even if seemingly lower than that of large economies such as Japan and China.

Gold and base metals have decidedly come back into vogue. Base metals such as aluminium produced by the likes of Dubal and Alba have ready markets and off-take agreements. They have benefited over the years from the strong surge in commodity prices across the various sectors. Steel prices have gone up and may give a further fillip to the GCC’s steel manufacturing initiatives; which had remained somewhat moribund in the past. The scale and the size of domestic and regional demand may not  justify huge investments or result in critical mass. There are reports that a mega steel plant may be set up in the UAE, perhaps in Jebel Ali; but all will require not just a huge financial investment that needs to be rustled up, but also gas supply. This is becoming critical, as an input factor, for Dubai’s continued industrial growth. Harnessing this growth, laying the necessary gas pipelines and assuring that these feed in, in a timely manner, would be therefore significant for Dubai in the years to come.

Fine metals such as gold, have also regained their  lustre; as a result of consistent and conscious efforts by the gold community to regulate their practices and dampen price volatility to enhance the perceived value of gold. Obviously a good job well done; as gold has re-emerged as a favourite of many investors and traders and projected as an attractive alternate asset class. The decline of the U.S. Dollar and the escalation of oil price and tensions in different parts of the world, have given gold the safe haven status previously enjoyed by the Swiss Franc and the U.S. Dollar. Gold is also intertwined intricately with Dubai’s trading history, underpinning its entrepot status. Gold traders here, have now blossomed into savvy businessmen and have brought in professionalism and care to nurture their businesses. The community has done a good deal of promoting itself during the Dubai Shopping Festival and leading players such as  Damas,  have created a market niche and a trusted brand name, having moved from wholesale to increasingly retail. They are receiving wider acceptance, not just in the UAE but across the GCC and in South Asia.

As many currencies and paper money depreciated or became tainted, gold entered the equation in various baskets to which the currencies are pegged. Gold standard, jettisoned by the U.S., during Lyndon Johnson’s regime, seems to have come into a full circle and certainly some lost ground has been recovered.

It is in this context that the announcement by the 15 European central banks of a five-year agreement, is a major boost to gold. They have committed to restrict their gold sales to no more than 500 tonnes a year and a total of 2500 tonnes from 2004 to 2009. In a sense, this dramatic decision is at a much higher level than what the market had been anticipating. The Swiss National Bank and the U.K. have declared that they have no plans to sell beyond small (say 130 tonnes) quantities. The last agreement was in 1999 and this reaffirmation will propel gold further into global monetary reserves. Any concerted and co-ordinated sales programme need not be viewed as a cartel and this is no different from OPEC’s quota system. Western European countries have also pledged to not lease the gold or resort to gold futures and options exceeding the amounts currently outstanding. All these augur well for the gold trade in Dubai; which has had its moments of glory in the past, but of late, had been buffeted by price volatility and demand uncertainty.  To an extent,  India and the rest of South Asia remain the major importer of gold, with a demand that had previously appeared to be insatiable. Now that India has liberalized imports, Dubai would have to reinvent itself. This is where the effort of certain institutions such as Damas, to get to into high end / quality jewellery to add value and professionalize their business will merit support.  The election of Mr. Tawhid Abdulla as the Chairman of the newly established Marketing Strategy Commission for the World Jewellery Confederation (CIBJO), is a further recognition of the important contribution made by him, and his family to this business and by the World Gold Council movement in Dubai.

Ultimately if Dubai wishes to remain and be known as the ‘City of Gold’; it needs to move ahead in a deft and assured manner; so as to regain its place in the comity of good gold-dealing nations.

 
The author is General Manager of Emirates Bank.  However, the views expressed in this article are not necessarily shared by the Bank.

Posted on: 14.03.2004

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