All that glitters is not gold for traders (page 3 of 3)

Some observers argue that it is only a matter of time before shops are boarded up across the region's gold souks.

Not everyone agrees. Regional gold heavyweights, such as Dubai Gold and Jewellery Group Chairman Tawhid Abdullah, insist the impact of recent demand pressures is being overplayed. He puts the downturn in business in Dubai's gold souk at nearer 10-15 percent.

Crucially, he makes the distinction between traders in 22-karat gold, targeting the Indian market, and those selling 18-karat gold, aimed at the high-end Arab and Western markets.
"The impact has been very minimal at the high end," says Tawhid. "For these people, it doesn't matter if something costs $400 or $500. Asian buyers are more price-sensitive, and we have seen demand about 10-15 percent lower at this end."

WGC's Barakat is similarly bullish. "Dubai's gold trade is experiencing lower traffic compared to the earlier part of 2002, mainly for local customers. [But] tourist sales are still going at the same levels as in the past due to the large differential in prices between Dubai and Europe." Barakat argues that the recent high gold price will ultimately convince buyers of the metal's true worth.

"The current high prices will only create a positive impact on the customer," he insists. "No matter what the price, gold offers a store of value like none other and continues to be seen as an investment rather than expenditure."

Barakat and Tawhid have a vested interest in talking up the gold market. But they have a point, and it would be wrong to overstate the drop in regional gold demand. The Gulf remains one of gold's most buoyant markets. A recent report by Saudi Arabia's National Commercial Bank pointed out that in 2001, the kingdom was the world's fourth biggest gold consumer. Consumers in Saudi Arabia bought nearly 8 grams of gold each, compared with the global average of around 0.5 grams.

On the technical side, bankers in Dubai are in talks with many of their gold-trading customers about ways to ride the current storm. Jeff Rhodes, of Standard Bank in Dubai, says few of the city's gold traders hold much cash in the bank - they prefer to hold their wealth in gold inventory. While this is understandable, it can lead to cash flow shortages in times of crisis.

"When business is booming this is fine, albeit shortsighted," says Rhodes. "But when the market is slow, the gold jewelry held in stock can become a passive and wasting asset." He is encouraging traders use their gold inventory as collateral, a move that will help them manage their cash flow better in the lean times.

PR campaigns and innovative banking techniques should help most Gulf traders cope with short-term downturns. Whether they will help them survive in an era of structurally reduced demand is another matter entirely. All eyes will be on the regional gold market when Hajj comes around again in January 2004. But only the most optimistic gold traders are banking on a speedy return to the good old days.