All that glitters is not gold for traders (page 1 of 3)

The annual Hajj pilgrimage is traditionally a time of peak gold demand in the Gulf. Muslims making the holy journey to Mecca invariably mark their odyssey with a trip to Saudi Arabia's gold souks, stocking up on jewelry to commemorate their once-in-a-lifetime trip.

Elsewhere in the Gulf, those who stay home flock to their domestic gold markets to buy gifts for friends and family as they celebrate the Eid al Adha religious holiday. In each of the three years to 2002, Middle East gold demand peaked in the first three months, thanks largely to Hajj and Eid demand.

This year it's a very different story. Official figures are not yet out, but anecdotal evidence suggests demand has slumped. "We expect lower offtake in tonnage terms," says Moaz Barakat, Middle East director of the World Gold Council (WGC), an organization funded by gold producers to promote the metal.

The same is true across the region. In the UAE, home to the region's most dynamic gold market at the Dubai gold souk, demand is down by up to 50 percent on last year. "Our business has shrunk substantially," says Joy Alukkas, managing director of Alukkas Jewellery, one of the leading networks in 22-karat jewelry. "There is no hiding the fact that the gold jewelry business this time around is very poor."

The Dubai Shopping Festival (DSF), which ran for a month from mid-January, saw a flurry of gold promotions as retailers tried to lure shoppers back. But the word on the street is that they enjoyed little success. While overall visitors to Dubai were up 40 percent on DSF 2002, jewelry sales were at best flat, at around 275 million dirhams ($75 million). Of that figure, a far greater amount was spent on gold's precious rivals, particularly diamonds, than in previous years.

What caused such a dramatic collapse in gold demand? In short, the price. The price of gold, set by traders on international commodity markets, has rocketed in recent months. In February 2002, gold was selling for around $280 per ounce. By February 2003, it hovered just below $380 per ounce, though the price briefly dropped to $340 per ounce by mid-March.

"Only those who cannot postpone buying are spending on gold jewelry, such as for a wedding," says Tushar Patni, chairman of Abu Dhabi Gold and Jewellery Group. He says, "Business at Abu Dhabi's gold souk is down by at least 50 percent."

The surge in the gold price over the past 12 months throws up a number of searching questions. What forces have sent gold prices skyward? Where is the gold price headed in 2003? And what are the likely implications for the region's gold industry?

A host of factors have conspired to send gold prices ever higher in recent months. But if one word could sum up the reasons, it's "uncertainty." Investors view gold as a safe haven in times of political and economic turmoil. Recent months have seen both escalate, as military tension mounts in Iraq and global capital markets continue to languish in the doldrums.

Investor skepticism about buying shares in the wake of the Enron and WorldCom scandals has forced them to look for alternative asset classes. At the same time, the weakness of the US dollar has given gold a further shot in the arm (they traditionally move in opposite directions, and the current downturn in the dollar's value has proved no different).

Ironically, the surge in the gold price has come at a time when demand for gold is at an historic low. How is this possible? Because the gold price is set by traders dealing financial derivatives in New York, London and Hong Kong, not by shoppers buying necklaces in downtown Doha.