UAE Central Bank set to enter the gold market

The Governor of the UAE Central Bank, Sultan bin Nasser Al Suwaidi told reporters this week that the bank was preparing to convert up to 10 per cent of its currency reserves into gold, although he said that the bank currently held very little gold in its reserves.

'I don't think it is appropriate to buy gold now - it is too expensive. The appropriate time might come very soon. We could go up to 10 per cent,' he said.

Gold analysts predict a choppy market for the yellow metal over the summer months with a rally likely in the autumn. This is the pattern that gold trading has followed over the past five years, with the second half stronger than the first, although the $725 spike in gold prices this year almost broke this pattern before the recent sell-off.

Summer purchase?

So with gold trading at $613 an ounce at the time when the UAE governor spoke this week, how low will the yellow metal have to go before the UAE decides to buy?

That is a moot point but July and August look the quietest months for the gold market, and it could be that the UAE makes its historic diversification while other market participants are on the beach in the South of France. Ten per cent of the UAE's $23 billion foreign currency reserves would be a substantial injection in to the narrow gold market.

Mr. Al Suwaidi also said that the UAE was waiting for the right moment to buy euros, a move that was announced earlier this year but has yet to be executed. Again the figure of 10 per cent of the UAE's foreign currency reserves is the target for diversification.

'We are waiting for (market) conditions to change,' he said this week. 'When there is a clear trend going up, you move into it. If it is going down, you wait for the bottom and buy. There is no trend at this point.'

$23bn reserves

On present reserve holdings, he commented: 'We are in general investing in short-term debt instruments in the US because we expect US interest rates to go further up.'

The UAE dirham is pegged to the US dollar and Mr. Al Suwaidi confirmed that any more rises in US interest rates would be matched immediately in the UAE. He expects two more interest rate rises from the Federal Reserve.

Many economists see US dollar devaluation now on the agenda as the US economy adjusts to accommodate its twin deficits, and that means that for the UAE holding non-dollar assets like gold and the euro will help protect the value of its foreign currency reserves.