A golden proposition

With the gold price now clearly above USD1,000 and poised for continued strength in the medium term, the GCC region merits attention as an increasingly important hub for the global gold industry. Exceptional growth potential exists across the value chain thanks to a sizeable and loyal consumer base, potentially large untapped mineral resources, and deepening regional expertise in manufacturing, wholesale and retail. While the high volatility in gold prices has thrown up short-term challenges, the strong structural growth drivers for the sector promise attractive medium and longer-term opportunities. Moreover, with the GCC economies set to be among the first to recover from the global downturn, the region is well positioned to further enhance its position as a gold manufacturing and trading hub of global importance.

• We believe that, in spite of record high prices, future prospects for gold remain very favorable in the near to medium term. A tight demand-supply balance and growing investment demand should make gold a resilient investment and its price, in spite of recent gains, remains well short of its historical inflation-adjusted peak. Gold has also regained favor with central banks as concerns mount about the dominance of the US Dollar.

• The Gulf region is characterized by a young, rapidly growing and relatively wealthy population with longstanding cultural attachment to gold as a gifting item, fashion accessory, and a store of value. The region is by far the world’s leading consumer of gold in per capita terms and the regional demand is highly resilient in value terms. Jewelry represents more than 90% of the physical gold purchased. Growth in the region’s top two gold retail markets — Saudi Arabia and the UAE — is primarily driven by strong domestic demand and tourism respectively.

• The Arabian Shield boasts attractive opportunities in gold mining. Recent studies show that only 20% of known and inferred gold resources in Saudi Arabia are being exploited. Regulatory changes initiated by the Saudi Arabian Government have smoothened the way for local and foreign private sector investments. Although the existing ageing mines have lost their previous cost advantages, the situation could quickly change with several new projects in the pipeline.

• The GCC’s gold jewelry manufacturing offers attractive growth potential, not least through import substitution, since imported finished products currently constitute approximately one-third of jewelry sold in the region. In addition, the quality of gold jewelry, acquired manufacturing and design capabilities of regional manufacturers, and uniformity in consumer tastes across the Middle East promise substantial export opportunities.

• Although physical gold remains by far the favored vehicle among regional investors interested in gold, a handful of listed companies now offer indirect opportunities. The most important among these are the Saudi miner Ma’aden (1211.SSE) and the retailer Damas (DAMAS.DIFX). The Australian miner Citadel Resources Group (ASX:CGG) is active in Saudi Arabia. The Tadwul-listed Fitaihi Holding (4180.SSE) designs and sells gold jewelry among other luxury products.

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