Dubai spot gold contract to help meet traders hedging needs

09/03/2015 05:25 AST

The Dubai Spot gold contract is likely to support the hedging needs of gold traders in a destination that is home to 40 per cent of the world's physical gold trade.

UAE investors will be able to buy and sell physical gold on a transparent, regulated domestic exchange. The Dubai Gold and Commodities Exchange (DGCX) has designed the spot gold contract taking into account the specific needs of market participants. The exchange has been in consultations with Dubai gold market players and realised that there is considerable demand for a regulated exchange-traded Dubai priced spot gold product not only locally but also in the world's other large gold markets.

The contract will play an important role in enhancing trading efficiencies as well as market depth and liquidity. The contract will allow bullion traders to be able to do netting, that is, be able to square opposing trade long or short positions when done both on-exchanges, which is not possible when dealing with two different parties.

The value of gold traded through Dubai stood at $75 billion in 2013, representing 40 per cent of the world's physical gold trade. Dubai is expected to be ranked second after London in terms of gold trade.

Dubai is strategically located amid a large consumer market, and well positioned to channel gold from the international market to consumers like India and China, which controls the majority of the world's consumption.

"Dubai is at the centre of trade flows of major metals including gold, silver, platinum, palladium and rhodium, which are routed through Dubai from their source market of Africa to their eventual destinations," Ian Wright, Chief Business Officer of DGCX, told Gulf News. By 2020, when Dubai is expected to attract 20 million visitors per year, the gold traded through Dubai is expected to increase further.

Shift in volumes?

"There will be shift in volumes. There will be more volumes taking place in local spot markets in Dubai, and we will see the daily cycle going from Shanghai, Dubai, Istanbul and New York. London will be there as a lot of central banks still have gold holdings there. A lot of central banks in the past 1-2 years, have repatriate gold, that will take some of the gold away," Gerhard Max Schubert, first vice president head of gold and commodities, Arab Banking Corporation told Gulf News.

London is the by far the biggest OTC (Over the Counter) clearer because a lot of OTC business is done depending on the price finding in New York, but it is cleared OTC in London. Currently, the exchange records a daily turnover of $1.4-1.5 billion per day in USD-INR contracts, which is a major cash cow. DGCX's biggest segment are currencies, equities, precious metals, and hydro carbons.

Gulf News