High gold prices bode well for Middle East

The positive outlook for bullion is good news for Dubai as a niche gold trading centre, and for Saudi Arabia, which is pushing ahead with the exploitation of its gold reserves

The inexorable rise of gold prices since hitting a brief low of just over $700 an ounce in late 2008 is showing little sign of abating. In 2011, prices rose 28 per cent year-on-year, and by the fourth quarter, the commodity was trading at an average of $1,680 an ounce. Total investment in gold increased by 20 per cent to a record $80bn in 2011, while the volume of net bar purchases increased by more than a third to almost 1,200 tonnes.

The high price of gold has not been without its consequences for retail gold sales. Demand for gold jewellery fell 2 per cent in 2011, with total sales down to 1,979 metric tonnes, compared to about 3,000 tonnes in 2001. In some markets, including Dubai, retailers have responded to rising prices by introducing lighter, more affordable gold pieces on to the market to prevent a slump in sales.

Jewellery demand weak

There have also been significant fluctuations in the price of gold in recent months, which can damage retail sales.

“Jewellery demand is very elastic, so volatility in the market makes an impact on demand,” says Philip Newman, research director at Thomson Reuters GFMS, a London-based precious metals consultancy.

“Weak price stability means that investors cannot plan ahead and may choose to stay out of the market. We’re expecting jewellery demand to be relatively soft in 2012.”

But while retail sales have fallen, central banks have started to accumulate gold. Net gold purchases in 2011 increased to 430 tonnes from just 77 tonnes in 2010, reversing a decade-long trend of institutional gold divestment.

“From 2001 onwards, central banks were firmly on the supply side of the market, selling around 400-500 tonnes of gold a year, but there has now been a swing to official investment in gold,” says Newman.

In the short term, there is room for gold prices to slacken. In the second update to its Gold Survey 2011, published on 17 January, Thomson Reuters GFMS predicted an average gold price of $1,640 an ounce for the first half of 2012. Bank of America (BofA) Merrill Lynch forecasts an average price of $1,850 an ounce in the first quarter, softening to $1,750 an ounce in the second quarter.

“Demand is depressed globally speaking and there is potential for short-term weakness in the market,” says Newman.

However, the outlook for 2012 as a whole is good. The continued economic downturn in Europe and slow growth in the US are likely to mean that gold remains an attractive investment on an institutional level. If the crisis in the eurozone deepens in the coming months then investors are likely to choose to invest in gold rather than weak currencies or risky equities.

According to BofA Merrill Lynch, the price of gold will average $2,000 an ounce in the fourth quarter of 2012. Thomson Reuters GFMS is similarly bullish.

“We could even see prices just over the $2,000 mark later this year or in early 2013,” it said in its January statement.

“Gold’s safe haven status encourages investors to come into the gold market,” says Newman.

Sharps Pixley, a London-based bullion brokerage, expects gold to average $1,800 an ounce in 2012, with a high of about $2,100.

“Gold has gone up on average 20 per cent year-on-year for a decade and we believe it should have another strong year based on economic uncertainty, political turmoil and strong fundamentals,” says Ross Norman, the company’s owner.

This positive outlook for the gold market in the medium term is good news for Dubai, which provides a range of gold-related services from refining to derivatives trading and retail sales, and for Saudi Arabia, which is pushing ahead with the exploitation of its gold reserves.

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Richard Nield is a freelance journalist, photographer and filmmaker covering the Middle East and Africa. In 10 years covering the region, he has been published and broadcast by clients including the BBC, Reuters, Al Jazeera, The Economist, The Financial Times, The Independent and Foreign Policy magazine. He has reported from throughout the region, including Algeria, Egypt, Libya, Morocco, Tunisia, South Sudan, Jordan, Lebanon, Syria, Kuwait and Saudi Arabia.