DUBAI: Uncertainty over the world economic outlook is changing Middle East gold buying behaviour, with individuals seeking bars and coins as a buffer against hard times, rather than snapping up jewellery for aesthetic reasons.
Investors are following those in the rest of the world into gold, partly compensating for lower consumption from the region's traditional retail demand base.
"People's confidence in the stock market went down with the financial crisis," said Ahmed Bin Sulayem, executive chairman of the Dubai Multi Commodity Centre (DMCC). "Investing in gold right now is a no brainer.
Investment in bullion in the Middle East was mostly coming from individuals, rather than from funds and institutional bodies, said Sampth Muthu, commodities analyst at Standard Chartered Bank Dubai.
The surge in investor demand could be seen across the region, said Jeffrey Rhodes, chief executive of INTL Commodities DMCC, an independent financial firm based in Dubai.
"I think it's fair to say that the investment demand level for gold for the Middle East on the whole has been very buoyant," he said.
Investors were buying gold bars and coins and keeping them in safes, Rhodes added. "While in more developed nations like the UK and US gold securities is what investors opt for, physical gold is still king in the Middle East," Rhodes said.
With an eye on the untapped local market and the popularity of vehicles for Islamic banking, the DMCC in March launched a sharia-compliant tradable security backed by gold, the first of its kind.
By the end of July, the instrument had traded around 28,000 times, said Sameer Meralli, managing director of investments at Dubai Commodities Asset Management (DCAM), a unit of DMCC. The value of each security was about $90-$95, giving trade to date of around $2.5 million.
"Whenever markets are unstable gold is a safe haven against all risks," Meralli said.
The volume of bullion gold imports to Dubai increased by 13 per cent on the year to 300 tonnes during the first half of 2009, according to data from DMCC. Some of those imports were reexported.
"The increase in imports was due to increased demand by investors who buy gold bars and coins from refineries," said a spokesman from DMCC.
Retail demand, which makes up more than 90 per cent of the region's market has fallen as high international prices due to global investor demand make gold jewellery more pricey for cash-strapped consumers. In Saudi Arabia, the Arab's world's largest economy, retail gold sales fell by 30 per cent the first six months of the year, retailers told Agenceis last month.
Investors in the region were quickly becoming accustomed to gold as an asset class, said Rozanna Wozniak, investment research manger at the World Gold Council.
"We are starting to notice a trend whereby the volume of gold investments in rising in the Middle East and with time we believe it will balance out with retail demand," she said.
Local investors had taken note of gold having outperformed many other asset classes during the downturn, Wozniak said.
"Unlike other commodities gold had managed to hold its value during these difficult financial times and returns on investment were also positive."
Gold prices have risen some 38 per cent to about $940 an ounce on Thursday from a low near $680 in October as investor demand for the yellow metal surges during times of economic uncertainty.
