Nasdaq Dubai and the World Gold Council launched their long-awaited gold exchange (ETF) traded fund this week, which is both Shariah-compliant for Islamic investors and 100 per cent backed by physical gold.
Emirates Business talked to World Gold Council CEO Aram Shishmanian about the new ETF that is aimed squarely at both local investors who want to buy just one-tenth of an ounce of gold as well as regional institutions that want to invest more than $1 billion (Dh3.67bn).
ETFs have often been criticised as derivative products with no complete assurance that they have underlying asset backing. Will the new Nasdaq Dubai gold ETF be backed by allocated or unallocated gold, that is to say will it be fully redeemable against gold held in a bank account?
This is not a derivative product because it is 100 per cent backed by allocated gold held in vaults in London by HSBC, and audited both by traditional and Shariah auditors. It is important to understand the difference between unallocated and allocated gold. The Dubai ETF has allocated gold, so there is no third party acting between the metal and its owner. The ETF certificate is an entitlement to one-tenth of an ounce of gold.
Why would an investor buy the Dubai ETF trading under the ticker symbol GOLD, and not one of the dozen other ETFs trading on global exchanges?
We have launched a series of ETFs around the world over the past eight years and have always found that a regional product stimulates new demand. It is also a Shariah-compliant gold ETF, the first of its kind in the world, and this was not something that was easy for us to achieve. This product is for people looking for a secure and efficient way to hold gold, without necessarily taking delivery. It is a clear response to the need to protect wealth at a time of huge economic uncertainty.
Are you sure this is the right time to launch an ETF in Dubai? Why should people be buying gold now, is the price going up?
I cannot forecast prices in my job. But the WGC has created ETFs on 12 exchanges over eight years. Today $38bn of gold is held in these ETFs, or 1,200 tonnes, more than many national reserves.
Before ETFs, it used to cost investors about five per cent to get in and out of gold, now it is 60 basis points. In the GCC, there has been a 40 per cent increase in demand for gold in the past year, and 114 per cent increase in the past four months. It is an opportune time to launch in Dubai. There is substantial latent demand from investors. Gold is a safe haven, a protection against inflation, a weaker US dollar and third party failures as well as a risk adjustor for investment portfolios.
Gold and bonds are the only asset classes to show a positive performance in the past 12 months. We are seeing a structural shift towards gold as an investment immune from third party failure at a time of systemic risk in the financial sector.
What about price volatility? This has wiped out many smaller investors over the past year, and is proving difficult for the Dubai jewellery sector to manage on a daily basis?
All I can say is that over the past year gold has actually been the least volatile asset against other asset classes, other than US bonds. Gold holders were particularly damaged after the unexpected fall in prices after the failure of Lehman Brothers that caused a domino effect in selling.
But even then gold was acting as it should as an insurer of wealth, and investors were able to liquidate their holdings to pay debts or meet margin calls. It proved its worth as the asset of last resort.
Still room for much higher prices
There is talk in the gold market of a 'double top' in prices and evidence of climatic selling by individual investors in India. But to many analysts the gold chart is reminiscent of the 2006 'top' and how investors got jittery at $730.
Since then we have been to $1,000 twice, slipped back and stayed around the $900 mark. The danger is getting short-term selling cycles muddled up with a long-term cyclical bull market that looks as deeply entrenched as ever.
Gold might be the last great bubble of the 2000s, along with bonds, but there is not a climatic price spike on the chart worthy of the name.
Oil last year reminded us how markets behave at the extreme phase of a bubble – the doubling of prices in months should have served as more of a warning than it did.
There is no such spike evident in gold. The price chart curves gently upward over the past decade with a little bouncing around in the price over 2008. That could be the volatility often associated with a price peaking, or the kind of base-building pattern often seen before a major price advance or spike. Macro-economic conditions are also not that great for gold with the dollar advancing, and deflation and not inflation. If gold can hold its own now – as a safe haven and guarantor against inflation – it should do better when conditions change in its favour. The pumping of huge amounts of money into the global financial system by central banks is the classic formula for inflation, and gold positive. The idea that central banks will be able to successfully manage this rush of liquidity is surely unrealistic. Gold bugs say a golden scenario for the gold price is thus being set up, and further problems in the financial sector and slumping stocks can only increase gold's appeal.
Indeed, is there any current scenario that looks really bad for gold? Even in an all-out deflationary collapse gold would hold its value better than probably any other asset.
Aram Shishmanian Shishmanian has over 30 years' experience as a management consultant. He joined Accenture (formerly Andersen Consulting) in 1976 and became a partner in 1987.
On retiring in 2003, he was appointed non-executive director at Resolution plc, Victoria plc and several other firms.
Shishmanian has been a trustee of Marie Curie Cancer Care and a member of the International Advisory Board of the Cass Business School and City University.
Aside from being CEO of World Gold Council, he continues as a member of the International Executive of leading global law firm Lovells.
He also holds a BA in Economics with honours and an MBA.
Ways to invest in gold and silver:
- GOLD, the Dubai exchange traded fund
- Gold certificates from Emirates NBD Bank
- Bars and bullion
- SLV, the ETF for silver listed in London and other products
- Shares in major gold producers like Newmont or Barrick
- Shares in major silver producers like Pan American Silver and Hecla
- Share in smaller precious metals producers and exploration firms