An old sea dog once told me how he used to stash gold bars in a rickety old dhow to smuggle them from Dubai into India. The bullion would be landed at Goa because the beaches there slope gently, which made transporting the gold off the boat and inland easier.
Until the early 1990s India had a quota system that limited the amount of gold that could be brought into the country and the smugglers exploited that by building a lucrative trade across the Arabian Sea.
The smugglers would pay off the Indian coast guard to avoid trouble but occasionally the baksheesh went to the wrong person and the gold-laden dhows would be caught. The smugglers would dump their stash over the side rather than go to prison and, as a result, there is probably more gold lying on the seabed off Goa than there is in the Bank of England.
That illicit trade has now ended but Dubai remains an important gold centre and its gold souk thrives. Demand for bullion and jewellery is stronger than ever as investors seek secure wealth havens, away from banks and their propensity for investing in trailer-trash mortgages in the United States.
For poorer people, gold jewellery is itself a form of banking and it is no coincidence that the gold price always rises after a good harvest in India and China. Peasant farmers buy jewellery for their wives in good years and then sell it in bad years – a hedging mechanism that has existed for millennia.
A similar hedge is now being adopted by a number of countries in the Middle East as a way of diversifying foreign assets out of the US dollar, which seems only to hold value these days because my fellow Britons go on regular shopping trips to New York.
Gold was historically used to support currencies and also as a long-term store of physical wealth but that idea has fallen out of favour in the West and most European countries are now selling bullion hoarded by their ancestors. The United Arab Emirates has also sold its gold holdings, reducing its vault from 24 tonnes in 1999 to nothing by 2003.
However, gold is beginning to be taken seriously again as a store of wealth for central banks. Qatar, with its vast revenues from natural gas, has been steadily building its physical gold holdings by one tonne every month for the past year.
Russia too is putting its foreign exchange earnings into gold, building its vault by 44 tonnes in the past year – worth more than $1.5 billion at current prices.
Their reason for doing so is the weak US dollar is eroding wealth generated from the boom in natural resources. Many of the resource-rich nations in the Middle East have set up Sovereign Wealth Funds (SWFs) to spread their windfalls into other assets but the advantage of gold is that it comes with no hidden surprises.
There are no accounting scandals in a gold vault, no sub-prime losses and no political objections when it is bought.
Investment funds, both Western and Middle Eastern, are also using gold as a means of diversifying assets. The introduction of quoted gold vehicles has added a level of sophistication to trading gold and allowed pension funds and SWFs to buy gold without actually taking delivery of the metal.
Exchange Traded Funds store gold on behalf of shareholders, who can buy and sell their holdings just like any other stock. Dubai’s bourse is likely to get one of these funds later in the year and given the Middle East’s historical taste for gold I expect it to be extremely popular.
Given gold’s resurgent popularity as an alternate store of wealth it is worth asking why countries like the UAE and Saudi Arabia are not following Qatar’s lead by pouring some of their revenue into gold.
I suspect the reason is the same reason I’m still holding out against buying property in London: the prices are just crazy. Gold has hit a succession of record highs in recent weeks, taking its peak to $976 per ounce. How can a central bank that sold gold, as the UAE did in 1999, at about $300 per ounce buy it back at nearly $1000.
The central bankers should swallow their pride. Gold is the ultimate rainy day fund and future generations of Emiratis will be much happier to discover a vault full of gold than a series of holdings in ephemeral Western companies.
(David Robertson is business correspondent for The Times of London)