x Abu Dhabi, UAESaturday 20 January 2018

How to invest in tomorrow

Before your next trip to the souk, there are a number of alternatives to consider when investing in the precious metal.

At the Dubai Gold and Commodities Exchange, volumes of gold futures doubled in the first quarter of 2010 compared to last year.
At the Dubai Gold and Commodities Exchange, volumes of gold futures doubled in the first quarter of 2010 compared to last year.

At the seventh annual Dubai City of Gold Conference this week there were 11 speakers, more than 400 delegates, and one primary concern: where is the price of gold headed? A related question may have been more relevant: what is the best way to invest in the precious metal? While Dubai and other cities throughout the region have a thriving trade in physical gold, there are a growing number of alternative options for investing in the commodity that do not involve the souk.

After a sustained rise for the past two years that saw gold soar past US$1,200 (Dh4,400) an ounce at the end of 2009, it fell back more than 12 per cent to start the year, only to regain favour of late as a safe haven against the global economic uncertainty. Always a popular item here in the Gulf, global investors have increasingly taken a shine to it. Even US hedge fund titan John Paulson is a gold bug now. The billionaire investor, (in) famous for predicting the housing crash and then convincing Goldman Sachs to create mortgage-backed securities that he could bet against, recently launched a fund that reportedly took huge stakes in gold mining firms and bullion-related derivatives.

Most regional investors do not have the $10 million minimum investment needed to join Mr Paulson's venture, but there are myriad ways to get in on the action. At the Dubai Gold and Commodities Exchange (DGCX), for example, volumes for gold futures more than doubled in the first quarter of 2010 compared to the previous year. A gold future is a contract to buy a certain amount of gold at some point in the future.

One advantage to this type of security is that the buyer is only required to put down, as a deposit, a relatively small percentage of the overall price of the metal. "At no time do you ever have to pay the full value of the gold. If you go to the physical market, you have to pay the full market value immediately," says Eric Hasham, chief executive officer of the DGCX. In addition, he adds that because the price of the contract fluctuates with the price of gold throughout the day "you can pursue very, very short-term gains as well as long-term gains".

The other major difference between futures and other venues is that futures markets allow investors to short the gold market, or take the position that prices may fall. There are significant risks as well. If the price of gold moves the other direction than the one the investor predicted, he may be asked to come up with additional deposits. And making money involves not only accurately gauging the price direction, but correctly forecasting when the move will occur, since the contract expires after a set period.

"I think it is for experts," says Peter Cooper, founder of the Dubai-based investment newsletter Arabian Money. "I know one trader who has lost a lot of money in the past year - and he rates very highly as a gold expert." Mr Hasham acknowledges that futures trading is typically for more sophisticated investors, but notes that the exchange offers workshops to introduce aspiring traders to the practice. In addition, the exchange's brokerage members can execute trades and assist investors who are looking to get involved in futures.

"The more advice [the broker] would have to give, the more he would charge" in commissions, Mr Hasham says. For those who do not see the need to utilise the leverage that gold futures offer, there are less complicated ways of investing. But Mr Cooper, who is extremely bullish on gold in the long term, says there is no need to start stashing ingots or bars in the kitchen pantry. "I am very dubious about the idea of buying gold and hiding it away somewhere," he says.

Instead, he advocates for depositories such as the Perth Mint, which allows individuals to buy physical gold without ever having to take possession of it. Investors have the option of buying "allocated" gold, in which bars are assigned to a specific buyer, or "unallocated" in which the buyer gets the guaranteed right to buy a certain amount. Because the unallocated gold carries a slight counterparty risk that it might not be available at the time of purchase for some unforeseen reason, it is available at slightly cheaper rates.

The Perth Mint, which is owned by the regional government in Australia, also waives storage fees for investors who buy more than $250,000 worth of the metal. Finally, there are a variety of exchange-traded funds, or ETFs, that track the price of gold. These funds purchase a large volume of the metal, then sell shares to individual investors that rise and fall along with the gold price. They are generally extremely liquid - in other words, they are actively traded so it is easy to buy and sell them quickly - and available through almost any brokerage. For small investors looking for exposure to gold, Cooper says, "that is really the most convenient way".