Gold and Jewellery Market in UAE

8/12/2019 Gold and Jewellery Market in UAE

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Market Monitor Series

Gold and Jewellery Market in UAE

Economic Research Department

August 2010


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Table of Contents

Executive Summary (Arabic)

Executive Summary (English)

1. Introduction.62. World Gold and Jewellery Market 83. Gold & Jewellery Market in the UAE224. Conclusion..28

References


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Executive Summary

An attractive and highly valued metal, gold finds its use both as a preciouscommodity and as near money and is also an important element in the investment matrix.

In addition the central banks of the world hold gold reserves for its asset value.

Gold demand has three major components: Jewellery, Industrial demand andinvestment demand. Investment demand in turn comes from the institutional investors and

the retail investors. Introduction of gold based exchange traded funds have further induced

the demand for gold. On the annual basis world gold supply is determined from producers

de hedging their stock, official sector sale of their gold reserves and recycled gold apart

from the mine production.

UAE has had a high affinity of gold and jewellery as a part of its cultural history.Despite competition from other consumer and lifestyle products gold jewelleries have a

prominent place in the consumption pattern in UAE. UAE boasts of the highest jewellery

demand per head of population in the world, including tourist consumption. Promotion of

the country, and especially of Dubai, as a gold centre and an increasingly popular tourist

destination has pushed up the demand levels in the economy. UAE gold demand has a

significant seasonal pattern with peaks around the festivals and during the periods of the

shopping festivals organized in UAE. Demand for jewellery in the country is influenced byseveral key factors like price levels and price volatility, as well as key gifting occasions and

the advertising campaigns that tend to accompany them.

With the financial crisis hitting the consumers disposable income and sentiment,demand for gold dropped significantly in 2009. Economic downturn also impacted

jewellery demand, the most price sensitive component of gold demand, in all the

economies. In the first two quarters of 2010, however, there are strong signals of recovery

in the world gold market. Demand for gold has recovered and expected to remain robust

during 2010 on account of increasing demand from the Middle East, India and China,

particularly for gold jewellery. Retail investment is also expected to be a substantial source

of gold demand. The figures for the second quarter of 2010 show an increase of 36% in

volume and 77% in value terms, largely on the back of strong gold investment demand.


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1.4 Methodology and Data:

The study is based on gold market related data from the world gold council, London

metal exchange and data from various investment houses. For UAE and Dubai, gold

related data is derived from Dubai customs, Dubai gold and commodity exchange and

world gold council. The demand levels and components and supply statistics is analyzed

to arrive at an exploration into the various components and drivers for the gold and

jewellery market.

1.5 Outline of Study

The study is further organized as follows: The second part will cover the varied aspects of

demand and demand components of the world gold market. It further delves into the supply

side of the market to understand the dynamics of world gold market. The third part of the

study explores the various aspects of gold market and jewellery market in particular in

UAE and Dubai. The forth part concludes the study with an outlook for the gold and

jewellery market.


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Chapter 2: World Gold Market Dynamics

Most valued among the precious metals, gold finds its use both as a precious commodity

and as near money. In addition, the central banks of the world hold gold reserves for its

asset value. The supply situation of gold market is equally diverse with many different

factors gaining prominence in different economic conditions. In this chapter, we explore

the demand and supply drivers and analyse the dynamics of gold market.

2.1 Gold Demand

Demand for gold is derived from the consumers and investors alike. While the consumers

demand gold for jewellery and other industrial consumption, investors rely on the value ofgold as a high yielding asset.

The volume of total identifiable gold demand in the world has been in the range of 3000-

4000 tonnes a year since 2000 (figure 2.1) (World Gold Council, 2010 February). While

there have been changes in different years the rate of change in demand level has been

oscillating in the range of 10% over the years. The value of gold demand has however

been rising fast with continuous increase in gold prices.

Figure 2.1: World gold demand

Source: Dubai Chamber based on data from World Gold Council


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Gold demand has three major components: Jewellery, Industrial demand and investment

demand. Investment demand in turn comes from the institutional investors and the retail

investors. Gold based exchange traded funds(ETFs) have further induced the demand for

gold globally.

The demand components have however changed widely over the years. While most of the

demand used to be derived from jewellery consumption, the demand driver has moved

gradually to investors. In 2000, as much as 84% of the total identifiable gold demand in

the world came from jewellery consumption (figure2.2) (World Gold Council, 2010 June).

Over the following years, however, the pattern has changed and jewellery demand forms

about 50% of the total demand. At the same time, demand from the retail investors have

increased. Introduction of gold based exchange traded funds have further titled the demand

pattern on investorsside.

Figure 2.2: Components of World Gold Demand



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2.1.1 Jewellery Market:

Gold demand for jewellery includes all newly-made carat jewellery and gold watches,

whether plain gold or combined with other materials. It excludes second-hand jewellery,

other metals plated with gold, coins and bars used as jeweler and purchases funded by the

trading of existing jewellery.

The shine of gold has attracted people to its use as jewellery since the time that the metal

has been known to mankind. In periods of high gold prices, the demand for gold jewellery

eases a little to increase again as soon as the prices cool off. As can be seen in figure 2.3,

there are few periods in which the demand for jewellery has come down both in volume

and value terms. However, compared to the demand levels in the range of 700 tonnes in

2005, the volume of gold demanded for jewellery came down to less than 500 tonnes in

2009.

Figure 2.3: Jewellery demand in tonnes and USD

Source: GFMS, World Gold Council


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This trend has been driven by two factors. First, the ever increasing price of gold has

curbed the jewellery demand by consumers owing to the high prices and availability of

substitutes. Secondly, even though the over demand for gold has increased the investment

demand has increased more, owing to the high returns. The proportion of jewellery

demand in the total gold demand has thus come down from 84% in 2000 to 52% in 2009

(figure 2.4).

Figure 2.4: Jewellery demand as proportion of total gold demand


While the proportion of jewellery demand has been falling over the years, the drop has

been further exaggerated in the wake of the global crisis since 2008. Country wise analysis

of jewellery demand shows a drop in demand of gold for jewellery in all the countries

except India and China. As can be seen in figure 2.5, in the fourth quarter of 2009, gold

demand for jewellery declined in the range of 10% to over 50% in different countries,

except in India and China.


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Figure 2.5: Growth in Jewellery demand in Q4 2008 -Q4 2009 (tonnes)

Source: GFMS, World Gold Council

Another remarkable feature of gold demand for jewellery is the seasonality pattern. The

demand for gold is seasonal throughout the world with different seasonal patterns in

different countries. The global demand for gold is normally strongest in the fourth quarter

of the year because different nations celebrate various festivals, and events at that time.

Demand for jewellery around the festival time is high in every country.

2.1.2 Industrial applications

Gold demand for industrial applications includes the first transformation of raw gold into

intermediate or final products destined for industrial use such as gold potassium cyanide,

gold bonding wire, sputtering targets and gold destined for plating jewellery. It also

includes the first transformation of raw gold into intermediate or final products destined for


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dental applications such as dental alloys. This component of gold demand thus arises from

its use in electronics industry, dentistry and some other industries.

As can be seen in figure 2.6, gold demand for industrial applications has been in the range

of 100-120 tonnes in a quarter since 2006. There has been some drop in demand of gold for

industrial application since fourth quarter of 2008 following the global financial crisis and

record increase in gold prices only to recover since the second quarter of 2009. Gold

demand for industrial and dental applications totaled 99.7 tonnes in Q4 2009, 11% higher

than Q4 2008. Demand in 2009, however, was down 16% on 2008 levels.

Figure 2.6: Industrial demand for gold by categories

Source: GFMS

Among the components of the gold demand for industrial applications, demand from the

electronics industry is nearly 70% of total industrial off take and has been growing

continuously. While the demand from electronics sector cooled off a little in 2009 with the

sector slowing in the wake of financial crisis, it has rebound in Q4 2009. Demand for gold

used in dental applications has been falling. Demand from the other industrial and

decorative sector also fell by 13% in 2009. With the outlook for the global economy

improving, industrial demand is expected to recover further in 2010. An increasing gold


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price can prove challenging for the industries dependant on gold as an input and are

researching on use of alternate metal like copper for some applications.

2.1.3 Investment Demand for Gold

Gold is an important element in the investment matrix as a key instrument reflecting

investors confidence.The recent credit crisis has highlighted golds role as a safe haven.

While it works as hedge against both equity weakness and tensions in the bond market, the

relationship with equity market is seen to be generally stronger than the bond market. Apart

from acting as a safe haven in times of risk, gold continues to attract investors attention

because it is universally accepted currency carrying no counterpart risk and easy

portability. As can be seen in figure 2.7 (World Gold Council, 2009 October), gold offers

the best combination of high returns and low volatility among the investment instruments

like S&P 500 index or US Treasury bonds or Morgan Stanleys Emerging Market or oth er

index.

Figure 2.7: Annualized return versus annualized daily return volatility for various

assets, Q1 2010


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As a result of high returns and low volatility the investment component of gold demand has

increased from 2% of the total identifiable world demand in 2000 to almost 30% in 2009.

Introduction of new exchange traded funds (ETF) linked with gold and other bullion funds

have further induced the demand for gold for investment purposes.

Gold demand for investment comes from the institutional investors and the retail investors.

On the institutional side, the increase in demand is captured partly by ETF demand and

partly by the inferred investment category, which captures the less visible flows, in

particular the over-the-counter market. Institutional investment in gold is both impacted by

and also impacts the price of gold. While there are sizeable purchases at key times which

fuelled the rally in the gold price, there were also bouts of profit-taking driven by gold

prices. Off late increased activity by hedge funds and other non-traditional institutions in

the investment market for gold is also becoming prominent. The build-up of long positions

in the futures market is also indicative of a more tactical element in the investor market.

Retail investment in gold includes bar, coin and medallions. It comprises of individuals

purchases of coins and bars for investment gold, medallions of at least 99% purity, and

wires and lumps sold in small quantities. Net retail investment demand for gold has gone

up from 166 tonnes in 2000 to 676 tonnes in 2009 (figure 2.8) (World Gold Council, 2010

April).

Figure 2.8: World Gold Demand for Retail Investment



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World gold demand has thus increased over the years for jewelleries, industrial applications

and investment alike. The sheen of the metal combined with its relatively better

performances among investment assets has fuelled the increase in demand. In the times of

unstable financial or economic conditions, the demand has further increased as a safety

valve and pushed up the price of gold. With high prices and worsened economic conditions

in 2009, the overall demand levels have cooled off a bit in last few quarters. Further trend

in world gold demand will depend a lot on the economic recovery worldwide. Investors are

however likely to continue to look towards gold for its diversification and portfolio

insurance properties.

2.2 Gold Supply

Gold being a non renewable metal, the total supply of gold in the world is constant. On the

annual basis however, world gold supply comes from the following sources; mine

production, producers de-hedging their stock, official sector sale of their gold reserves and

recycled gold.

Figure 2.9: World gold supply and its components

Source: GFMS


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As can be seen in figure 2.9, total annual production of gold from gold mines in countries

like South Africa, USA, etc, has been almost constant over 2000 till 2009. The total mine

production in terms of volume stands at around 2500 tonnes a year with small variations

over the years. with a number of new projects coming on stream in 2009 (notably in

Tanzania and Senegal) as well as improvements in production at existing mines there was a

6% increase in annual mine production over 2008 to 2,554 tonnes.

Net producer hedging refers to the change in the physical market impact of mining

companies gold loans, forwards and options positions. Producer de-hedging thus leads to

reduction in annual gold supply at the time of physical delivery of gold against the options

and futures buy backs. Although relatively a small component of the total gold supply,

there have been large variations in the volume of gold de hedging. With high gold prices

following instability in the global financial market since 2008, there has been reduction in

the de hedging amount. Consequently, reduction in world gold supply has declined in

recent years. The global hedge book as at the end of 2009 stood at around half the level of

one year earlier, with numerous gold producers completely removing hedge positions to

leave them fully exposed to spot prices.

The third component of world gold supply, Official sector sales refers to

gross sales less gross purchases by central banks and other official institutions. Central

Banks in different economies allocate a certain proportion of their assets in form of gold

reserves. Use of gold as reserve asset helps the central banks to manage their foreign

reserve objective, strategic asset allocation and maximisation of risk adjusted returns in

investment portfolio and also act as a hedge against global macroeconomic risks apart from

being a high quality liquid asset. Countries like USA and Germany maintain as high as

71% and 66% of their reserves in form of gold (World Gold Council, 2007 December).

Table 2.1 below lists the top 25 countries in terms of their gold reserves and the percentage

of gold reserves in the total reserve of the country.


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Table 2.1: Top 25 Official Gold Holdings

Country Tonnes % of reserves

1 United States 8,134 70.4%

2 Germany 3,407 66.1%

3 IMF 3,005

4 Italy 2,452 64.9%

5 France 2,435 65.7%

6 China 1,054 1.6%

7 Switzerland 1,040 27.0%

8 Japan 765 3.0%

9 Russia 641 5.0%

10 Netherlands 613 53.4%

11 India 558 6.9%

12 ECB 501 25.2%

13 Taiwan 424 4.1%

14 Portugal 383 84.9%

15 Venezuela 361 36.8%

Source: World Gold Council table, IMF, national data, WGC

* This table was updated in March 2010 and reports data available at that time.

Data are taken from the International Monetary Funds International Financial

Statistics (IFS), March 2010 edition, and other sources where applicable .

The central banks have shown a clear desire to maintain an allocation to gold thus

signaling prominence of the reserve value of gold. There has been a growing recognition ofgolds unique properties as an investment and protector of wealth and reaffirm its role as a

key element of global monetary reserves (World Gold Council, 2009 September). In

contrast to the investors expectation of future supply of gold from the official sector, the

central banks have emerged as purchasers marking a shift in the market sentiments. The

supply of gold from the official sector sales reduced considerably in 2008 (figure 2.9) and


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has almost dried up in 2009. In 2009, the net sales stood at 44 tonnes compared with sales

of 236 tonnes in the previous year and an annual average of 444 tonnes over the five years

to 2008.

The fourth component of world gold supply, Recycled gold refers to gold sourced from old

fabricated products which has been recovered and refined back into bars. Recycling supply

of gold tends to be high with strong rise in gold price. Consumers prefer to sell their

existing holdings of gold at the prevailing higher prices to book profits. There is also an

emergent trend of some selling back of gold jewellery by retailers seeking to raise cash. As

can be seen in figure 2.10, in periods of increase in gold prices, there have been spikes of

high supply of recycled gold in the world gold market.

Figure 2.10: Recycled gold and gold price

As compared to a little over 500 tonnes of gold supply from recycled gold, it has

increased to over 1500 tonnes by 2009 (figure 2.9). The recycled gold supply increased

substantially in 2008 with the usual surge in recycling in period of high gold price. In 2009,

the recycled gold supply was at a historically high level of 1549 tonnes, up 27% over 2008,

primarily due to weak global economic conditions.


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Thus while a large part of supply comes from gold mine production, supply

of recycled gold has increased over the years as well. The expected supply from official

sector sales however has diminished with central banks holding larger gold reserves as

assts.

2.3 The Gold Market Dynamics

World gold market thus has multi-dimensional aspects that together impact the price

performance of gold. Both the supply and demand components of gold market are spread

broadly. This provides a cushion to the market against shocks and is a key source of

stability of gold price. As against the other financial instruments, gold has no default or

counterparty risk.

Figure 2.11: Annual average gold prices (US Dollar/ounce)

Source: Source: Dubai Chamber based on data from World Gold Council


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Gold prices have performed strongly in periods of high world economic growth like

2003-2007 (figure 2.11). In periods of global recession (2008-2009) as well the gold prices

have rallied high. Similarly, gold prices have performed well in periods of high inflation or

high inflationary expectation as also in periods of deflation.


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Chapter 3: Gold and Jewellery Market in UAE

UAE has had a high affinity of gold and jewellery as a part of its cultural history. Rising

wealth and a continuing trend towards a modern lifestyle has ensured a strong market for

traditional gold jewellery, coupled with growing demand for modern designs, spurred by

young affluent consumers even in modern days. Despite competition from other consumer

and lifestyle products, gold jewelleries have a prominent place in the consumption pattern

in UAE. As can be seen in figure 3.1 below, UAE has the highest jewellery demand per

head of population in the world, including tourist consumption.

Figure 3.1 Jewellery consumption per head, 2006 (grams)


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Even among countries in the Middle East region, UAE along with Saudi Arabia has shown

clear upward trend in terms of gold demand over the years both in terms of volume and

value (figure 3.2). Promotion of the country, and especially of Dubai, as a gold centre and

an increasingly popular tourist destination has pushed up the demand levels in the

economy.

Figure 3.2: Consumer demand of gold in the Middles East, Volume and Value

UAE gold demand has a significant seasonal pattern with peaks around the festival of Eid

al Fitr at the close of the annual Ramadan month of fasting, the annual Hajj pilgrimage and

Umrah. Gold demand also rises quite high during the periods of the shopping festivals

organized in UAE.

In the United Arab Emirates, Dubai has long since outgrown its traditional role as simply

the principal source of supply for gold going into the eager consumer markets of the Indian

subcontinent, and has developed rapidly into a sophisticated gold trading centre that can


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easily hold its own in competition with anywhere in the world. Despite consistently high

prices, there have been significant growth in the value of gold imported and exported

through Dubai since 2002 (figure 3.3). Gold and jewellery remains the biggest export item

by value for Dubai trade.

Figure 3.3: Value of Gold trade in Dubai over the years

Source: Dubai Chamber based on data from Dubai Customs

The trends of exports and imports of gold from Dubai reinforce its traditional role as the

gold centre of the region. Gold traded through Dubai reached AED 98 billion in 2009 a

20% increase over 2008. In line with global trends, gold trade cooled off a little in 2009

following the impact of financial crisis on the consumers. Leading suppliers to Dubai

include the refineries of Switzerland and the UK for bullion, and increasingly Malaysia for

finished jewellery products, while Dubais top customers include India, Iran and the GCC

countries. The geographical reach of business from Dubai continues to expand each year.

In terms of domestic demand, gold demand in UAE has been above 100 tonnes since 2005

and hit an all time high of 110 tonnes in 2008 (figure 3.4). Though demand levels fell

down significantly in 2009 by 30% following the recessionary impact, it is picking up

gradually in 2010.


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Figure 3.4: Gold demand in UAE


Among the components of UAE gold demand, demand for jewellery comprises more

than 90% of the total demand (figure 3.5). With the financial market sophistication and

new gold trading exchange gaining prominence in the country, there has been an

increasing trend of demand for investment in gold as well.

Figure 3.5: Demand Components of gold in UAE



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However, demand for jewellery continues to be the overwhelming driver of gold demand

in UAE. The volume of gold demanded for jewellery in the country has been in the range

of 95-100 tonnes since 2005. Following the economic downturn and impact on both the

domestic consumers and tourist arrivals, demand level in 2009 dropped by almost 50% as

compared to previous years (figure 3.5).

Jewellery market in UAE has historically been driven by a strong economy and high

levels of consumer purchasing power. In addition to the direct impact of high oil prices,

individual incomes also benefited from major government spending on infrastructure,

health and education projects. In addition, an increase in tourist numbers had a positive

influence on jewellery demand. The major shopping festivals viz, Dubai shopping

festival and Dubai summer surprises also marked increased gold sale in the market. The

gold market thus advanced in terms of improved product offering and growth in trade

outlets as well as rising promotional spending by the trade. The Dubai Gold and

Jewellery Group kept recording every increasing sale over the years. The shops in the

gold souk in Dubai reportedly sell tons of gold each and are popular among tourists as

one of the cheapest place in the world to buy gold.

Around 90% of the total consumer off take in the country is in form of jewellery and

retail sales represent the bulk of gold demand. According to the latest available official

figures, Dubai's gold industry was worth US$29 billion (Dh106.4bn) in 2009.

Given the tough economic conditions and the resulting impact on the gold trade globally

in 2009, Jewellery sales in UAE have seen a run of declines since the end of 2008 due to

the economic crisis coupled with record high gold prices. Gold retail volumes fell as

consumers remained skeptical about fluctuating gold price and decline in tourists flow.

Jewellery sales in the UAE, and Dubai in particular, suffered under the pressure of fewer

expatriates, the economic downturn and lower than normal tourist arrivals.

Jewellery market has, however, witnessed signs of revival in recent quarters in 2010. The

Dubai Shopping Festival early in the quarter recorded better sales than 2009. According

to industry experts, Dubai gold and jewellery sales surged during the first quarter of 2010

compared to last year and it is estimated that it rose by up to 20 per cent. As gold prices


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have started stabilizing and consumers disposable income has increased than a year ago,

retail gold demand volumes in UAE has started increasing. According to the gold souqs

in Dubai, drop in the price of gold coinciding with the tourists coming through Dubai has

helped pick demand up. Gold dealers, in Dubai Gold and Jewellery group have reported

increase in the volume of gold trade in the first quarter of 2010.

Three top gold refiners in the UAE are also reportedly more than doubling their

processing capacities this year, sending signals that the flow of gold into UAE may

substantially improve this year.


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Chapter 4: Conclusions

World Gold Market is a complex interplay of various factors driving the demand and

supply conditions. The jewellery market in contrast is a driven by price trends of gold and

cultural affinity to the metal. In UAE this fact is very prominent in the demand and supply

trends of gold and jewellery over the years. Demand for jewellery in the region is

influenced by several key factors like price levels and price volatility, as well as key gifting

occasions and the advertising campaigns that tend to accompany them.

Economic uncertainties in the recent past and the ongoing search for less volatile and more

diversified assets has driven high investment demand for gold off late. With lingering

concerns over economic recovery and rising public debt levels in many economies, demand

for gold as a safe investment haven is likely to continue in near future. Economic downturn

also impacted jewellery demand, the most price sensitive component of gold demand, in all

the economies. With the financial crisis hitting the consumers disposable income and

sentiment, demand for jewelry dropped significantly in 2009.

In the first two quarters of 2010, however, there are strong signals of recovery in the world

gold market. Demand for gold has recovered and expected to remain robust during 2010 on

account of increasing demand from the Middle East, India and China, particularly for gold

jewellery. Retail investment is also expected to be a substantial source of gold demand. The

figures for the second quarter of 2010 show an increase of 36% in volume and 77% in

value terms, largely on the back of strong gold investment demand. Jewellery demand has

also picked up since the fourth quarter of 2009, despite the international gold price hitting

record levels during the period driven by a rebound in the Indian and Chinese market. In

UAE as well gold jewellery demand has increased by 15 per cent in the second quarter on

2010, compared to the same period last year despite rising prices of the yellow metal.

Furthermore, as global economic conditions improve, jewellery and industrial demand are

likely to continue to recover. India and China will continue to provide the main thrust of

overall growth in demand, particularly for gold jewellery, for the remainder of 2010.


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References

World Gold Council. (2007 December). Gold as a safe haven.www.gold.org.

World Gold Council. (2010 February). Gold Demand Trends.www.gold.org.

World Gold Council. (2009 October). Gold Investment Digest.www.gold.org.

World Gold Council. (2010 April). Gold Investment Digest.www.gold.org.

World Gold Council. (2010 June). The Importance of Gold in Reserve Asset Management.

www.gold.org.

World Gold Council. (1998 November). Gold as a store of value. www.gold.org

Bullion Desk. (September 2005). Dubai: Taking Centre stage in the gold Market.

www.thebulliondesk.com

World Gold Council. (2009 September). Major Changes in Central Bank reported reserves 1990-

2009. www.gold.org

World Gold Council. (2010 August). Gold Demand Trends. www.gold.org

City of Gold Newsletter. (2010). Dubai Gold and Jewellery Group. www. dubaicityofgold.com

Dubai Gold Souq. (2010). www.dubaigoldsouq.com

Media reports

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Gold and Jewellery Market in UAE