Dubai: The Last City of Gold

In August this year, based on the success of the "Visions of Dubai" gold coins, DMCC unveiled its 2022 edition UAE bullion coins, a continuation of the first and second, which were released in April 2012. Featuring His Highness Sheikh Khalifa bin Zayed Al Nahyan, the late President of the UAE, and the Burj Khalifa, the second launched just eight months later, featuring His Highness Sheikh Mohammed bin Rashid Al Maktoum, Vice President and Prime Minister of the UAE and Ruler of Dubai, and the Palm Jumeirah on the reverse. Each coin was minted by Emirates Gold DMCC remain available in 1 oz, ½ oz, ¼ oz and 1/10 oz denominations respectively.

In continuation, the third and fourth feature His Highness Sheikh Mohammed bin Zayed Al Nahyan, President of the United Arab Emirates and Ruler of Abu Dhabi, with The Louvre Abu Dhabi on the reverse, and His Highness Sheikh Mohammed bin Rashid Al Maktoum and the Museum of the Future. As a collection of four, the most recent pair pay tribute to a nation and its leaders while remaining symbolic of the UAE's accomplishments in culture and the arts, as well as its very broad-based position as a centre for the gold industry. And while some may have read my headline as hyperbole, I would suggest that Dubai may be the closest thing to a "City of Gold" left in the world.

As an expression that became widely used by 16th-century conquistadors, based on the often-mythical stories of long-lost cities with unimaginable wealth, the idea of a "City of Gold" isn't a new one, with Cíbola (today known as the Zuni-Cibola Complex, located in New Mexico), Quivira (suspected to be somewhere near modern-day Kansas) and El Dorado (based on folklore) becoming amongst the most well-known. As a precious metal with a long history of value, either as a commodity or as a cultural ornament of power, particularly by the Mesoamerican civilizations of the Maya, Aztecs and Olmecs, Dubai not only stands alone as a city with no indigenous gold but as one that has earned its position due to several factors; namely addressing the challenges in the market, creating an easy-to-use environment, and the development of innovation and accountability to community before shareholders.

It is interesting to note that the UAE was founded in 1971, the same year President Nixon closed the gold window as a way to address the United States’ mounting inflation issues – a somewhat ironic decision given the current economic environment. Certainly, one of the positives to come from this, was the liberation of gold as an independent commodity whose value was solely dictated by supply and demand, resulting in a global opportunity, and none more so than for the UAE and its burgeoning hydrocarbon wealth.

Aside from the city's long-standing Gold Souk, some of whose tenants continue to trade over forty years later, Dubai's relatively recent arrival to the gold industry's international markets meant a lower financial exposure to the serious volatility which had plagued the debt-heavy gold companies of the 2000s, whose aggressive M&A programs had led to all-in sustaining costs declining by 20 percent with losses exceeding $100 billion. Certainly, while the price of gold has continued to serve well as a hedge and an industrial/ tech commodity, the ongoing decline of resources and successive greenfield exploration failures have not only required the industry to adopt a more multi-pronged approach but carefully analyze how the industry can adopt new technology while understanding how to streamline existing supply chains.

Putting the market to one side, other challenges that have supported Dubai’s rapid success can also be partially placed on the shoulders of the institutional giants whose excessive greed has led to a general lack of trust in the markets, most recently illustrated by JP Morgan Chase & Co, whose precious metals and treasury security scandal led to a fine of more than $920 million, while a further 11 financial institutions including Bank of America, Barclays, Credit Suisse, Goldman Sachs and Morgan Stanley were fined over $710 million by the Commodity Futures Trading Commission (CFTC) for recordkeeping and supervision failures, as well as widespread use of unapproved communication methods.

As a destination which made its name as a historic centre for trade as opposed to mining or refining, Dubai's leadership understood that in positioning itself as an attractive centre for business, its ecosystem had the potential to support the gold industry's physical and trading future, particularly by utilising location to its advantage, more importantly, its ability to reinvest with greater agility than its competitors. As such, Dubai is often widely overlooked as a city that has risen through to ranks to become one of the world’s most desirable cities for both expats and tourists; however, few people stop to think why. I believe the decisions to reinvest in infrastructure while listening to the evolving demands of the global economy remain two of its most vital, thereby creating a safe, secure destination where businesses and individuals can thrive without facing the social disorder being witnessed in many other parts of the world.

For Dubai Multi Commodities Centre (DMCC), even its foundation was underpinned by gold. Conceived to provide the physical and financial infrastructure required to create a hub for the global commodities trade, it wasn’t until Standard Bank London and Dubai Islamic Bank became the first to make gold Shari’ah-compliant by launching the first and only, ground-breaking gold Sukuk, which raised $200 million, the proceeds of which were used to finance the construction of its first commercial towers, namely Gold, Silver and Almas.

With a foundational environment created the Dubai Gold & Commodities Exchange (DGCX) debuted as one of its subsidiaries in 2005 and, with it, the region's first commodity derivatives exchange. With a formally established bourse that not only provided guaranteed settlements, reduced counter-party risk, fully transparent fee structures and access to both regional and international liquidity pools, DMCC's facilities and services, particularly its vault, which was developed in conjunction with Brink's Global Services helped to support not just the development of its futures market, which today includes Shari'ah Gold, India Gold Quanto, Daily Gold and Physical Gold Futures & Spot Gold Contracts, but that of its physical.

As a single location that fully services the entire gold value chain, from research and refining to trading and investing, Dubai has risen to become responsible for roughly 25% of global trade. However, this was only made possible, but creating and nurturing the right environment. In a similar way to how China, Indonesia and Uzbekistan remain the largest producers in Asia, with China and India being the largest consumers, it is Singapore and Hong Kong that remain the favored trading centres due to their zero rate tax for bullion and strong rule of law.

Similarly, other centres such as Luxembourg have also remained attractive and competitive by catering to the increasing demand for ESG products by offering Fair Trade bullion through its state savings bank. Akin to other Fair Trade products, BCEE guarantees that for each kilo of gold sold, in addition to the minimum fair wage guaranteed, Fair Trade receives a premium of $2,000, which is directly paid to the community of the Macdesa mine in Southern Peru, where the gold is mined.

As a lesson learned from the regulated economies of least resistance, hopefully the same philosophy will be applied to the UAE’s mint and coin industry, thereby attracting another branch of the gold industry to benefits from the country’s existing verticals.

If I were to mention a second key policy advantage, it would be DMCC's steadfast commitment to serving its stakeholders by remaining an impartial entity whose sole commitment is to its community and the greater long-term vision of Dubai and the UAE. Driven by its own decree, its duty to provide an optimal environment has led to Dubai becoming an epicenter for the global physical gold ecosystem, connecting mining supply sources from Africa and the former CIS countries with the major demand markets of Asia, Europe, and the United States, in a globally centralized time zone that facilitates trading activities around the clock.

An additional practice that has dramatically served Dubai's gold industry is that of collaboration, most recently illustrated through DGCX's agreement with FinMet, who will not only bring their wealth of experience but support the rollout of new products and in an advisory capacity to onboard banks and new members that are seeking greater diversity with their product needs.

Looking to the future, it will be interesting to see how gold translates into the digital economy, in particular blockchain and crypto – with companies including Pax (PAXG) providing an asset-backed token where one token represents one fine troy ounce of a London Good Delivery gold bar, stored in professional vault facilities, perhaps more investors will consider this as an easier and safer way to invest. Certainly, DMCC Crypto Centre will continue to monitor the market and be ready when opportunity, regulation and demand meet.

In a similar fashion to the development of Dubai's wider gold industry, the release of our latest bullion coins are still in their infancy, particularly by comparison to the Krugerrand, which has been on the market since 1967 and is by far the world's most popular 1oz coin, however, as a store of value, which reflects the extraordinary progress made and forged using only fully-compliant, 999.9 24-carat gold, I believe it is just a matter of time before history will repeat itself.