Gulf State Central Banks to Increase Gold Reserves

Gulf News
Gulf central banks look to gold as uncertainty rises
By Cleofe Maceda, Staff Reporter
October 07, 2008, 23:26

Dubai: Central banks in the Gulf and elsewhere in the world will likely turn to gold as the global banking crisis boosts the metal's appeal as a buffer against dire economic conditions, industry sources said on Tuesday.

With bank shares across the world plunging and the US dollar still unstable, central banks have no better option but to diversify their reserves into gold, considered the only alternative to the US dollar and euro.

Analysts said demand from banks will likely affect gold prices, and retail consumers will resort to investing in bullion as well, particularly in exchange traded funds (ETFs), coins and small bars.

"Gold will definitely see a revival as a reserve asset for central banks. The main purpose for the central banks when investing is not to generate the highest possible returns, but to provide a safe and sound financial basis for the currency and the economy built on it," Rolf Schneebeli, former head of the World Gold Council, told Gulf News.

Schneebeli said suitable central bank assets must be universally recognised and must provide a liquid market that is deep enough to absorb major transactions. However, he noted, there are not many currencies that can be used as possible assets.

Earlier this year, the US dollar plummeted against the euro. Although it has started to strengthen recently, doubts remain over its outlook.

"The only alternative to the US dollar is the euro. The pound sterling is probably not strong enough anymore. The yen and the Swiss franc, both strong currencies, do not have enough depth ... Hence, gold is really the only alternative to the dollar and euro," Schneebeli added.

Another advantage of investing in gold, Schneebeli said, is that the precious metal is "nobody's liability."

"This means one is not at the mercy of other governments. After all, governments might use the financial system to exercise pressure on other governments. In the case of gold, this is quite difficult," he said.

K.P. Baiju, managing dir-ector and chief executive officer of Buz Consulting, said gold demand from banks "will impact the prices and will help sustain the current levels for the time being".

Baiju noted that demand from consumers will continue to increase as well, because "gold is considered a good means of small-time savings."

"Gold prices are currently ranging around $825 to $850 an ounce, which was last year's fourth quarter level and the consumers know that this is a good time to buy," Baiju told Gulf News.

Among UAE consumers, Schneebeli sees an increase in demand for ETFs, coins and gold stocks.