How Iran crisis pushed gold prices to 7-year high, but Gulf-based Asian expats ‘will continue to buy’

As tensions in the Middle East increased and missiles were fired, the value of yellow metal rose sharply. (Shutterstock)
Updated 16 January 2020

How Iran crisis pushed gold prices to 7-year high, but Gulf-based Asian expats ‘will continue to buy’

  • The fundamental reason why people buy gold is they are trusting less and less in currency and more in physical gold saving
  • Higher gold demand predicted in 2020 owing to uncertainty generated by US-Iran tensions

DUBAI: In the first two weeks of the year the world teetered on the brink of war, with both the US and Iran exchanging a series of threats.

It was certainly not the most pleasant of times for the GCC region. For a few days at least, many around the world worried about the ultimate outcome of a conflict between these two countries.

However, this uncertainty did generate a certain enthusiasm among many gold investors. For as the tensions increased and missiles were fired, the value of yellow metal rose sharply.

As Iran fired a series of missiles on Jan. 8 at US bases in Iraq in response to the killing of General Qassem Soleimani, the price of gold rose to $1,608, up $91 from the Jan. 1 level, according to a 2020 World Global Council date set.

This was its highest value since Feb. 19, 2013, when prices stood at $1,693 an ounce.

To give some indication of how the recent incidents in the Middle East affected gold pricse, the day before Soleimani’s killing on Jan. 3, the yellow metal was valued at $1,530 an ounce. It jumped by $25 to reach $1,555 the following day. The day before Iran’s retaliatory missile strikes on US bases, the price of gold had stood at $1,594 an ounce.

(Touch the interactive graph)

Tawhid Abdullah, chairman of the Dubai Gold and Jewellery Group, said that any instability in gold prices arising from these political events would be short-lived. Prices might rise quickly, but they will then return to normal. His comments are not without weight: Prices from Jan. 8 to Jan. 9 fell $64 to $1544 an ounce at their lowest, according to a 2020 World Global Council date set.

If you’re still doubting the impact the Iran crisis had, then compare the prices in the same time period in 2019: The value averaged between $1281 and $1292 an ounce.

When asked about his outlook for gold in 2020 with the current tensions in the region, Abdullah said the year would witness a higher demand for gold with people from various Asian countries topping the list of the GCC’s largest buyers. Abdullah said the economic situation in the world was heading toward inflation, with interest rates down, prompting people to purchase the yellow metal.

“The fundamental reason why people buy gold is they are trusting less and less in currency and more in physical gold saving,” he said. For investors the best time to go into the gold market is now, according to Abdullah, with the continuing economic uncertainty. “Gold is not only useful in periods of higher uncertainty.

The gold price has gone up by an average of 10 percent per year since 1971 when gold began to be freely traded following the collapse of Bretton Woods. And gold’s long-term returns have been comparable to stocks and higher than bonds or commodities,” a 2019 World Global Council report said.

The Bretton Woods system was established on July 20, 1944, to control the value of money between nations. According to a book written last year entitled The Bretton Woods Agreements, “The Bretton Woods system is chiefly identified with the monetary agreement that set up the IMF to help countries maintain fixed exchange rates.”

Abdullah said the rise in gold demand would be a response to political instability but also to the increasing number of tourists in the region — particularly in Saudi Arabia and the UAE. With the UAE’s Expo 2020 set to open in October and with Saudi Arabia’s new tourist visa that was introduced in September 2019, both countries will witness a boost in the number of tourists visiting the two nations.

Known as the City of Gold, Dubai has an entire souk dedicated to selling and buying the yellow metal. Today the city has become a popular gold trade destination among the expat community and visiting tourists.

Saudi Arabia is also known for its vast gold reserves, and expats and visitors head to the Kingdom’s souks to make their purchases at what are widely seen as affordable prices.

“It seems that in 2020 we are going to see another positive year for gold with prices ranging from $1475 to $1600 an ounce,” Abdullah said.

In 2019, the average rate of gold prices ranged between $1,281 and $1,546 an ounce, according to the World Global Council 2019 data set.

Abdullah said people from across Asia were the highest consumers of gold and would remain the largest buyers in 2020, adding that it was not uncommon for people to set aside a certain amount of their monthly budget to invest in it.

A 2019 World Gold Council report said India and China account for more than 50 percent of the current global gold demand.

Indians, for example, are among the top buyers of gold in the Gulf region, as they purchase gold for different religious occasions such as Diwali, the festival celebrated by millions of Hindus, Sikhs and Jains across the world.

The UAE’s Department of Economic Development in a 2019 report listed the other top nine countries whose nationals are investing in the yellow metal as Pakistan, Britain, Saudi Arabia, Switzerland, Oman, Jordan, Belgium, Yemen and Canada.

Local Arabs, Abdullah said, are also big buyers of gold and tend to buy the metal for special occasions such as weddings, Eid, Mother’s Day and more.

Will gold remain a safe haven commodity in 2020? Abdullah said yes. “It is stronger, stronger than ever. We have seen central banks around the world which had sold some gold 10 years ago and are now buying it back.”

When asked if the UAE would localize its gold industry as Saudi Arabia did in 2017, Abdullah said the situation in the country was different from that in the Kingdom.

“Here the locals represent 11 or 12 percent of the total population,” he said. In Saudi Arabia, he said, the locals represent 70 percent of the country’s population and that makes localization in Saudi Arabia much easier. “But we hope to see 100 to 150 UAE nationals in the next two years working in our industry,” Abdullah said.

The jewellery business, according to Abdullah, has changed dramatically worldwide; occasional buying is more frequent. Gold jewellery is becoming trendier and more fashion-oriented, attracting the young generation who have abandoned gold buying for years, he said.

China Pakistan Economic Corridor is a game-changer

Updated 24 min 56 sec ago

China Pakistan Economic Corridor is a game-changer

  • Project will strengthen bond between two countries who share history of good strategic relations

The China Pakistan Economic Corridor (CPEC), presently under construction at a cost of $46 billion, aims to improve Pakistani infrastructure and deepen the economic and political ties between China and Pakistan.

CPEC is advantageous to Pakistan but also carries substantial economic and strategic benefits for China.

Its importance for China is evident from the fact that it is part of China’s 13th five-year development plan.

CPEC will boost ties between China and Pakistan, which share a history of congenial strategic relations, over a versatile canvass of mutual interest extending over six decades.

In the past 65 years, both countries have developed strong bilateral trade and economic collaboration.

China is Pakistan’s largest trading partner in imports and exports. And CPEC is going further to enhance the lucrative economic cooperation between the two countries.

If realized, the plan will be China’s biggest splurge on economic development in another country to date.

Consul Syed Hamzah Saleem Gilani

It aims over 15 years to create an economic corridor between Gwadar Port to China’s northwestern region of Xinjiang through the 2,700 km long highway from Kashgar to Gwadar, railway links for freight trains, oil and gas pipelines and an optical fiber link.

The project will create nearly 700,000 new jobs and add up to 2.5 percent to Pakistan’s annual growth rate.

CPEC has undeniable economic and strategic importance for Pakistan and China. It has been called a game-changer for Pakistan because it will link China with markets in Central Asia and South Asia. Presently China is some 13,000 km from the Arabian Gulf with a shipping time of about 45 days.

CPEC will shrink this distance to merely 2,500 km (an 80 percent reduction).

The shipping time will reduce to 10 days (a 78 percent reduction). The bulk of China’s trade is through the narrow sea channel of the Strait of Malacca.

Top security analysts say that in the event of a future war in Asia, the US Navy could block the Strait of Malacca, which would suffocate China’s trade route. CPEC, besides providing an alternate route, will reduce the shipping time from China to Europe.

The largest part of the project would provide electricity to energy-thirsty Pakistan, badly affected by hours of daily scheduled power cuts because of electricity-shortages, based mostly on building new coal-fired power plants.

The plans envisages adding 10,400 megawatts of electricity at a cost of $15.5 billion by 2018. And after 2018 a further 6,600 megawatts, at an additional cost of $18.3 billion, will be added, doubling Pakistan’s current electricity output.

The CPEC brings many benefits for China and Pakistan, but it is also challenged by security-related and political threats.

There are two major sources of threat: Indian involvement, and the separatist rebellion in Baluchistan where the port of Gwadar is situated.

Both dimensions of threat are interconnected because recent arrests of Indian spies by Pakistan reveal that the Indian government is spending a huge amount of money and resources on sabotaging the CPEC project.

Apart from espionage activities, India is also supporting the Baloch rebels. Nevertheless, Pakistan is well-equipped, with adequate security and infrastructure support to effectively deal with such challenges. Operation “Zarb-e-Azb,” which has received international recognition, has flushed out the major chunk of extremists from Pakistan’s soil.

The political side of the project for Pakistan is also not rosy.

It is always difficult to achieve political consensus on an issue. The Kalabagh dam project, for example, which is considered to be extremely important in addressing Pakistan’s water-shortage problems, has been subjected to political controversy and still awaits construction.

Similar formulas are being applied to CPEC. Drums of provincialism are being beaten loudly to make CPEC another Kalabagh dam.

However, this time sanity has prevailed in the political leadership and controversies were nipped in the bud at an early stage. Besides the efforts of political leaders, the contribution of the Army chief should not go unappreciated.

He took a special interest in this project and provided — and ensured for the future — the Pakistan Army’s full support for the mega-economic project.

CPEC has the potential to carry huge economic benefits for the people of Pakistan and the region. According to a recent estimate, CPEC will serve three billion people, nearly half of the global population. Thus a huge economic bloc is about to emerge from this region.

On completion of the CPEC, Pakistan will become a connecting bridge to three engines of growth: China, Central Asia, and South Asia.

It will create many jobs and elevate Pakistan to high growth rates, which will ensure Pakistan’s stability and serve as a deterrent to extremism and violence.

The completion of CPEC is not going to be an easy task because it has attracted international conspiracies, against which it must be protected.

The economic dividends of this project, by connecting all the economies of the region, are going to be so high that once this project is in full-operation even our neighbor India might ultimately join the club for greater economic benefits.


The author is Pakistan’s press counselor in Jeddah