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Dubai aims to become price discovery center with spot gold contract

Section: Daily Dispatches

Dubai Gold and Commodities Exchange to Launch Spot Gold and Agricultural Contracts

By Babu Das Augustine
Gulf News, Dubai, United Arab Emirates
Sunday, June 15, 2014

Diversifying away form its derivatives focus, the Dubai Gold and Commodities Exchange is all set to launch a spot gold contract that will make Dubai a major price discovery center for the precious metal.

"We are working on the spot gold contract's specifications and timing the launch," said DGCX CEO Gary Anderson. We expect to launch it next two to three months. The reason for the spot gold is to create a contract that is very much a regional and Dubai-relevant asset class."

Now up to 40 percent of the gold traded in the world comes through Dubai. The city has a robust gold ecosystem that constitutes of importers, refiners, exporters, an active gold trading market and a derivatives market. One thing missing is the physical spot gold trading and benchmarking.

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The exchange expects to attract multiple users of the local gold ecosystem to participate in this contract, such as mining companies, refiners, fabricators, traders, and international banks. Primarily it will be a spot gold price discovery platform and will be fully deliverable. So the price that is seen on DGCX's screen will be the price for spot gold in Dubai for delivery.

One of the benefits of trading in spot gold on the exchange is that the trade is cleared through the clearinghouse, making it a much more efficient way of trading in gold from a collateral perspective. In this type of trade, counterparty risk is virtually eliminated as trade is routed through clearinghouse. In simple terms once a trade is executed, the clearinghouse becomes buyer to the seller and the seller to the buyer and then it does all the collections and payouts and there is no need for bilateral credit limits.

In equities, DGCX has plans to strengthen its relationship with financial index provider MSCI and create equity derivatives on UAE and Gulf Cooperation Council indices. "The equity markets in the region are developing now and it needs a derivative component. One of the issues is that there are two indexes that cover the UAE. Really we need one index that captures the whole UAE market that will give people a chance to participate in the UAE market," Anderson said.

Equity derivative are expected to attract both institutional investors and professional traders who trade equities. The key advantage of a product like the futures is that the investor can broaden the risk taking to a whole basket of shares rather than be confined to a few stocks. From an international perspective too, a futures product is more relevant as it reflects a broader view of the economy rather than volatilities in individual stocks.

The exchange has been looking for opportunities to launch futures contract on agricultural products. "It has always been there on our product radar," Anderson said. "This again is one area where we are trying to leverage on the trade aspect of Dubai. Anything between 10 to 15 per cent of world cropss come through Dubai. We have brought on board a commodities expert who will be looking at certain products. We would look to launch in Quarter 1 and Quarter 2. One of the things we have been looking at closely is black pepper. Again the idea is to leverage the trade aspect and make it regionally relevant."

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