UAE central bank would buy dips in gold and euro


From AMEInfo, Dubai
Monday, July 3, 2006

The United Arab Emirates Central Bank governor this week gave his strongest hint yet that the emirates will shortly enter the gold market and also purchase euros as a diversification of the national currency reserves presently held in US dollars. With the US dollar ripe for devaluation this seems a timely initiative.

The governor of the UAE Central Bank, Sultan bin Nasser Al Suwaidi, told reporters this week that the bank was preparing to convert up to 10 per cent of its currency reserves into gold, although he said that the bank currently held very little gold in its reserves.

"I don't think it is appropriate to buy gold now -- it is too expensive. The appropriate time might come very soon. We could go up
to 10 percent," he said.

Gold analysts predict a choppy market for the yellow metal over the summer months with a rally likely in the autumn. This is the pattern that gold trading has followed over the past five years, with the second half stronger than the first, although the $725 spike in gold prices this year almost broke this pattern before the recent selloff.

So with gold trading at $613 an ounce at the time when the UAE governor spoke this week, how low will the yellow metal have to go
before the UAE decides to buy?

That is a moot point but July and August look the quietest months for the gold market, and it could be that the UAE makes its historic diversification while other market participants are on the beach in the South of France. Ten percent of the UAE's $23 billion foreign currency reserves would be a substantial injection in to the narrow gold market.

Mr. Al Suwaidi also said that the UAE was waiting for the right moment to buy euros, a move that was announced earlier this year but has yet to be executed. Again the figure of 10 percent of the UAE's foreign currency reserves is the target for diversification.

"We are waiting for (market) conditions to change," he said this week. "When there is a clear trend going up, you move into it. If it
is going down, you wait for the bottom and buy. There is no trend at this point."

On present reserve holdings, he commented: "We are in general investing in short-term debt instruments in the U.S. because we
expect U.S. interest rates to go further up."

The UAE dirham is pegged to the U.S. dollar and Mr. Al Suwaidi confirmed that any more rises in U.S. interest rates would be
matched immediately in the UAE. He expects two more interest rate rises from the Federal Reserve.

Many economists see U.S. dollar devaluation now on the agenda as the U.S. economy adjusts to accommodate its twin deficits, and that means that for the UAE holding non-dollar assets like gold and the euro will help protect the value of its foreign currency reserves.