All that glitters

It's easy to spot the fathers of the brides at the Dubai Gold Souq. They're the ones weeping inconsolably after looking at the price tags on the dowry jewellery. As if losing their little princesses wasn't bad enough.

Now it's a case of either paying twice as much for their daughters' dowries or buying a Barbie-sized bracelet instead and enduring the knowing glances from the guests at the reception.

Investors who correctly predicted that gold would emerge as a ‘safe haven' investment and hedge against inflation will have been feeling smug this past week after the increasingly precious metal broke through the US$1000-per-ounce barrier.

Not so the traders in the souq, as buyers held off in the expectation that prices will fall back soon.

Gold price movements have been historically well correlated with inflation and the price of crude and this time seems no different.

Gold has been rising steadily for the last six years but that growth has accelerated in the last 12 months amid continued dollar weakness and turmoil in global credit markets. That all started when US banks began selling mortgages to the sort of demographic upon which the TV show ‘My Name is Earl' is based.

Anyone who bought US$1000 of gold last March would have an investment worth roughly US$1500 a year later.

It is no coincidence that this latest spike should occur within a week of central bankers meeting in Bahrain to look at ways of curbing inflation - today undoubtedly the biggest economic issue facing Gulf economies.

The problem is most acute in Qatar as it grapples with inflation nearing 14% and rent increases of some 28%. The UAE is also feeling the impact of rising prices and was forced to look at introducing subsidies covering 14 food items as well as gasoline and cooking oil for its citizens.

Now Oman's Chamber of Commerce and Industry is calling for the introduction of price controls for basic food items as the government tries to control inflation running at more than 8%. Economists interviewed say price controls are not the way to go. Such controls address the consequences of the problem rather than the problem itself, they say.

For as long as Qatar, the UAE and other Gulf states retain their currency pegs to the dollar, they are limited in what they can do with their monetary policy, which is effectively governed by what the Fed decides to do.

Central bankers will be looking for answers in Bahrain and Gulf consumers will be hoping they come up with them soon.

Otherwise it won't just be the fathers of the brides down at the souq doing the crying.

Sean Cronin is the editor of Arabian Business English.

RELATED LINKS: Gold crush, Paying the price

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