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Sun 1 Mar 2009 04:00 AM

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For jewellers, gold loses its shine

Gulf jewellers are reporting lacklustre sales, as recession-spooked investors are pushing up gold prices.

Gulf jewellers are reporting lacklustre sales, as gold prices are pushed up by recession-spooked investors seeking a solid asset class.

Shane young, a joiner and cabinet maker from Melbourne, has just bought his girlfriend Rachel Clark a white gold ring in Dubai's Gold Souq. It is their first visit to Dubai.

"From what I've seen prices here are very negotiable," he says with a smile, having just brought down the price to AED700 ($190) from AED1,300 ($354). "But they're not exceptionally cheap."

Some things may never change in the Gulf's traditional souqs - haggling being one of them - but the price of gold certainly does. Gold reached $1,000 per ounce last month for the first time in almost a year as investors turned to a traditional safe haven in volatile times.

Gold has again proven its core investment qualities as a store of value, safe haven and portfolio diversifier and this has struck a chord with nervous investors.

For the region's jewellers, that has added to the pain of slowing consumer spending, especially among tourists.

Inside Dhanak Jewellers, one of the souq's 300 or so outlets, store manager Deven Jatakia says his prices have risen by up to 25 percent since the beginning of the year due to the soaring cost of gold. Coupled with the international recession battering tourists, this has led to a 50 percent drop in sales in the year to date, compared with the corresponding period last year.

"December was still good, but sales in January were down a lot," he says. "The number of tourists is unchanged, but their buying power is down."

Regional jewellery giant Damas takes a slightly more sanguine view of the market. "I think sales are down by 10 to 12 percent this year," says chief executive Tawhid Abdullah, adding that sales seem to be stabilising at the current level.

"Usually, when the price of gold goes up, it takes a while before people start buying aggressively," he continues. "But the confidence is still there. I mean there is more confidence to buy gold at $900 than there is at $800."

Abdullah does not think his company will have to close any stores this year as a result of a weaker market. "The market is not that bad. I am talking on behalf of myself, I don't know about others, but we don't see people closing down."

Damas recently opened nine new stores in The Dubai Mall, one of the world's largest shopping centres, but has shelved plans for around six store openings in the UAE, in response to reduced demand.

In Abu Dhabi, the volume of gold jewellery sales fell by 70 percent in January, according to the Abu Dhabi Gold and Jewellery Group, a trade body.

"Sales are poor, down to 70 percent in volume in January, it is the lowest sales since early 2008," chairman Tushar Patni told newswire Reuters. "The prices are high, there are no festivals or occasions and the liquidity crisis... these are the main reasons for such bad sales."

According to the World Gold Council, global demand for gold assets rose by 29 percent last year to $102bn. While equity markets around the world lost an estimated $14 trillion in value, investment demand for gold, which includes exchange traded funds (ETFs) and bars and coins, rose 64 percent. Over the year as a whole, the gold price averaged $872, up 25 percent from $695 in 2007.

Demand for gold jewellery in the Middle East fell seven percent in the fourth quarter of last year, but was largely offset by a 139 percent surge in retail investment, which excludes ETFs and similar products.

The rise in investment demand for gold as an asset class was widespread across the region, with growth of 300 percent in Saudi Arabia, 67 percent in Egypt, 38 percent in the UAE and two percent in other Gulf countries. The surge in Saudi Arabian investment offset an 11 percent fall in jewellery sales in the quarter in the Kingdom.

The western region managed a flat performance as the Hajj pilgrimage season underpinned the market, while demand in the eastern and central regions were particularly weak.

"Gold has again proven its core investment qualities as a store of value, safe haven and portfolio diversifier and this has struck a chord with nervous investors," says Aram Shishmanian, chief executive of the World Gold Council."While current market conditions have impacted consumer spending on jewellery, purchasers in many of the key gold markets understand gold's intrinsic investment value and continue to buy."

Looking ahead, he believes the precious metal will continue to play a vital role for both retail investors and institutional players.

Caroline Bain, who heads up the Economist Intelligence Unit's commodity coverage, agrees. "With all other assets having already collapsed, investors are looking for somewhere to restore value," she says. "Historically gold has moved in line with the US dollar, but at a time of relative dollar strength gold is still going higher, so that relationship clearly does not apply anymore."

Bain sees gold trading at just under $900 per ounce this year amid continued economic uncertainty.

"In the first half of this year we're going to have a raft of bad news coming out of almost every region of the world," she warns. "Equity and bond markets are going to be very volatile and weak."

Gold prices may begin to slide towards the end of the year, when all the negative data has been priced into markets, prompting them to stabilise, but not recover, she adds.

Dan Smith, a metals analyst at Standard Chartered bank, expects gold to pull back slightly to $930 per ounce in the first half of the year, only to bounce back and break through the $1,000 barrier once again later in the year. Gold will average $1,025 per ounce in the second half as the dollar weakens and the "safe haven" flows continue, he argues.

"The main risks are the fact that a lot of the usual factors are not supportive at the moment," he says. "The dollar has been strong, inflation has largely faded away and the physical [demand] is quite weak."

A case in point is India, the world's largest consumer of gold, where imports have collapsed. Gold imports amounted to just 1.9 tonnes in January, compared with 18 tonnes in the corresponding period last year. The country last year imported around than 720 tonnes of gold to meet demand for jewellery and ornaments.

Still, Smith of Standard Chartered thinks physical demand will pick up later this year as people get used to higher prices.

At Dhanak Jewellers in Dubai's gold souk, Deven Jatakia takes comfort in tales he hears from other parts of the world.

"I think we are doing better here," he says. "Sales haven't stopped completely. People are still buying."

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