The direct impact of the ongoing tension in the Middle East is beginning to be seen on the global economy and especially the gold market. Gold trade in Dubai has been badly affected due to the fierce war going on for the last seven days between America, Israel and Iran. While gold has crossed the historical level of $ 5,000 per ounce in the international market, traders in Dubai are forced to sell it at huge discounts. The reason is clear – due to the war, air flights have come to a standstill and tons of gold is stuck in the storage of Dubai. This situation has created a stir in the bullion market all over the world.
Why did gold become ‘cheaper’ in Dubai?
Dubai is considered a major center of gold refining and export across the world. Gold coming from Switzerland, Britain and many African countries reaches Asia and India through here. But due to missiles fired by Iran, the airspace of United Arab Emirates (UAE) has been partially closed.
Usually, huge consignments of gold are sent in the cargo of passenger planes. Now suppliers are not able to send their goods out due to flights being canceled or extremely limited. The situation is that traders are now reluctant to take new orders. Shipping and insurance costs are skyrocketing and there is no guarantee that the goods will arrive on time. To avoid paying huge rent for storage indefinitely without any certainty, traders are now withdrawing their gold at a huge discount of about $30 an ounce to the London benchmark price.
From sky to earth, every road is closed
After the air routes are disrupted, even land routes are no longer a safe option. Traders and logistics companies are afraid to transport this high-value sensitive cargo by road to airports in neighboring countries like Saudi Arabia or Oman. The risks and security complications associated with crossing land borders have made this option almost impossible. This is why the prices of ‘Dubai Good Delivery’ standard gold (which are anyway slightly lower than London prices) have now fallen even further due to this shipping disruption.
What will be the impact on the common Indian buyer?
India is one of the largest countries importing gold from Dubai. In such a situation, a question is bound to arise in the mind of the common Indian consumer whether this will make gold cheaper for them too or will there be a shortage of it in the market? According to Renisha Chainani, head of research at Augmont Enterprises Limited, India’s leading gold dealer, many cargo shipments coming from Dubai have been delayed or stuck. Due to this, there has been a decline in the availability of physical gold in India for some time.
However, common buyers do not need to panic at the moment. Chirag Sheth, Chief Advisor, South Asia, ‘Metals Focus’, says that the immediate demand in India is relatively low. Indian dealers have adequate inventory due to heavy imports in January. But he also clearly says that if this war and shipping crisis continues for a few more months, then definitely a big problem of supply may arise in the Indian market.
Spot gold prices jump by almost 20%
Spot gold prices have increased by about 20% so far this year. Currently it is trading around $5,172 per ounce. However, due to the strength of the dollar, there have been some ups and downs in trading this week.
Apart from finished gold, the supply of ‘dor’ (semi-refined gold bars) coming directly from the mines has also been badly affected. Samit Guha, managing director of MMTC-PAMP, India’s largest precious metals refinery, said that about 10% of their dore comes from a mine in the Middle East, the supply of which has now been completely disrupted. For new contracts coming from elsewhere, logistics costs have increased by 60% to 70% since the war began.