UAE Central Bank puts faith in gold

During the former governor's administration of the UAE Central Bank, its reserves in US dollars, estimated at 98 per cent of the total, were put in one basket. This was only 2 per cent of currency-supported reserves, and there was no gold reserve unlike at other central banks like the US Federal Reserve, where gold constitutes a large proportion.

This is considering the yellow metal's status as a safe haven in times of global economic crisis and growing geopolitical risks, especially in these days. At that time, there was no explanation for the UAE Central Bank's approach and one held one's breath each time the dollar experienced a crisis or collapse, for fear of losing an important portion of the value of these reserves or a substantial decline in their value. This would along with inflation consume a portion of the reserves' value.

However, the new Central Bank's administration recently took a wise decision, introducing gold into its assets. This helps remove the state of anxiety associated with fluctuations in the dollar while reducing risks and maintaining reserves, which are of high importance for economic performance, specifically of the banking system.

Bear in mind gold constitutes 75 per cent of US Federal Reserve. The US central bank has created a basket of diversified reserves. Gold also constitutes 72 per cent of reserves of both Germany and France and 13.5 per cent in Russia. According to figures by the UAE Central Bank, its foreign currency reserves reached Dh278 billion in May, the same month in which the bank decided to include gold to its defensive assets for the first time by Dh351 million, representing 0.13 per cent. This is a good start to increase the share of the yellow metal until it reaches no less than 30 per cent of the total reserves.

Indeed, there is no better time than now to implement this forward- thinking approach. First, gold price has fallen from an all-time high of just under $2,000 (Dh7,346) an ounce to $1,100 earlier this month, before rising to $1,1166 due to the Chinese crisis, the dollar value and oil prices.

Second, the decline in oil prices and the economic boycott of some countries may force these countries to sell a portion of their share of gold, which may limit its rise significantly in the near future. This will allow the Central Bank to increase its gold assets gradually by buying the yellow metal at varying prices to achieve a good rate for its overall future reserves.

Based on the experiences of many countries, there is a need to restructure the reserves of the Central Bank - the dollar should be 50 per cent, 30 per cent the weightage for gold and 20 per cent for other major currencies, Sterling's price is quite suitable, as is the case of the yen or the euro, thanks to the low price due to the crisis in Greece.

The Central Bank has a historic opportunity to channelise its assets to become more flexible and less risky, as well as achieve significant gains by selling half of its dollar reserves to buy gold and other currencies at low prices.

Certainly, this needs a central and flexible resolution to be implemented in a manner of high professionalism, by adopting an accurate follow up of gold prices and currencies and their fluctuations in global markets. Such fluctuations are expected to increase rapidly as a result of the repercussions of various economic crises and fluctuations in commodity prices, particularly oil. This is in addition to the economic slowdown in Asia, particularly China and Japan, the gloomy picture of Greece's crisis and the ambiguity of the US economic growth.

These factors can be harnessed to make considerable economic and financial gains against the expected losses resulting from the collapse of oil prices, which may reduce the pressure from these losses, thereby assigning the Central Bank's new approach with more importance and wisdom.