UAE Cen­tral Bank puts faith in gold

The Pak Banker - - OPINION - Mo­ham­mad Al Asoomi

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.

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