Gold market: Is the UAE positioning itself to dethrone Switzerland?

Switzerland is the most dominant player in the global gold market and benefits from its deep history of banking, financial services, and a well-established and discreet regulatory system.

This has attracted significant gold refining and trading businesses given gold’s safe asset reputation and liquidity.

In 2022, the European country was the largest exporter and importer of the yellow metal by a significant margin, accounting for nearly a quarter of gold exports at over $100 bn and $99 bn in imports.

However, a challenger is now arising in the global trade for gold.

A report by Swissinfo.ch notes that the UAE, and Dubai, in particular, is catching up fast.

The city is located at the ‘crossroads of the West and an increasingly affluent East’, boasts world-class infrastructure, and has encouraged global businesses and financial innovation for over a decade.

Crucially, the Dubai Multi Commodities Centre (DMCC) which is a free-trade zone, and hosts the offices of major refineries such as SAM Precious Metals and Al-Etihad has been central to the UAE’s ascent in the global gold market.

With its persistence, the UAE has crafted itself into a major gold hub, with exports of $35bn (currently, in fourth place) and imports of $59.5 bn (currently, in third place).

A gold expert Marcena Hunter noted,

…you can argue that Dubai is already bigger than Switzerland, especially in relation to [gold imports from] artisanal and small-scale mining.

Origin and ethical issues?

While much of the gold that is transacted in Dubai comes from sub-Saharan Africa, Latin America, and South Asia, Swiss operations rely largely on procurement from industrial mines.

Unfortunately, the report suggests that the UAE’s transactions run the risk of being sourced from ‘illegal, criminal, conflict zones’ even as momentum behind mega-trends such as sourcing responsibly and ethical stewardship is on the up.

However, while Swiss banks and refiners ‘trumpet their adherence to strict regulations’, gold is also the UAE’s largest export to Switzerland, amounting to over $9 billion in 2022.

As a result, the so-called ‘problematic gold’ may be being bought by Switzerland’s banks as well.

In 2022, given the uncertain origin and nature of some of the trades in Dubai, the Financial Action Task Force (FATF) placed the UAE on its grey list which would require undergoing heightened monitoring to identify potential gaps in countering money laundering and terror financing.

Overlapping interests

The threat to Switzerland’s dominance may appear more on the refining side, with the UAE launching its own Good Delivery Standard in 2021, which includes annual audits on gold players, and a tightened framework for anti-money laundering enforcement and responsible procurement, in a bid to ensure world-class trade and settlement services.

In numerical terms, the UAE boasts twice as many refineries as Switzerland even though they are much smaller and individually less significant in the global market.

In addition, the report notes that in response to the FATF actions, the UAE has been taking steps to increase sustainability and transparency in its processes; while making progress on objectives to remove itself from the FATF’s monitoring systems.

Lars Johansson, an independent advisor at Secure Supply Chains, a Switzerland-based consultancy said,

In two years, this place will be as clean as Singapore. This is bad news for Switzerland.

Crucially, the UAE has also signed an agreement with India, one of the largest gold consumers in the world, which should enable a consistent flow of business.

Having said that, Switzerland remains far and away the preferred destination for global investors, especially for its vaulting, valuation, and investment services.

Looking ahead

As mentioned, Johansson has a lot of confidence in the steps being taken in the UAE.

However, one of the key advantages that the Swiss refineries wield over its rivals in the Middle East is that they are accredited by the global hub for refined gold – the London Bullion Market Association (LBMA), while no UAE refinery has yet obtained the license to supply gold to London.

Following the FATF’s action, strengthened regulations are coming into the UAE landscape, and markets will be closely watching the effectiveness of these mechanisms.

This will be especially important to attract trading parties that place a premium on gold which is certified as ethically sourced.

However, there is a large market base that does not particularly distinguish between ethical and ‘problematic’ gold, and which is likely to ensure high demand for the UAE’s services in the future, even if it is unfavourably compared to Switzerland on these grounds.

The global marketplace may have to eventually decide whether the UAE’s tightening but relatively relaxed or potentially difficult-to-regulate frameworks are a serious drawback compared to Switzerland’s regulations which are being continuously refined.

In the coming years, gold players may also take into consideration the difference in cost-effectiveness of these markets.

Given the high global demand for the yellow metal, for both its liquidity and as a safe haven, the evolving dynamics between Switzerland and the UAE will be interesting to follow, especially amid elevated inflation and intensifying geopolitical fragmentation.