Dubai's tax advantages and lower costs for gold storage have driven increasing numbers of investors to move their holdings to the Gulf emirate, writes James Doran of The National.
The Dubai Multi Commodities Center, better known as the DMCC, has been inundated with inquiries from banks and wealthy investors seeking to move their bullion to the high-security vaults beneath the free zone, following a move by Swiss banks to raise fees for gold storage.
Executives from the DMCC and Brink's (BCO), the international security company that operates the vaults, both confirmed that there had been a marked increase in gold storage and inquiries from new customers in recent months.
It is understood that UBS (UBS) and Credit Suisse (CS), the Swiss banks that lead the gold storage market in their home country, are in the process of raising vault fees because of increased costs imposed by the Basel III banking regulations. The regulations came into effect on January 1, and will be phased in until 2019.
Gold that is unallocated, or held on a bank's balance sheet as an asset, has traditionally held a book value of 50% of its market value. Under Basel III regulations, however, such unallocated gold becomes a so-called Tier One asset, to be valued at 100%. It therefore costs twice as much to keep unallocated gold on a bank's balance sheet under Basel III.
"In Switzerland, a lot of the gold that is held is actually unallocated gold. That is, it actually forms part of the balance sheet of that bank," said Gautam Sashittal, the chief operating officer of DMCC.
"And what has happened over there is that in the past this unallocated gold was cheap for banks to keep. Gold could be lent out to gold producers so that they could hedge their future production. That was a big market for banks. But today, producers are not hedging."
UBS acknowledged that the new regulations would increase the cost of keeping gold on a bank's balance sheet but declined to comment further. Credit Suisse declined to comment. (So-called allocated gold belongs to a client of the bank, and does not have to be accounted for in the same way.)
What is more, Sashittal added, hedge funds and gold funds are more often long gold, meaning they are invested because they think it will rise in value, which has further depressed the market for lending the precious metal.
Because of this shift in valuations and pricing, banks and high-net-worth investors are increasingly looking to Dubai to lower their costs of gold storage. "There is a lot more transit gold coming into to the DMCC vaults recently," said Sashittal.
Michel Constain, the general manager for Brink's in Dubai that operates the DMCC vaults, agreed. "We witnessed solid growth throughout the region during 2012 from both new and existing customers," he said.
Typically vaulting fees will be between 0.05% to 0.1% of the value of the gold, plus value added tax (VAT), said Sashittal.
"Now, I mention VAT, as that can go as high as 25% depending on your jurisdiction. The key factor to remember here is Dubai doesn't have VAT, so automatically you have that difference." VAT is levied at 8% in Switzerland.
The gold vaults beneath the DMCC are five stories underground and one story below sea level. To access them, customers must endure a lengthy and elaborate security procedure, passing through at least four electronic security gates and descending an unknown number of floors in two elevators.
The gold is stored in a large vault alongside ingots of silver, cages filled with bags of jewels and cabinets of expensive watches.
