Ahmed Bin Sulayem, DMCC's executive chairman

Investors in the Middle East can now buy a gold exchange-traded commodity that complies with Islamic law. Writer Mike Imeson

]More proof that the ingenuity of those who invent financial products for a living knows no bounds comes in the form of the Middle East's first sharia-compliant gold exchange-traded commodity (ETC) - Dubai Gold Securities, a joint initiative from the World Gold Council and the Dubai Multi Commodities Centre.

Dubai Gold Securities (DGS) began trading on Nasdaq Dubai in spring this year. Each share in the ETC is 100% backed by physical gold held by an independent custodian, and each represents an initial interest of one-tenth of a fine troy ounce of the spot price of the allocated gold bullion.

DGS allows investors to buy gold without physically transacting in the metal, avoiding insurance and storage costs - and the fact that it is fully backed by physically allocated, uniquely identifiable gold means that it complies with Islamic law.

Price tracking

The securities are listed and traded like ordinary shares, and are designed to track the price of spot gold, less 0.4% annual management expenses and broker charges. Dubai Gold Securities are marketed by Dubai Commodity Asset Management, a subsidiary of the Dubai Multi Commodities Centre (DMCC), and are traded by HSBC as the primary market maker and by registered Nasdaq Dubai brokers.

"As the first sharia-compliant gold ETC [in the region], Dubai Gold Securities will establish a benchmark for investors looking for innovative solutions to invest in commodities within the framework of Islamic finance," says Ahmed Bin Sulayem, DMCC's executive chairman.

The average spot price of gold when DGS was listed in March was $924 an ounce. It fell to $890 in April, and by early May (the time of writing), it had recovered to $916. The average price of an ounce of gold was $872 in 2008, well up on the average of $650 in 2007.

First instance

Physically backed gold ETCs trade on stock exchanges in about 12 countries, but this is the first instance in the Middle East. It is always fascinating to see how products are structured to comply with Islamic principles, and DGS is no exception.

It complies with sharia law because each security is backed by a defined quantity of gold; a security holder has an ownership interest in the allocated gold backing each security rather than an account reflecting the price of gold; and a security holder has no obligation to pay, or right to receive, any interest payments.

A sharia supervisory board comprising five scholars from the United Arab Emirates, Bahrain, Saudi Arabia, Malaysia and the US has approved the issuance and trading of the securities, and it conducts regular physical inspections of the gold held on behalf of investors. The gold is held by the custodian, HSBC Bank USA, in its London vaults. There are plans to appoint a sub-custodian with vaults in Dubai.

Creative thinking

Jeff Singer, Nasdaq Dubai's chief executive, says the exchange had to be "a little creative in how to get the product listed, how to classify it, and how the market maker would support it" to ensure it had enough liquidity. "There are other exchanges where you can buy gold bullion, but [Dubai Gold Securities] is sharia compliant," he adds. It will appeal not just to investors in the UAE, but to Muslims around the world. DGS was listed on March 2, 2009, and 6865 of its securities were traded that month.

Dubai has played a significant role in the international gold trade for centuries. The DMCC, since it was created, has integrated the refining, manufacturing and trading of gold.

"A look at the gold sector in general suggests that there are sufficient reasons to remain bullish about Dubai's ability to ride out the storm and further enhance its position as the 'city of Gold'," says Harendra Kailath, DMCC's gold director.

"Over the past few years, DMCC has launched a range of initiatives, the most recent being Dubai Gold Securities and the Almas Tower Vault. Initiatives such as these will provide further impetus to the growth and development of the sector," adds Mr. Kailath.

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