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London forces UAE traders to re-refine gold

posted on 19/05/2010: 3262 views

None of the refineries in the UAE are certified to supply gold to London, the largest centre for over-the-counter (OTC) gold transactions in the world, even as the country, and Dubai in particular, emerged as the largest re-export centre for the metal in the world.

It is mandatory that bullion bars made by refineries be certified by the London Bullion Market Association (LBMA) and, therefore, belong to the LBMA Good Delivery list to be allowed into London's gold markets.

Such supplies have garnered strength since the launch of exchange traded funds (ETFs).

Refiners and traders in Dubai, wanting to supply gold to London, therefore, have their gold 're-refined' in refineries located outside the UAE – mostly in South Africa – thus eroding their margins as the price they finally receive in London is dictated by the prevailing global gold prices.

"Having our gold re-refined usually costs us an extra US$1 (Dh3.67) to US$1.25 per ounce. It's certainly troublesome that none of the refineries in the UAE have a certification to supply gold to London," one of the largest traders of gold based in Dubai told Emirates Business. Gold ETFs in particular require trade to be backed by physical asset and that has seen hundreds of tonnes of gold moving into the vaults in London. Even the gold that backs Dubai Gold Securities (DGS), the ETF traded at Nasdaq Dubai, is stored in the vaults of HSBC in London.

Such are the stringent requirements of LBMA Good Delivery List that none of the gold refineries in London itself has been able to meet its specifications. The list is dominated by refineries located in Japan, Russia and Switzerland and there are other refiners based in Australia, South Africa, Taiwan, Turkey and the USA who have made it to the list.

There are 10 Japanese refineries in the LBMA Good Delivery List, whereas, the number stands at eight for Russia and five for Switzerland. Industry insiders say that though Dubai gold is widely reputed to be pure, LBMA requirements that the company supplying gold to the UK market have a net worth of £10 million (Dh52.98m) and a long process of tests hinder Dubai-based refiners.

Another factor is that Dubai refiners prefer to deal in kilo bars whereas the London bullion market prefers 12.5kg bullion bars.

"We will apply for an LBMA listing soon," a Dubai-based refiner said while declining to be named. Others said that they were not even considering it for the fact that India, the largest jewellery market in the world, does not require any certification. "We supply our gold to India instead," another refiner said. Dubai's gold trade in 2009 stood at US$29 billion, and several gold refiners, who prominently contributed to this trade, exceed the minimum tonnage requirement of an LBMA certified refinery by multiples of 20 to 25.

The LBMA Good Delivery set of rules requires an applicant refinery to have operated for at least five years and have an annual turnover of at least 10 tonnes. Besides laying down a number of technical specifications for gold, the LBMA also reserves the right to make short inspectional visits to the refineries. Several refineries based outside the UAE have lost their LBMA good delivery status because of failing to meet the required specifications. – Emirates Business 24|7


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