Questions and Answers
What are the recent trends for the precious metals trading market in Dubai?
We are of the view that the next decade will see stronger growth in the Dubai gold trade than the previous decade, since many of the structures required to create Dubai as a major physical gold hub are now in place. In 2001, for example, there were no bonded insured vaults managed by a global security firm in Dubai. Now there are several (airport, DMCC, Gold Souk), which are fully managed by Brinks, G4S, or Loomis (Via Mat), and all within an hour drive from the airport.
How is market risk hedged?
Unlike other commodities, like steel per example, gold and silver are easily hedged. Physical Gold and Silver has three unique advantage in the world of commodities: 1) Price exposure is easily hedged, yielding a better risk reward profile, 2) Once refined to a certain purity (99.5 gold 999.0 silver), both metals are the only metals considered currencies by the banking system, with no risk of being stuck with inventory, and 3) Global standardization is already in place that allows for lucrative opportunities of Location Swaps during any given year, especially in gold. Metals House has a dynamic risk management system that hedges price volatility risk on a real time basis and on a no-leverage basis. Metals House will execute hedges with Bullion banks using spot and forward contracts and on several commodity exchanges using futures contracts.
What is the difference between the prices for gold and silver I see on Bloomberg or Reuters and physical precious metals?
The prices for gold and silver that you see on Bloomberg or Reuters are for non-deliverable gold, or silver loco (location) London, i.e. paper gold. Physical good delivery gold and silver have a premium above the paper London (spot) price and that premium is affected on a daily basis by actual supply and demand. Even if there is no current demand for gold there will still be a premium to the London spot price, as it cost money to refine, fabricate and ship the actual metal. On the other hand, in a case where prices are flat due to hedge fund margin selling at a time when physical demand is very strong; the premium for the physical metal will go significantly higher, regardless of the paper London price.
How often are independent audits performed?
Audits are once a year and need to be submitted to the appropriate regulatory body, the Dubai Multi Commodities Centre Authority (DMCCA), within the first quarter of the year following the year for which the audit was performed to avoid penalties. DMCC firms are only allowed to use auditing firms approved by the DMCCA.
There are many large banks and financial firms in Dubai. What prevents them from doing the same business as Metals House?
In Dubai, bullion banks such as Scotiabank, Standard bank of London, Mitsui and Deutsche bank are domiciled in the DIFC (Dubai International Financial Center)( www.difc.ae) and are licensed as financial institutions. Physical Bullion firms are domiciled in and licensed by the DMCC (Dubai Multi Commodity Center)( www.dmcc.ae) and in the Gold Souk District where they are licensed by the government of Dubai.
Financial companies in the DIFC can only deal with accredited institutions or individuals (minimum US$ 5Million) and cannot solicit or market themselves outside of the DIFC as per DIFC regulations. They are not even allowed to market themselves or to transact business in Dubai. Whereas companies in the DMCC and the Gold Souk District have commercial licenses and do not have such restrictions. Further, the majority of counterparties who would deal with us in the Souk or the DMCC would find it overly complex and costly to complete the due diligence processes and documentation required to open an account with these large institutions.
The segregation of the licenses between the DIFC and DMCC firms has essentially created a regulatory arbitrage opportunity that favors physical traders over financial institutions. As a result the large bullion banks need us to exist because we can deal directly with the smaller suppliers and, in turn, can deliver deal flow to the banks.
What is the nature of the buying agreements with mining companies for dore?
With regard to such Buying Agreements, we believe Metals House has a knowledge advantage relative to other Dubai firms and can provide superior consistent high quality institutional service to the placer / artisanal miners. Our terms are placer miner friendly and provide them with clear visibility on their pricing model, regardless of market conditions, allowing them to increase production when possible. In addition, Metals House provides the miners a high level of flexibility with full discretion regarding to the amount delivered and the timing of delivery. Currently, many placer miners find themselves at the mercy of unscrupulous buyers, who frequently change the terms of the deal once metal delivery time arrives. Solid capitalization and superior risk management know-how will allow Metals House to offer, what will appear to many as, generous terms within the existing industry structure.
What are the reporting requirements of the business?
Reporting requirements are numerous and transaction-specific at the operational level. For example, in order for a customer to open an account with Metals House, and before we can deal with them as a client, we need to complete Know Your Customer (KYC) documentation as per the Dubai Multi Commodities Centre Authority’s (DMCCA’s) regulations. A client paying in cash needs to fill out specific forms about the source of such cash. Every metals shipment has to be cleared through customs, and we generally outsource this compliance-heavy process to a clearing agent such as Loomis or Brinks. Requirements for each country are unique and change frequently. All transactions have to be fully traceable. Metals House will have a full-time, staffed, Compliance Department to insure all operations comply with existing regulations, and to be aware of any new regulations as they become effective.