Merchants of gold.

While investors in the West have recently had little appetite for gold, dealers in the Middle East are doing a roaring trade in the yellow metal. Dubai has recently overtaken Singapore as the world's largest gold redistribution centre. But as Frank Gardner reports from Dubai, there are some dark days ahead for the Gulf's merchants of gold.

In a backstreet office in Dubai's gold souk an Aladdin's cave of jewellery is laid out on a table. On one side sits a row of Indian wholesalers, on the other a handful of Saudi and Qatari retail buyers.

The dealing is hushed, almost conspiritorial, as the Arabs hold up 22-carat necklaces that cascade through their fingers like liquid fire.

From this tiny room these wholesalers turn over US$65 millions worth of gold in a year, but it's only a fraction of the enormous gold trade being conducted daily in the Gulf's commercial capital.

By the beginning of this year Dubai had overtaken Singapore as the world's largest importer and exporter of gold, buying-in a total of 660 tonnes in 1997. According to the World Gold Council, 67 per cent of Dubai's population buys gold at least once a year. Although at 30 grammes per capita, demand for gold in the United Arab Emirates is the highest in the world, the vast majority of Dubai's gold imports travel on to the Indian subcontinent.

Indians and Pakistanis make up the bulk of the UAE's multi-ethnic society, and in their home countries, gold is never out of fashion. Even the poorest roadside labourer will invest his savings in a few grammes of gold as soon as he can scrape up enough money. Which is why, when it comes to today's low prices, the Chief Executive of the World Gold Council for the Middle East and India, Rolf Schneebeli, believes people in the east see gold in a different light from those in the West.

"In Europe, or in the West," he says, "when you have the price dropping 10 dollars everybody says it's a bad investment. Here, people say `great, I can buy more gold for the same money'. I think that's the basic difference in mentality, because people here are buying gold and they don't want to make a quick buck. They buy it, and they keep it for a rainy day."

But behind the glitter of the estimated 10 tonnes of gold on display in Dubai's shop windows alone, the Emirate doesn't actually produce any gold of its own. The nearest mines are in Saudi Arabia, but to feed so huge a demand Dubai has to import its gold from Europe and South Africa. In the wake of the Asian financial crisis there have also been some large consignments arriving from Korea and Singapore as distressed Far Eastern sellers `dishoard' their life savings to survive.

So with all these cargo costs, how does Dubai maintain its competitive edge over other cities?

The Chairman of Dubai's Gold and Jewellery Group, Syrian-born Tawfique Abdullah, says the answer lies in high volumes and low mark-ups. "Dubai's policy in the jewellery and gold trade," he says, is on volume turnover. The mark-up in retail here is roughly about three to four per cent. A retailer in Europe, the States, or any other place, has to have a margin of 60, 70 or 80 per cent to survive, because he doesn't have this volume of business.

Not surprisingly, the competition between Dubai's dealers is intense. In a half square kilometre in the souk there are 300 gold shops offering the lowest retail prices in the world. But despite their brisk trade there is a deep concern over the future amongst the city's bullion dealers. In October 1997 India's Ministry of Commerce passed a law allowing its banks to import gold on `Open General Licence' (OGL).

Effectively, it opened up the country to direct gold imports from Europe after decades of relying on Dubai as a staging point. One of Dubai's leading bullion dealers, Hajji Abdul Razzak Yacoub of ARY Trading, says the move has cost Dubai a drop of 40 to 50 per cent in bullion trade in the first quarter of 1998 compared to last year.

Although he still believes Dubai's gold trade will survive due to its long-established reputation and speed in turning around orders, there are others who maintain that the future lies in diversification.

For some this means finding new export markets like Iran and Egypt. Others, like the Managing Director of Dubai's only sizeable refinery, Emirates Gold, believe that manufacturing is the key to Dubai retaining its title as the world's largest importer and exporter of gold.

"After India legalised the gold import," says Mohammed Shakarchi, "there is a big danger that we lose our number one position, due to the Europeans who are starting to ship gold directly to India instead of going via Dubai. The only way we can really do something about it is by enlarging the capacity of refining in Dubai."

But that would require a capital investment of hundreds of millions of dollars by Dubai's bullion traders, something they are loathe to do. Instead, even the most optimistic of traders believes that 1998 will be a painful year for some of Dubai's merchants of gold.