I spent a few days in Dubai last week conducting field research speaking to jewellers and bullion dealers as well attending the Dubai Precious Metals Conference. Compared to my home town of Mumbai it was relatively cool, but it was just as frenetic. Over the course of the 3 days I met with 15 people representing different parts of the gold value chain.
The main message is jewellery demand is still suffering because of the recent change in tax. As a reminder, the 1st January 2018 marked a significant change for consumers in the UAE: for the first time they would have to pay VAT. The 5% consumption tax was well flagged by the government. And the response in gold jewellery demand was entirely unsurprising: it perked up in Q4 2017 ahead of the tax change, before slumping once it came into effect. Demand for gold jewellery was just 36 in 2018 – 25% down on the previous year.
The decline was wasn’t purely VAT-driven. Contacts I met highlighted how the struggling economy has led to job cuts, particularly among industries dominated by expats, which in turn, has put pressure on the real estate sector. Gold jewellery demand has been a casualty of the negative wealth effect.
- VAT refund for tourists brings some shine to jewellery demand. In November, the UAE introduced a refund scheme for tourists, allowing them to reclaim 85% of VAT on purchases of at least AED 250 (roughly US$70). Tourist spending is a chunky part of the gold jewellery market – at least 50% – so the refund scheme is likely to have supported demand in Q1 (especially during the Dubai Shopping Festival).