It is across the sea from Tolbi, and the Silk Road connects the two. The town was founded by the merchant Master Hammet. A large settlement, with the largest building being Hammet Palace. The townspeople attribute its prosperity to Master Hammet's business skills, Lady Layana's love and devotion to the town and the aqueducts in Kalay Tunnel. Ivan lived in this town for most of his life prior to joining Isaac on his quest. A Colosso tour group leaves from Kalay in Golden Sun, which Isaac and co. join for the journey across the Karagol Sea.
Beneath Kalay is the Kalay Tunnel, which contains the Mars Djinni, Scorch. If the player frees Hammet from his detention in Lunpa, they may return here to gain access to the treasure room and the mountainside exit to the tunnels.
Spoiler warning:The following section(s) contain plot and/or ending details that some people may not wish to learn before reaching this point in the game on their own. If this applies to you, take caution while reading this section (if you choose to read it at all).
Some time before the events of Golden Sun, Master Hammet, then a fledgling businessman, travelled across Weyard in search of a profitable source of trade. Eventually, he made a long journey to the distant land of Atteka (which was, at that stage, still connected by land to Gondowan, a trip that exhausted him so badly that it nearly cost him his life. He was saved however by a tribe of Jupiter Adepts, presumably residing in or around Contigo. These Adepts gave him some gold doubloons, the Shaman's Rod, the infant Ivan and a piece of advice, to trade silk produced in Xian with the citizens of Tolbi. In exchange, he was tasked with helping Ivan fulfil his future role as one of the party members who re-ignite the four Elemental Lighthouses.
Fearful he would run out of time (as he was given the ambiguous timeline of three years after a great storm that struck only Vale, which occurs in the game's prologue), Hammet traversed the land in search of this item, taking Ivan with him so that he could pass it on as soon as he found it. He never locates the item, and is instead captured by the band of thieves in Lunpa, leaving Ivan behind to re-acquire the Shaman's Rod that was stolen from him by a separate band of thieves in Vault, which unknowingly made Ivan, Isaac and Garet meet, thus putting Ivan on the path toward fulfilling his predestined role. If Hammet is rescued from his captors in Lunpa, he will explain that he did manage to find out that the item the party needs is located in Hesperia. This "something" is later revealed to be the Hover Jade, which is exchanged for the Shaman's Rod after completing the challenge of Trial Road although it is not Ivan, but rather Sheba who acquires the Jade. After the ignition of Jupiter Lighthouse, both parties do combine and hence Ivan is part of the group that fires the final beacon, thus fulfilling the prophecy.
Acting on the advice of the Jupiter Adepts that saved him, Hammet sets up the town of Kalay, between Xian and Tolbi, to exploit Silk Road's lucrative trading potential. This turns out to be a huge success, and Kalay grows to become one of the largest cities in Weyard, and Hammet receives the reputation (as Garet put it) of being the "greatest merchant ever known".
Spoilers end here. Those who did not want the plot ruined for them may now continue reading as normal.
Kalay has a distinct Arabian touch to it, seen in the architecture and soldiers. Given its location along the Silk Road, with Xian being equivalent to China and Tolbi to Rome, Kalay is probably either Constantinople (modern day Istanbul) or Samarkand, with the former being the most likely given Kalay's eastern location on the Karagol Sea and Constantinople's eastern location on the Mediterranean Sea.