There has been a need for clarification for how gold bullion can be used for investment purposes by Muslims for a long time and this uncertainty has kept Shariah-compliant offerings at a minimum, and many investors restricted by the type of gold bullion transactions they are able to partake in, with most focused on jewellery and coin offerings. The introduction of the Shariah Gold Standard now gives as many as 1.6 billion Muslims in the world, 25 per cent of the population, far greater access to the gold market than they have had since the birth of modern finance.
The comments above and below are excerpts from an article by Jan Skoyles* (www.GoldCore.com/us) which may have been edited ([ ]) and abridged (…) to provide a faster & easier read.
The Accounting and Auditing Organisation for Islamic Financial Institutions, Amanie Advisors and the World Gold Council announced yesterday, at the World Islamic Banking Conference in Bahrain, that they have approved a set of guidelines, to be known as the Shariah Gold Standard, that will expand the variety and use of gold-based products in Islamic Finance…
…The sharia gold standard now allows …investors in the Islamic world to invest in:
- vaulted gold
- gold savings plans…
- gold certificates
- physical gold ETFs including “probably” the SPDR Gold Trust, the biggest exchange-traded gold (GLD)
- gold mining shares (within certain Shari’ah parameters)
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…The new Shariah gold standard will:
- increase diversity in the number of available Shariah gold compliant investment products,
- increase the emphasis on the role of physical gold in gold transactions and
- permit Islamic finance to have a greater say in the setting of the gold price.
To some, this may appear to be an unnecessary formality taken by the body whose guidelines are followed by Islamic finance institutions across the world. After all, physical gold is Shariah-compliant and holds a unique status for Muslims.
AAIOFI states, “From the perspective of Islamic Fiqh and the Islamic economic system, gold has its specific significance. This significance arises from the specific principles provided for gold and silver as Thaman in Shari’ah.”
According to Islamic texts, gold is a ribawi item, which means that it must be sold on weight and measure, and cannot be traded for future value or for speculation. In order for a gold instrument to be Shariah-compliant, the precious metal must be the underlying asset in related transactions. However, there has been a need for clarification for how gold bullion can be used for investment purposes by Muslims, for a long time…
If Islamic finance institutions were to allocate just 1% of assets into new gold products then we would expect to see demand climb by about 500-1000 tonnes, per annum. Given that recent demand and supply figures showed a surplus of just 172 tonnes of gold in the market, we could begin to see some tightening with the increase of Shariah-compliant gold instruments, which will have a positive impact on the price.
It is not unreasonable to expect a minimum 1% move of Islamic finance assets into gold, especially when you look at how it has performed compared to other major Islamic asset classes over the last 8 years. According to WGC data REITs, the Takaful index, the Dow Jones Islamic Equities Index and the Dow Jones Sukuk Index have all underperformed compared to gold, as have the major currencies used in the Islamic world.
Few appreciate that the launch of a Shari’ah gold or Islamic gold standard signals a changing dynamic in the gold market. Gold bullion will be additionally appealing to Islamic banks due to Basel III rules that require banks own high liquidity and quality, low counter party risk assets such as physical gold in allocated and segregated storage..
*Jan Skoyles is a research executive at GoldCore, a gold investment platform and this is a version of an article that first appeared in the Khaleej Times, the UAE’s best selling English newspaper and highest circulated English language newspaper in the Gulf.
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Once the Sharia Gold Standard is adopted, it’s very likely 100 million Islamic gold investors in key Islamic countries like Bahrain, Qatar, Indonesia, Saudi Arabia and Malaysia will start aggressively buying gold investment products and this could push gold prices higher – a lot higher.