Islamic Gold – Vital New Dynamic In Physical Gold Market
Islamic Gold – Important New Dynamic In Gold Market
- Next month, 1.6 billion people will have a new ‘gold investment standard’
- Gold bullion investments to become accessible to 25% of planet
- Islamic finance market expected to grow to US$5 trillion by 2020
- Islamic asset classes have all under performed compared to gold
- In 10 years, gold has risen over 367% in US dollar terms and by more in currencies used in Islamic countries
- Gold bullion products additionally appealing to Islamic banks due to Basel III
- New Sharia Gold Standard will impact gold price
By the end of 2016, 1.6 billion people will have a new gold investment standard for the first time in modern history. These 1.6 billion people are the Muslims of the world who constitute nearly 25% of the 6.9 billion people on the planet. This new ‘gold standard’ is the Sharia gold standard developed as part of a three-party collaboration between AAOIFI, the World Gold Council (WGC) and Amanie Advisors which will be announced Tuesday, December 6th.
The new Sharia or Islamic gold standard, ‘will provide guidance from a Sharia perspective on the usage of gold in financial and investment transactions for Islamic financial institutions and participants,’ the WGC states on its website as we reported back in May . ‘The Standard also aims to increase transparency and harmonisation regarding the use of gold in various market practices.’
The new standard is expected to act as an internationally recognised consensus on regular gold savings plans (gold accumulation plans), allocated and segregated gold bullion storage, gold certificates, physically-backed gold ETFs, certain gold futures and gold mining equities.
Gold investment is currently allowed under Sharia law, given certain conditions are met. In the physical gold market today, there are a very few gold investment products or services, such as those offered by Goldcore, which are Sharia-compliant. We will explore what sharia-compliancy means in more detail but suffice to say that the lack of guidelines means there are few eligible gold investment products out their to meet Islamic investors’ requirements.
Islamic Finance and gold investment
Many non-Muslims will be familiar with the phrase ‘Sharia Law’. It has come under some attention in recent years throughout the world as people seek to understand Islam, how it is practised and what it means in the modern world.
Whilst Sharia Law is based on the Quran and other sacred texts, it has been adapted in order to keep up with changing times, through the guidance of Islamic scholars.
Many non-Muslims understand Sharia Law to be a set of laws that guide or govern how a Muslim lives their personal life. Few realise that it also guides the financial decisions of Muslims.
Islamic Finance, the financial services industry that operates under Shariah Law, is rapidly growing in size and therefore importance. At present the Islamic Finance market is a small part of the global financial market, at just $2 trillion. But this is expected to grow. Standard and Poor’s believe it could reach US$5 trillion by 2020 as reported by Truewealth Publishing, Business Insider and MSN.
Currently money managers within Islamic financial markets find themselves limited to Sharia-compliant assets such as equities, real estate an Islamic bonds (sukuk). There are virtually no official sharia-compliant gold products on the market.
“As the Islamic financial services market grows in size and importance, so does the need for a greater understanding of the application of Shariah guidance on the use of gold,” stated Aram Shishmanian, CEO of the WGC. “While there is some guidance for gold coins and bars, there is virtually no guidance on gold elsewhere in the financial sector.”
Whilst there are some gold-products available within Islamic finance the market is fragmented and there is no guidance for Islamic investors. “…there is a lack of Islamic gold-based products globally,” explained Maya Marissa Malek, the managing director of Amanie Advisors, “We conducted comprehensive research of the available gold-based products conventionally, with [the] WGC instrumental in providing this information. Based on that, we tried to envisage a Shariah equivalent so that the standard will be robust enough to cover both existing and future possible gold-based products.”
Muslims and the gold market
There has been awareness that change is afoot in the gold market, by gold commentators for the last eighteen months or so. For many the passing of Sharia-compliant guidelines means a huge surge in gold demand and therefore the gold price. But can we really expect this from a diverse group of people who happen to share a religion?
Yusuf DeLorenzo, an AAOIFI member, stated “…gold has historically been the choice of individual Muslims desirous of preserving wealth and value.” The AAIOFI expands on this further, “Historically, gold has always been a fascinating and charming choice of investment for humans in all societies and cultures. 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.”
There is certainly a desire for Muslims to invest in gold according to Dr. Mohammad Daud Bakar, Chairman of Amanie Advisors, a critical partner in the new Sharia gold standard who said:
“Gold has a unique status in Islam, but the existing Islamic standards for gold are fragmented, hampering product development and market demand. The Sharia Standard on Gold … will provide clear guidance on gold to individuals and institutions.”