More on How a Change in Islam’s Shariah Law Could Affect Gold Prices
The world gold market could soon have 1.6 billion new potential investors.
Currently, many Muslims aren't permitted to invest in gold. But soon -- possibly before the end of 2016 -- gold as an investment may become an option for the world's sizable Muslim population.
(Our latest special report includes more reasons why you should own gold, in addition to what's happening in Islamic finance.)
Last month, we explained how there is confusion in the Islamic world about gold investments.
Shariah law governs the lives of Muslims all over the world. Under Shariah law, Muslims are allowed to own physical gold (such as jewelry). But it is not clear whether or not gold is acceptable as an investment. That's about to change, though.
The "Shariah Standard on Gold" is now being drafted to clear up confusion in the Muslim world on gold investments. It is being written by the World Gold Council (WGC) and the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), which establishes Shariah standards for Islamic finance. They plan to release it by the fourth quarter of this year, according to Natalie Dempster, a managing director at the WGC.
This new standard could allow Islamic investors to participate in gold's ongoing rally. The price of gold is already up 26% this year (see chart below). After the U.K. voted to leave the EU on June 24, the price of gold jumped 5%. On June 25, holdings of gold-backed ETFs skyrocketed $4.3 billion. According to Bloomberg, that's the largest one-day increase in four years.
Why Don't Muslims Own Gold as an Investment?
Under Shariah law, gold is a "Ribawi item." That means it must be traded immediately, ruling out any trade for future value or speculation. For that reason, Islamic financial institutions and investors have avoided any gold-related financial products for years.
Gold can be used as a currency or for personal use, such as jewelry. However, the real dispute comes down to whether gold can be traded as a commodity.
"The hesitation about investing in gold when credible Shariah standards are unavailable is nearly universal in the Islamic world," Yusuf DeLorenzo (an AAOIFI member) told me recently. He continued, "On the reverse side of the equation, however, gold has historically been the choice of individual Muslims desirous of preserving wealth and value."
Much of the confusion and disagreement should be solved by the new standard. For one, it will allow banks to issue Shariah-compliant gold products. It will provide international consensus on a number of different gold products, including gold certificates, certain gold futures, gold mining equities, physically backed gold ETFs, and gold savings plans (or gold accumulation plans).
The Islamic Gold Market Has Huge Potential
The Islamic financial world currently has total assets of nearly $2 trillion spread across 100 million Islamic savers and investors. Standard and Poor's estimates Islamic investment could reach $5 trillion by 2020. Other estimates put that figure closer to $6.5 trillion by 2020. The potential demand for new gold and gold-based investments is enormous.
DeLorenzo thinks the new gold-compliant products are a "huge opportunity" for investors, "whether as collateral in infrastructure projects or in the form of any number of innovative gold-based investment products."
According to a recent report by consultants Ernst & Young, 93% of Islamic financial assets are held in nine countries: Bahrain, Qatar, Indonesia, Saudi Arabia, Malaysia, United Arab Emirates, Turkey, Kuwait and Pakistan. Money managers in these nine core markets must invest in Shariah-compliant equities, real estate and Islamic bonds in part because of the lack of Shariah-compliant gold products currently on the market.
He adds that there are unique opportunities in countries such as Malaysia and Pakistan -- countries that experience large currency fluctuations and have large Muslim populations. Gold may be more stable than the local currencies since it is recognized as a store of value and a global currency.
In addition, DeLorenzo sees more Muslims looking for greater financial sophistication in Shariah-compliant gold options, as many Muslim countries are developing a larger (and growing) middle class. Shariah-compliant gold ETFs, which would be fully backed by gold, could easily become actively traded in the near future.
Ultimately, Islamic investors want to embrace gold for the same reasons that other investors do. There is stock market volatility, global economic concerns and a lack of low-risk alternatives in a world with zero (or negative) interest rates. Gold also allows for diversification and provides a form of insurance.
The new standards may not lead to a sudden rush of Islamic investors buying gold. But it will be a source of long-term support for gold prices.
As gold prices continue to soar, this is yet another reasons to be bullish on the gold market. One fifth of the world's population may soon be open to the world of gold investments.
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Read our special report about why you should own gold too -- along with three great ways to do it.
Kim Iskyan is the founder of Truewealth Publishing, an independent investment research company based in Singapore. Click here to sign up to receive the Truewealth Asian Investment Daily in your inbox every day, for free.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.