A new source of gold demand equal to all of China's gold purchases in 2015 could soon enter the markets. And this extra demand could move gold prices a lot higher.
Islamic investors don't own a lot of gold-related investments, even though they can own gold as currency or jewelry. This has to do with gold's status under Islam's Sharia law, which I'll explain later. Because of this, the $2 trillion held in Islamic financial institutions has very little exposure to the precious metal.
However, there will likely be a "Sharia Gold Standard" in place by the end of the year. This will clarify and streamline gold-investing rules for Islamic finance. As a result, gold could soon become a viable investment option for the Muslim world's 100 million active investors.
When the Sharia Gold Standard is adopted, there's a very good chance that asset managers in countries like Bahrain, Qatar, Indonesia, Saudi Arabia and Malaysia -- all key Islamic finance centers -- will start offering gold investment products, such as gold exchange-traded funds.
The gold market is currently undergoing a pullback in its ongoing bull market. Even if only a small portion of the $2 trillion worth of Islamic assets is allocated to gold products, though, it will support prices in the short term. And, more importantly, this huge new source of demand will provide ongoing support for gold prices.
The new gold standard is being developed by the Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) and the London-based World Gold Council (WGC). Last month, they issued a press release announcing the standard's "exposure draft." After getting the public's feedback and suggestions, the group plans to meet again this month to finalize the draft. Then the standard's implementation schedule is expected to be announced before the end of the year.
Muslim Gold Investors Could Become a Global Force
In 2015, China bought a lot of gold. Few people know how much because the government doesn't provide exact numbers. But based on the amount of gold imports that passed through Hong Kong on their way to mainland China, China bought about 1,000 tons of gold in 2015.
Based on current prices, if just 2% of the assets under management at Islamic financial institutions were allocated to gold, it would equal about 1,000 tons of extra demand. That's the equivalent of another Chinese gold-buying spree.