The long-awaited new Shariah Gold Standard is now set to be launched before the end of 2016 and expected to become the next big catalyst to push the precious metal to new highs – some analysts say even up to $3,000 an ounce in the medium-term, more than 2.5-fold of where the price currently stands.
Islamic scholars at the Accounting and Auditing Organisation for Islamic Financial Institutions in Bahrain are reportedly in the final phase of creating an acceptable standard for Muslims to trade in gold, a regulation set to become effective next month that will allow Muslims to trade physical gold and gold-related financial instruments. The council is working with London-based World Gold Council on all technical and ethical issues.
The basic challenge to create a Shariah Gold Standard is that gold has been treated mostly as a currency in Islamic finance, limiting its use to spot transactions. Under Shariah law, gold is one of six items (ribawi items, the others being barley, dates, salt, silver and wheat), which are forbidden from being held onto with the intention of trading at a later date for an expected higher value. This means that, until now, Muslims could not trade gold for a profit, neither use gold-related investment vehicles such as gold index funds, futures and even mining stocks.
Muslims have always been allowed to own gold jewellery, though, but consumer demand for gold in the Middle East region has actually fallen in recent years.
This is highly likely to change quickly. The key of the new Shariah Gold Standard is that gold is no longer seen as a currency, but as a commodity, and any transaction would be allowed under this circumstance as long as it is backed by real gold as an asset. The standard now also delivers a consensus on gold trading in financial instruments such as exchange traded funds or futures, which are halal as long as physical gold is delivered at the end of a transaction, ending the confusion and hesitation that was always part of gold deals in Islamic finance. It provides guidance from a Shariah perspective on the usage of gold in financial and investment transactions for Islamic financial institutions and participants.
According to the World Gold Council, the new standard will also serve as an internationally recognised consensus on regular gold savings plans, gold certificates and gold mining equities.
“The Shariah Gold Standard will highly likely bring a boost to the gold market and spur a new wave of product innovation in Islamic finance,” says World Gold Council CEO Aram Shishmanian, pointing out that until now, money managers within Islamic financial markets were limited to a few Shariah-compliant assets such as equities, real estate and sukuk as there were virtually no official Shariah-compliant gold products on the market.
Thus, gold investments will now allow Islamic investors to diversify their assets more broadly, stabilising the Islamic financial market in the process.
Once the Shariah Gold Standard is introduced, many market observers expect the gold price to take off since an additional 1.6bn Muslims, dozens of central banks and hundreds of Arab ultra-high-net worth individuals will be eligible to invest in gold.
In addition, Muslim countries with weak currencies such as Malaysia, Indonesia and Pakistan, are expected to build up gold reserves to flatten exchange rate volatilities. Younger middle-class Muslims, who are looking for greater financial sophistication, might find it in Shariah-compliant gold options such as compliant gold exchange traded funds.
According to a Standard & Poor’s estimate, up to a whopping $3tn could flood into the gold market after the Shariah Gold Standard is introduced, propelling Islamic assets globally to $5tn by 2020.
