The coming ‘shariah gold standard’ or shariah compliant gold could lead to a very significant source of new demand for physical gold coins and bars in the Islamic world. It is believed that this will contribute to much higher prices and gold “soaring” as some of the $2 trillion of assets held in Islamic financial institutions are allocated to the very small physical global gold market.
Fifty gram gold bars sit across a one kilo gold bar at bullion dealers Goldcore, in London, U.K., on Thursday, March 11, 2010. Gold priced in euros reached a new record on March 5, 2010 as investors, concerned that a Greek debt default may devalue the currency, purchased gold for diversification purposes. Photographer: Chris Ratcliffe/Bloomberg
“The Islamic finance entry into gold market could definitely shake the gold market as Islamic financial institutions around the world, which hold around $2 trillion in assets and are expected to double that asset base up to 2020, would certainly unleash large funds to participate in the Shariah-compliant gold trade” according to the Gulf Times:
“On the outlook for new investment opportunities, the rapidly growing Islamic finance industry has set sight on the gold market as initiatives are underway to establish a new standard to make the metal tradable under Shariah finance rules, eliminating disputes among scholars whether gold is to be treated as a currency or as a commodity.
So far, Islamic investors have been reluctant to invest in gold because to do so, they would need the metal in physical form as an underlying asset, which is rarely the case in conventional gold trade. Because of that, broadly traded gold futures do not qualify as a Shariah-compliant investment. Other conventional gold-based financial offerings in the form of derivatives are also widely viewed as unacceptable for Islamic scholars.
London-headquartered World Gold Council (WGC), together with Kuala Lumpur-based Amanie Advisors, an independent advisory firm on Shariah investments and the Accounting and Auditing Organisation for Islamic Financial Institutions in Bahrain, now have been developing a “Shariah Standard on Gold” which aims at “providing guidance from the Shariah perspective on the usage of gold in financial and investment transactions for Islamic financial institutions and participants,” as WGC head Natalie Dempster puts it.
There are still different opinions among scholars about the classification of gold either as a commodity or a currency, referring to its previous use as gold coins.
“We found that there is overwhelming demand for gold to play a greater role in Islamic finance,” Dempster says, adding that “our discussions with industry participants signal that it will act as a major catalyst for the development of a broad range of Shariah-compliant gold products such as gold accumulation plans and physically-backed gold funds.”
If the standard goes through, it could definitely shake the gold market as Islamic financial institutions around the world, which hold around $2tn in assets and are expected to double that asset base up to 2020, would certainly unleash large funds to participate in the Shariah-compliant gold trade and represent a tremendously bullish force for the metal’s price with demand coming from investment funds, wealth managers, retail banks, liquidity managers, treasurers and takaful institutions.
Furthermore, gold, as an important tool to manage financial risk and volatility, could also help Islamic finance institutions to offset credit risk and diversify their exposure to commonly used, but limited Shariah-compliant assets such as real estate, Islamic bonds or certain stocks.”
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