Islamic Gold – Important New Dynamic In Gold Market
- Next month, 1.6 billion people will likely have a
new ‘gold investment standard’
- Islamic finance market expected to grow to US$5 trillion
by 2020
- Islamic asset classes have all under performed compared
to gold
- Gold has risen over 367% in US dollar terms and by more
in currencies used in Islamic countries
- Gold bullion products may be additionally appealing
to Islamic banks due to Basel III rules
- New Sharia
Gold Standard will impact gold price
By the end of 2016, 1.6 billion people will likely 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.
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.”
For the AAIOFI the opportunity to create guidelines for Sharia-compliant
gold investment products is giving Islamic investors the opportunity for
further diversification, “Shari’ah compliant investment options in gold
market (including physical as well as exchange based transactions) can
provide Islamic Financial Institutions (IFIs) and their
customers a great opportunity to diversify their investments.”
However, the AAOIFI reminds us
that there is also a call in the Quran and other holy texts that call for the
reader to exercise caution when investing in precious metals
“The original sources of Shari’ah i.e. the Holy Quran and Sunnah have
numerous cautions on the use and hoarding of gold on the moral and ethical side.
These include a few prohibitive uses, as well as, general guiding principles
against hoarding of gold and silver.”
Gold and Sharia
When people talk about Sharia or Islamic gold, they are referring to gold
or gold investment products that are Sharia compliant. However in Islam gold
is a special case. “Gold is very much Shariah compliant
in terms of using it as a commodity. But there are certain conditions from a
Shariah point of view which are enforced on gold and not on other
commodities,” Dr Mohamad Akram Laldin, the executive director of
International Shariah Research Academy for Islamic Finance, explained to IFN.
In Islamic texts gold is a Ribawi item and investors need to practice
caution when investing in it to ensure that it meets certain conditions. A
Ribawi item in Sharia law is an item that must be sold on weight and measure.
There are six Ribawi items: gold, silver, dates, wheat, salt and barely.
As a Ribawi item gold cannot be traded for future value or for
speculation.
In most cases trading gold futures contracts is haram and forbidden or
proscribed by Islamic law. It is speculation and not backed by physical gold,
the price can be volatile and you can end up paying or receiving interest on
your trading account.
This means that gold investment has been limited to its use as a currency
and jewellery, as the earning of interest is forbidden. The immediate
transfer requirement means that speculating on future values is not allowed.
This makes it tricky in the area of gold futures and other paper gold
products.
Dr Mohamad Akram Laldin, explained to IFN, “In other
commodities the counter value can be deferred. But when it comes to gold,
both counter values have to be spot. That is one of the biggest issues when
it comes to the trading of gold. Under modern transactions we will have
sophisticated platforms, and different ways and means to transact, but as
long as these conditions are satisfied we can always trade.”
This might sound as though gold investment is near impossible in the
Islamic world today. In reality it is not, although there is some confusion.
Yusuf DeLorenzo, an AAOIFI member, stated
“The hesitation about investing in gold when credible Shariah standards
are unavailable is nearly universal in the Islamic world … There
might be certain other issues, particularly when it comes to delivery,”
stated Dr Mohamad Akram. “If I am buying gold from a vendor on a platform,
can I take physical delivery of this gold? But as long as these conditions
can be satisfied, there shouldn’t be any issue. As an underlying asset, gold
is Shariah compliant and can be used.”
With gold investment platforms such as Goldcore able to offer segregated, allocated
gold bullion accounts with the option of physical delivery Muslims are
able to invest in gold bars and coins. However, there has been no consensus
on the trading of gold as a commodity, owning companies that hold gold assets
(e.g. an ETF), gold futures allowing delivery etc.
Why the need for a new gold standard?
WGC data shows that in the last eight years (when reliable data first
became available) the major Islamic asset classes (including REITs, the
Takaful index, the Dow Jones Islamic Equities Index and the Dow Jones Sukuk
Index) have all underperformed compared to gold, as have the major currencies
used in the Islamic world. Since 2000, gold has risen 367% in US dollar terms
(Gulf Cooperation Council currencies are pegged to the US dollar), 393% in
Malaysian Ringgit terms, and 762% in Indonesian rupiah terms.
Whilst Muslims are able to invest in gold there is clearly a lack of
understanding and consensus for how Sharia law can be applied to today’s vast
number of gold product offerings. Hence why the WGC and their partners,
believe a gold standard will be beneficial to both Muslims and the gold
market.
The World Gold Council stated in its October newsletter that they hoped
the new standard will ‘bring all the strategic benefits of investing in gold to
Islamic investors.’ The choice of assets that Muslims are currently able to
invest in is considered to be ‘so limited’ by the WGC that they are expecting
the benefits of a gold investment standard to be ‘even more pronounced.’
The new Sharia gold standard will set a future path in place for gold
products and those who invest in Sharia-investible assets. Once the Standard
is announced on December 6th, we are likely to see increased development of
new products due to the increased customer base and some diversification
amongst Shariah-compliant offerings which will likely offer options for
savings, hedging and diversification. So far, none of these things have been
available on a standard Sharia compliant basis.
Natalie Dempster has been quoted by Reuters stating that the new
guidelines for holding gold-backed products may be additionally appealing to
Islamic banks who are/will be required under Basel III rules to increase the
amount of High Quality Liquid Assets (HQLAs):
“Gold for its nature could fit into HQLA buffers that Islamic banks could
hold…Since the financial crisis, banks have been required to set aside
pockets of so-called high-quality liquid assets to protect them against
another systemic liquidity crisis…Basel gave national supervisors in Islamic
jurisdictions the right to define high-quality liquid assets themselves. And
I think gold will fit very well there. It is an extremely liquid market.”
New gold standard
The new Sharia Gold Standard is set to be announced on the 6th December at
the World Islamic Banking Conference. “Shariah Standard on Gold” will provide
“guidance from the Shariah perspective on the usage of gold in financial and
investment transactions for Islamic financial institutions and participants,”
according to Natalie Dempster of the World Gold Council.
It is believed that it will state that gold investments must be backed by
physical gold. In truth, whilst there have been some draft rounds of the
Standard and quite a bit of publicity, no one knows what is set to be
revealed in the ‘guidance’.
It may still exclude gold futures contracts, a draft by the WGC states
that whilst gold as a currency can be traded on a spot basis, however if it
is seen as a commodity then it could be the subject of a future sale under
the principle of salam, or deferred delivery sale.
The gold standard draft will likely approve holding gold in ETFs,
derivative contracts, investment accounts and Islamic bonds.
What the standard will not include is guidance on the sourcing of gold,
which is unsurprising in some respects as their is nothing directly about
this in the Quran. However, it does require its followers to be ethical –
something that is an important issue in the gold market these days. “It will
provide clarity on gold’s use in financial services and harmonise the
relevant rules across markets, thereby creating greater access to gold,” said
Natalie Dempster, Managing Director, Central Banks and Public Policy, WGC.
Overall the Standard is expected to achieve the following:
- Increase the amount of available liquid
Shariah-compliant instruments
- Increase the diversity of available liquid
Shariah-compliant instruments including gold bullion and some other gold
related investments
- Facilitate greater consumer choice by expanding the
range of Shariah-compliant financial solutions
- Greater role for the Islamic finance industry in global
gold price discovery
New dynamics in gold price discovery
The final point above, to achieve a ‘Greater role for the Islamic finance
industry in global gold price discovery’ is one that is playing on current
gold market participants’ minds.
There are estimated to be around 1.6 billion Muslims around the world.
Given the extent to which the gold market looks to Chinese and Indian demand
in terms of demand, supply and price changes this move will likely come
to have a very significant impact on the dynamics of the gold market.
The role of price discovery has been, up until recently, shared between
the London Gold Market and the LBMA and the COMEX. However there has been a
new dawn and the new policies from China regarding all aspects of the gold
market have put the wheels in motion. Earlier this year the Shanghai Gold
Benchmark was launched by the Shanghai Gold Exchange, seen as China’s step to
“increase its weight in the global pricing of gold,” according to the
People’s Daily.
When the benchmark was announced Marwan Shakarchi, chairman of Swiss-based
refining group MKS (a Shanghai gold Exchange member) was quoted as
saying that China is “a market of 1.2 billion people and simply cannot be
neglected.” This step was seen as the first of many toward
internationalisation of the Chinese Gold market.
The Islamic world is obviously different to the Chinese and Indian gold
markets – dispersed geographical location, different exchanges, different
nationalities, regulations and customs. However, it is worth remembering that
the majority of Muslims reside in countries where there is still a strong
view that gold is money and a strong store of value. In countries such as
Pakistan with tricky geopolitical status, or Malaysia and Indonesia with a
fluctuating currencies, one can expect to see an increase in demand for
Sharia compliant gold products. And, therefore, a change in dynamic in the
gold market.
The places to watch are Bahrain, Qatar, Indonesia, Saudi Arabia, Malaysia,
United Arab Emirates, Turkey, Kuwait, Oman and Pakistan which currently
represent 93% of Islamic financial assets within their financial
institutions.
Gold
coins of Kushnan Empire centering on Afghanistan, northern India and western
China. British Museum. Wikimedia
Whilst one of the bodies involved in setting the standard, the AAIOFI, is
based in Bahrain, we expect to see Dubai gain some serious influence with
these changes.
The Emirate plays a significant role in both the physical and paper gold
markets. Over $75 billion worth of gold, or about 40 per cent of the world’s
physical bullion exchange, was traded through Dubai in 2013, according to the
Dubai Multi Commodities Centre (DMCC). This is a city with very
strong vision over what it can achieve in the gold market.
“In 2003, Dubai traded US$ 6 billion in gold; in 2012, it was US$ 70
billion. Even taking into consideration gold’s phenomenal price rise over
this period, Dubai has doubled the tonnage traded through the
Emirate,” according to the Dubai Multi Commodities Centre (DMCC).
Currently the Dubai Gold and Commodities Exchange (majority owned by the
DMCC) already has active gold futures trading and earlier this month it
announced that it would become the first foreign exchange to list Shanghai
gold futures. It is clear that it has set itself up to compete with the likes
of Singapore as a gateway between the East and the West, and in the meantime
will play an increasing role in this increasingly globalised financial and
increasingly important physical gold market.
The launch of a Sharia Gold Standard, is also an opportunity for those in
the West, who are determined to maintain some control over price discovery.
In London, the London Metal Exchange (LME) is the central clearing hub for
Shariah compliant commodity trades. Given their recent work on updating their
role in the gold market it will come as no surprise that they are reportedly
looking at a gold futures contract that could be settled based on the
physical delivery of gold bars. This is what the Chinese have done with gold
bars in a kilo format on the Shanghai Gold Exchange (SGE). Should this
happen, the LME exchange likely already has the right relationships in place
to leverage a new Sharia gold standard.
Is the physical gold market big enough
It is important to retain the important point that the new gold standard
will stress the need for underlying physical gold, in whatever gold products
are bought. Whilst the likes of the COMEX gold market are able to grow to
multiple times the size of the underlying physical market, with little
impact on physical demand, this will no longer be case. Especially with the
likes of China enforcing similar rules.
The World Gold Council have stated that we can expect to see an additional
demand of ‘hundreds of tonnes’ once the sharia gold standard has been
approved. If just 2% of the assets currently managed by Islamic finance
institutions are invested into sharia-compliant gold products then we can
expect to see over 1,000 tonnes of additional gold demand.
Should these numbers come to fruition this will have a major impact on
supply, as well as demand. Without the existence of a formal Sharia Gold
Standard, total global gold demand was just under 1,000 metric tonnes in Q3,
whilst total global gold supply was just over 1,000 metric tonnes leaving a
surplus of 172 metric tonnes. Should Islamic Finance begin to create
significant additional demand in the gold market, then we should see
these demand and supply issues in the gold market leading to higher prices.
It is always important to remember the very small size and rarity of
physical gold in the world. Physical gold is both finite and extremely rare
and all the gold ever mined would fit into a giant gold bar the size of a
four bedroom house. It is roughly 22 metres cubed and would fit on the center
court of Wimbledon – see GoldNomics
video.
Conclusion
While we do not know the details of what will be announced on the 6th
December, we do know the most important aspects. Indeed, GoldCore have for a
number of years been working on a Sharia compliant gold bullion solution for
the institutional market and have strong partners who we are working with
today.
The changes will affect the physical gold market globally, 1.6 billion
people will be able for the first time to use gold bullion products and
platforms that offer physical delivery, allocated and
segregated gold ownership.
Silk
Road – Wikimedia
As we reported on last month, the impact of religious festivals on the
gold market is monitored all over the world. We can expect to see similar
changes and dynamics come the arrival of the Sharia Gold Standard. However,
this is an entire financial market that will coming into the physical gold
market. Unlike with religious festivals etc, we will see an increase in the
number of structured, well-marketed and regulated financial products that
have been designed to offer physical gold to sophisticated investors
including high net worth (HNW), ultra high net worth (UHNW) and indeed family
offices.
This will not only impact the physical gold market, but it will impact the
current roles in price discovery and how 1.6 billion people choose to invest
in and hold gold coins and bars.
To us, this could not have come at a more pertinent time. The West is
coming under increasing economic and political pressure as the ‘Silk Road’
nations of the Middle East and Far East, including Russia and China,
continue their rise and become more powerful. It is without surprise that the
Silk Road nations continue to assert their independence from western
dominance and monopoly – including in financial markets. And it is with even
less surprise that they are doing this through gold.
Gold Prices (LBMA AM)
17 Nov: USD 1,232.00, GBP 9,988.19 & EUR 1,148.10 per ounce
16 Nov: USD 1,225.70, GBP 9,984.36 & EUR 1,144.68 per ounce
15 Nov: USD 1,228.90, GBP 998.86 & EUR 1,138.70 per ounce
14 Nov: USD 1,222.60, GBP 997.80 & EUR 1,136.53 per ounce
11 Nov: USD 1,255.65, GBP 999.19 & EUR 1,154.45 per ounce
10 Nov: USD 1,280.90, GBP 1,034.07 & EUR 1,175.48 per ounce
09 Nov: USD 1,304.55, GBP 1,050.42 & EUR 1,176.84 per ounce
Silver Prices (LBMA)
17 Nov: USD 17.04, GBP 13.65 & EUR 15.87 per ounce
16 Nov: USD 16.95, GBP 13.64 & EUR 15.85 per ounce
15 Nov: USD 17.00, GBP 13.68 & EUR 15.80 per ounce
14 Nov: USD 17.20, GBP 13.73 & EUR 15.95 per ounce
11 Nov: USD 18.59, GBP 14.73 & EUR 17.09 per ounce
10 Nov: USD 18.75, GBP 15.11 & EUR 17.20 per ounce
09 Nov: USD 18.81, GBP 15.12 & EUR 16.96 per ounce
