Right now, most of the world’s 1.6 billion Muslims don’t invest in gold. That will likely change before the end of the year – opening up a big new source of gold demand.
As we explained last month, gold’s status under Sharia law, which governs the lives of Muslims worldwide, is murky. Muslims can own physical gold. But there’s currently no “party line” among Islamic scholars outlining when, if ever, it’s acceptable to own gold as an investment. That’s about to change.
The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), which establishes Sharia standards for Islamic finance, and the World Gold Council (WGC), are currently drafting a “Shariah Standard on Gold.” Natalie Dempster, a managing director at the WGC, told me that they plan to release it by the fourth quarter of this year.
Why many Muslims don’t own gold as an investment
For years, Islamic investors and financial institutions have shied away from gold-related financial products. You see, Sharia (also spelled Shariah) law considers gold a “Ribawi item.” That means Muslims can’t trade it for future value, or for speculation. They can, however, use gold as currency and own it as jewelry and the like.
The real disagreement turns on whether Muslims can trade gold as a commodity.
Yusuf DeLorenzo, an AAOIFI member, told me that “The hesitation about investing in gold when credible Shariah standards are unavailable is nearly universal in the Islamic world. On the reverse side of the equation, however, gold has historically been the choice of individual Muslims desirous of preserving wealth and value.”
The new standard, which will allow banks to issue Sharia-compliant gold products, should ease much of the confusion and hesitation. According to the WGC, it will serve as an internationally recognised consensus on regular gold savings plans (gold accumulation plans), gold certificates, physically-backed gold ETFs, certain gold futures and gold mining equities.
The potential Islamic gold market
Today, the world’s 100 million Islamic savers and investors hold almost US$2 trillion in assets. Standard and Poor’s projects that figure could reach US$5 trillion by 2020; another industry estimate forecasts that the number will be US$6.5 trillion by 2020. This represents a potentially huge new demand for gold and gold-based financial products.
A recent report by Ernst and Young stated that 93 percent of Islamic financial assets are held in nine core markets – Bahrain, Qatar, Indonesia, Saudi Arabia, Malaysia, United Arab Emirates, Turkey, Kuwait and Pakistan. Since there are virtually no Sharia-compliant gold products right now, money managers in these core markets are generally limited to investing in Sharia-compliant assets in equities, real estate, and Islamic bonds.
Reference : Business Insider
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