A Change in This Law Could Unleash Huge Demand for Gold - Vivek Kaul's Diary
Free Reports

A Change in This Law Could Unleash Huge Demand for Gold

Oct 28, 2016

41

A wave of new demand for gold could come from an unexpected source: A long-anticipated clarification of Sharia law that would permit the world's 1.6 billion Muslims to invest in gold.

Sharia law, which guides the personal and financial lives of many of the world's Muslims, has its origin in the Koran. Over the centuries, Sharia law has evolved under the guidance of Islamic scholars, in part to take into account evolving financial instruments.

Under Sharia law, paying or earning interest is viewed as exploitive and is prohibited. Investing in stocks is permitted, as long as the underlying business is not involved in activities viewed by Islam as unethical (such as selling alcohol).

Owning gold investments is a controversial issue, with different interpretations of Sharia law. To clarify the issue, the World Gold Council (WGC) and the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), which establishes Sharia standards for Islamic finance, are drafting standards for investing in gold to comply with Sharia law.

Public hearings on the proposal will be held later this year in Morocco and Dubai. (In mid-April, Bloomberg quoted a Sharia scholar who is working on the Sharia gold standard as saying that the draft was close to completion.)

Under Sharia law, gold is considered a "Ribawi item." A Ribawi item can be exchanged only by weight and measure, and the transfer of goods must occur immediately. That means that the item cannot be traded for some future value, or for speculation. There are six Ribawi items - gold, silver, salt, barley, wheat and dates.

As a result, Muslims under Sharia law are allowed to own gold - for example, as jewelry. But there is disagreement in Islam over whether gold can be traded as a commodity - or used only as a currency.

As a result, there is no clear policy over investing in companies that are backed by gold, or which hold gold assets (such as ETFs or other vehicles). Gold futures contracts are also avoided because they do not involve an immediate transfer of goods.

A related aspect of Sharia law is the prohibition on charging interest. Sharia prohibits the payment or acceptance of interest rates or fees for loans. To get around this, sukuk bonds - Sharia-compliant bonds that generate returns to investors without infringing Islamic law - provide a share of revenues on tangible assets.

The proposed Sharia-compliant gold standard under development by the WGC and AAOIFI states that gold investments must be physically backed by gold. Gold futures, which typically are not backed by physical gold, would not comply. However, the draft of the gold standard outlines several approved uses for gold, including investment accounts, derivative contracts, Islamic bonds, and ETFs.

These changes would result in more Sharia-compliant gold products becoming available to Muslim investors. Any additional demand from the global Muslim population, stemming from a definitive interpretation of Sharia law, could have a big impact on gold demand. According to the World Gold Council, the new Sharia gold standard could result in "hundreds of tonnes" of new demand coming from Islamic investors.

(We've written recently about gold as a hedge; how a Donald Trump presidency could spur demand for gold; and how China is fueling demand for gold.)

In addition to a significant short-term impact on gold demand - stemming from new demand for gold from Muslim investors - these changes could result in an increase in baseline demand levels. Total worldwide gold demand in the first quarter of 2016 amounted about 1290 tonnes. That was an increase of about 180 tonnes, or 16 percent from the fourth quarter of 2015. Not coincidentally, the price of gold rose 17 percent in the first quarter of this year, the biggest quarterly gain since 1986.

Soon, a sizeable segment of the world's Muslims who have historically not been able to buy gold as an investment could enter the market. If the Sharia gold standard goes into effect later this year - which appears likely - the current gold rally may be just getting started.

Please note: This article was first published in Truewealth Asian Investment Daily on June 06, 2016.

Kim Iskyan is the founder of Singapore-based Truewealth Publishing. He has spent most of the past 25 years exploring and analyzing global markets. He has been a stock analyst and research director for a big emerging market investment bank, managed a hedge fund, and sold mutual funds to private bankers. He has advised Fortune 50 companies on political risk and helped build stock exchanges from scratch in countries that few people could find on a map. He has lived and worked in ten countries, from Spain to Russia to Sri Lanka to the United States.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Recent Articles

Mr Trump Has Been Broken August 24, 2017
Kelly, Mattis, McMaster, Cohn, and Mnuchin are in charge. But these Pentagon bureaucrats and Wall Street hustlers may be worse than a loose-cannon president.
Deep State First August 23, 2017
Nowhere was the darkness deeper than in the nation's capital. There, no light shone. No flicker of awareness...observation...learning...or reflection appeared.
A Darkness Is Spreading Across the US August 22, 2017
Today, we are attacked by one preposterous thing after another, each of them even more absurd than the last.
Dear PM Modi, India is Already Land of Self-Employed, and It Ain't Working August 21, 2017
Most Indians who cannot find jobs, look at becoming self-employed.

Equitymaster requests your view! Post a comment on "A Change in This Law Could Unleash Huge Demand for Gold". Click here!