Gold set to surge on Sharia standard

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  The Gold Souq in Dubai. According to Islam, gold is a ribawi item – one regarded as so important to daily life that they cannot be hoarded. Reem Mohammed / The National

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  Gold bars at the Kaloti Jewellery factory in Sharjah. To be Sharia compliant, ribawi items such as gold must be sold on weight and measure, and cannot be traded for future value or for speculation. Duncan Chard / Bloomberg

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  Strings of melted gold from a 350 kg gold bar drip into water during the smelting process at the Emirates Gold company in Dubai. Kamran Jebreili / AP Photo

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  Gold bars at the Emirates Gold refinery in Dubai. Pawel Dwulit / The National

CAPE TOWN // The introduction of a Sharia standard for gold will not only be good for investors but also for gold producing countries and even individual mining operations.

Last month the Sharia Gold Standard was approved as a collaboration between the Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), the Islamic standard-setting body, and The World Gold Council (WGC) in London.

“We launched the standard to enable greater access to gold for the Islamic investment community,” says Natalie Dempster, the managing director, central banks and public policy at the WGC. Currently, the WGC is talking to Islamic financiers and product developers as well as scholars over how to put the standard into practice.

Much as it is in the rest of the world, gold has long played a role in Muslim society as a store of wealth and as a means to facilitate trade. However, its use comes with a caveat rooted in Islamic texts, according to AAOIFI.

It is a ribawi item, which puts it in a special category of six items regarded as so important to daily life that they cannot be hoarded (the others being silver, dates, wheat, salt and barley).

To be Sharia compliant, ribawi items must be sold on weight and measure, and cannot be traded for future value or for speculation. This kept these items in circulation so that ordinary folk could go about their daily life without undue hardship caused by artificial shortages.

This has limited the growing Sharia investment community from taking advantage of gold products such as exchange traded funds, bullion bars and even mining shares. Now, this will change.

“Muslim consumers and investors can now benefit from exposure to gold, including its portfolio diversification properties, its status as a safe haven asset, and its role as a long term preserver of wealth,” Ms Dempster says.

Larger investors such as banks and wealth funds could also turn to gold to meet Basel III requirements. Under this global agreement, banks are supposed hold “high-quality liquid assets “as a buffer for times of financial stress. These assets should be available to sell at short notice, which is why most banks prefer bonds. However, bonds often do not meet Sharia requirements, so here, Ms Dempster says, gold can now be used instead.

All this extra room to invest will also affect gold supply and demand.

“The new Sharia gold standard is very important as it allows Islamic investors to access and gain exposure to physical gold in a safer and more efficient manner,” says Mark O’Byrne, the executive director at the bullion trader GoldCore in London.

“It will increase the diversity of available Sharia gold-compliant investment products and spark greater emphasis on the role of physical gold coins and bars.”

GoldCore research shows that if just 1 per cent of Islamic finance goes into gold, demand could increase by up to an enormous 1,000 tonnes a year. Even if demand comes in at half that it means the gold market will undergo a considerable shake-up.

Annual worldwide production is now around 3,000 tonnes, almost all of which is taken up by investors, central banks and jewellery makers. A mere 180 tonnes or so is surplus, leaving the market fairly inelastic. Worldwide, about US$2,4 trillion in gold products is exchanged each year, GoldCore says.

The latest move will put Sharia investors at the centre of the global gold market. “Islamic finance will have a greater say in the setting of the gold price and longer term this new source of investment demand for vaulted gold bullion will almost certainly contribute to higher gold prices,” Mr O’Byrne says.

Buying patterns will probably change as well, moving away from jewellery and toward coins, bars, and Sharia gold products such as ETFs ( exchange traded funds) that meet the standard. Crucial to meeting Sharia standards is that any investment must be backed up by physical gold.

For companies that store gold such as GoldCore, the theoretical addition of a some 1.6 billion people looking for Sharia compliant gold is obviously a win. Physical gold is central to compliance – any investment must have bullion or some other form of the precious metal to back it up.

It is even possible that the centre of trading could shift further towards emerging financial hubs such as Dubai. The emirate already has a tried and trusted gold trading infrastructure as well as being home to many international banking concerns.

It is may well be that UAE-based banks will extend their services to customers to include the safe storage of physical gold.

“This very much depends on whether Dubai embraces Sharia gold and attempts to position itself as a Sharia gold trading hub,” Mr O’Byrne adds.

“Other cities and countries see the opportunity in this and places like Istanbul, Kuala Lumpur, Singapore are also aware of the opportunity in Sharia gold.”

So it seems a bright new future is emerging for the precious metal.

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