Sharia-compliant gold standard to attract massive Islamic investments

A new Sharia-compliant standard for gold is expected to attract massive Islamic investments over the next five years and lead to the creation of at least five new Islamic gold products next year, officials said on Monday.

The World Gold Council (WGC), the market development body that is based in London, and the Accounting and Auditing Organisation for Islamic Financial Institutions (Aaoifi), the Islamic standard setting body, which is based in Bahrain, have developed the standard, which was officially published on Monday.

The standard will help to answer questions from all stakeholders, Islamic scholars to merchants, about how to invest gold in a Sharia-compliant way in the US$2 trillion Islamic finance industry.

“If just 1 per cent of Islamic assets were to go into gold in the next five years, that would be equivalent to 500 tonnes of gold,” said Natalie Dempster, the WGC’s managing director of central banks and public policy. In the third quarter of this year, gold demand was 992.8 tonnes, according to the WGC. With the Islamic finance industry forecast to grow to $3tn in the next decade, according to Standard & Poor’s, the potential for growth is big.

Already a few international players in the gold industry are interested in launching between five and seven products next year, according to Mohd Daud Bakar, founder and chief executive chairman of Amanie Group, which helped the WGC and Aaoifi develop the standard. These products could include a Sharia-compliant exchange-traded funds (ETFs), which are listed on an exchange, tracking indexes.

SPDR Gold Trust, the world’s biggest gold ETF, is expected to be Sharia-compliant, Ms Dempster said.

ETFs are expected to be one of the more popular products as the standard is adopted by gold players. Although gold demand fell in the third quarter by 10 per cent, the only segment to register growth was ETFs.

The net addition of 145.6 tonnes in ETFS in the third quarter took the total assets under management in these products to 2,335.6 tonnes, the highest since April 2013, according to WGC. Online platforms that sell gold products will also target the Sharia-compliant market.

Islamic banks could also use gold as a high-quality liquid asset to comply with more stringent Basel III banking standards that are being phased in. High-quality liquid assets can be composed of cash or assets that can be converted into cash at little or no loss of value.

“Gold can comply with the regulations of central banks and Basel III,” said Mr Bakar. “This can open up a lot of interesting products because gold is very liquid.”

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