A common interpretation of Sharia Law could help boost gold investing in the Islamic community. However, in the absence of changes in monetary fundamentals, the price of gold is unlikely to change as a result.
Although it is commonly acceptable for Muslims to own physical gold, for example as jewellery, there is currently ambiguity about gold as an investment. Gold is considered a “Ribawi” item which means it must be traded by weight and measure and cannot be traded for its future value or speculation. The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), working with the World Gold Council has developed the “Sharia Standard on Gold”. The AAOIFI Board adopted the new standards today.
Many commentators have noted that there is more than US$2trn invested in Islamic Finance assets and a small allocation of that could be a significant boost to gold investing. A common example offered is that a 2% allocation of existing assets into gold could rival total 2015 consumer demand from China. However, we believe the price impact will be limited. Gold trades more like a currency and its price is driven more by monetary considerations such as inflation, interest rates and exchanges rates.
Not all gold products currently available are likely to be Sharia compliant. It will likely take time for sufficient market access to develop. The standard states that gold ETPs must be physically backed, with requirements of segregation and allocation. Many existing ETP structures would need to be amended to become Sharia compliant. Equally gold futures would need to be physically settled to be complaint.
Although we don’t expect Islamic investors to reallocate existing portfolios into gold in a rush, with Muslims representing 25% of the world’s population, there could be a larger investor base over time.
Nitesh Shah, Research Analyst at ETF Securities
Nitesh is a Commodities Strategist at ETF Securities. Nitesh has 13 years of experience as an economist and strategist, covering a wide range of markets and asset classes. Prior to joining ETF Securities, Nitesh was an economist covering the European structured finance markets at Moody’s Investors Service and was a member of Moody’s global macroeconomics team. Before that he was an economist at the Pension Protection Fund and an equity strategist at Decision Economics. He started his career at HSBC Investment Bank. Nitesh holds a Bachelor of Science in Economics from the London School of Economics and a Master of Arts in International Economics and Finance from Brandeis University (USA).
