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Gold Approved To Enter The $1.8 Trillion Islamic Finance Market

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Gold Approved To Enter The $1.8 Trillion Islamic Finance Market
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Gold might be getting an extra sheen now.

The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), along with the World Gold Council, announced Monday issuance of Shari'ah Standard No. 57 on Gold and its Trading Controls, paving the way for using gold as an investment in the $1.88 trillion Islamic finance business.

Gold will now join a group of asset classes, including equities, real estate, Islamic bonds and takaful or insurance, as investment avenues for Islamic finance. The fructification comes after 18 months of negotiations, when several Islamic scholars were consulted whether or not gold can be allowed as an investment avenue.

Some of the contentions that delayed adoption included it being a ribawi item, meaning it has to be spot traded or transferred immediately.

Standards

The Standard, as per the release, deals with the Shariah rulings for gold, the Shari'ah parameters for gold transactions and the rulings for gold-based financial products in institutions. The new Standards greenlights investment in gold, provided all Shari'ah rulings are satisfied, including those relating to taking possession of gold and proper calculation of Zakah.

Now the Islamic banks and other financial institutions can facilitate the creation of a broader range of saving, hedging and diversification products. The release said discussions of the Standard No. 57 were finalized by at the AAOIFI Shari'ah board meeting held between November 17 and 19. The standards were apparently adopted after a consultation period, including public hearing sessions, involving all key stakeholders.

Aram Shishmanian, CEO of the World Gold Council, commented, "This is a ground breaking initiative for Islamic investors and for the gold industry at large. We are delighted that there is now definitive Shari'ah guidance on the permissibility of investing in gold. Gold is a proven wealth preservation asset that Islamic investors can now deploy to protect their wealth and diversify market risks."

A Bloomberg report quoting Mohd Daud Bakar, a Shari'ah scholar, the SPDR Gold Trust (ETF) (NYSE: GLD) will probably qualify and the standard may open new demand for central banks. The GLD is the biggest ETF backed by bullion. However, the physical backing requirement for COMEX gold futures may disqualify it.

The Bloomberg report also said physical gold bars and coins may qualify. The Shari'ah rule required that a bank selling gold gas to offer same-day settlement or has to show it can provide the exact gold being sold within a day.

Vast Opportunity Foreseen

About 1.6 billion Muslims around the world may get greater access to the gold market, according to a report in Khaleej Times. Islamic investors thus far had access to gold market through merely jewelry and coins. Estimates for a demand increase of 500-1000 tons per annum are doing the rounds if Islamic financial institutions were permitted to set aside just 1 percent of assets into new gold products.

Three offshoots seen by the Khaleej Times report include:

  • 1) Increase in the number of diversity of available Shariat compliant gold investment products.
  • 2) Greater emphasis on the role of physical gold in gold transactions.
  • 3) Islamic finance will have greater say in the setting of the gold price.

This could give a boost to gold prices, which are already on a tear.

In pre-market trading:

  • The SPDR Gold Trust was down 0.91 percent at $111.12
  • Market Vectors Gold Miners ETF (NYSE: GDX) was slipping 1.78 percent to $21.37.
  • Direxion Shares Exchange Traded Fund Trust (NYSE: JDST) was rallying 5.16 percent to $35.90.
  • Credit Suisse AG - VelocityShares 3x Long Gold ETN (NASDAQ: UGLD) was slipping 0.26 percent at $11.70.
  • Direxion Shares Exchange Traded Fund Trust (NYSE: JNUG) was slipping 5.47 percent at $6.99.
  • Direxion Shares Exchange Traded Fund Trust (NYSE: NUGT) was declining 4.81 percent to $8.11.

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