How the New Shari'ah Gold Standard Could Affect Your Gold Holdings

By Rich Checkan

On December 5, 2016, the new Shari'ah Gold Standard was enacted following the announcement of the Shari'ah Gold Standard No. 57 by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) and the World Gold Council (WGC).

Previously, the rules relating to various gold products for Muslim investors and consumers were unclear and therefore a potential barrier to investment. Now, this standardization will make it much easier for the Muslim investment community to invest and own gold products.

We spoke with John Mulligan, Director of Corporate Communications for the World Gold Council, on how they played a part in the change of the Shari'ah Gold Standard and how the new law will affect gold ownership in the future.

While this new law seems like it may not relate to you, don’t be fooled. The enactment of the new Shari’ah Gold Standard will affect the gold market globally, allowing 1.6 billion people access to gold investing with the confidence that it is compliant with their religion. Given the future potential for gold demand from the Muslim market, I believe now is the time to buy, while the prices are still low.

Rich: How does Shari’ah Law govern Muslim investing and specifically, gold?

John: Shari’ah Law covers most aspects of Muslim life, including investments. The nature of Islamic finance means investors need a high degree of clarity and confidence in the products presented to them. Although consumers in many Islamic regions already understand gold’s basic appeal as an asset, until last December, there was no single standard for gold ownership and trading by Muslims. The newly issued Shari’ah Standard on Gold now covers most aspects of gold investment from acceptable product characteristics to the nature of partnerships, transactions and storage.

Rich: How was the standard developed?

John: Standards are guidance for what is appropriate and are set by Shari’ah rulings on investment products and instruments, transactions and contracts. They state what is and is not permissible. The new standards were developed by the Accounting and Auditing Organization for Islamic Financial Institutions. The providers of gold investments can now all be on the same page in developing compliant products such as gold savings plans, gold certificates, ETFs, and many more gold products of the type offered by dealers like ASI.

Rich: How does a gold product become compliant?

John: The product developer, or vendor, must engage a Shari’ah advisor or consultant who will do their due diligence, validating they adhere to the conditions defined in the Standard. They will then issue a Shari’ah endorsement – basically, a certificate of compliance. With that certificate in place, Muslims throughout the world will be able to invest in that form of gold from that supplier.

Rich: What was the role of the World Gold Council in enacting the standardization law?

John: The mission of the World Gold Council is to stimulate and sustain demand for gold throughout the world. The Islamic market has been on our radar for some time, as banks and dealers faced major barriers in selling gold products to Islamic investors in a clear and consistent way. In the past, there were different standards and a lack of clarity and definition as to what was compliant with Shari’ah Law. As a result, there were substantial constraints on offering a gold product of any type as consumers were uncertain about its compliance and therefore tended to think the options available to them were quite narrow. The World Gold Council initiated the process and collaborated with AAOIFI and leading Shari’ah experts at Amanie Advisors to bring about this agreed upon, widely accepted standard. And now we will be educating on the topic and generally supporting the wider set of products that will become available to investors over the coming years.

Rich: What are the basics behind the standard?

John: The idea behind the Shari’ah Gold Standard is to offer investors clarity and confidence in gold investment products. Gold is an item that is defined in Shari’ah law as a staple and vital commodity, so stringent transaction rules apply to how it is sold and traded to ensure fair and honest dealings.

And gold is acknowledged by Shari’ah experts as both a commodity and/or a currency, but they have varied in the past as to how these aspects of gold are interpreted and, again, this has potentially confused consumers. So the case for a Standard that laid out clear and agreed upon guidelines was strong as it can remove these differences of perception and interpretation.

Shari’ah investments must be clear and transparent and easily understood to promote safety and fairness. Certain types of bonds, equities and real estate products were already defined as compliant. Gold, however, was often previously still peripheral to the Islamic Finance market, but with this new Standard it can now be brought into the mainstream.

Rich: We know from experience that Muslims are gold investors. What do you think the impact will be now that they have more access?

John: We see very substantial potential additional demand for gold which should therefore be  supportive of the long-term price of gold. It won’t happen overnight, but we already see the Muslim investment community reacting very favorably, and we know from our extensive consultations that a range of product suppliers and banks and large institutions are getting ready to offer gold to this new set of consumers.

Gold as an asset has many qualities that already appeal to Islamic investors: it is a tangible asset with relatively low risk, and an enduring preserver of wealth over time and across locations. And many of the key regions in which Islamic Finance is rapidly growing already have a cultural affinity to gold.

Moreover, gold is uncorrelated to other assets including the majority of mainstream Shari’ah compliant products. As you often inform your own clients, uncorrelated assets bring greater stability and more robust returns to a portfolio. We have produced a very substantial body of research that proves gold lowers overall portfolio risk. This is very much in line with the philosophy I believe you share of holding gold in a long-term portfolio for diversification and risk reduction.

Rich: Of course, our readers want to know the impact on gold prices of all this.

John: We have witnessed in various markets across the world, from China to Germany, that where there is pent up demand, and then access is created, we often see very substantial additional volumes of gold purchases, and this will support the longer-term price trend. And the more diverse these buyers, the stronger their impact on gold’s diversification power. New avenues of demand will likely include individual investors, very wealthy families, banks and Islamic financial institutions.

We are talking about a very large potential market. Today, a quarter of the world population is Muslim. There is an estimated $2.2 trillion in Islamic compliant investments, and this is expected to rise to 5 or 6 Trillion by 2020. If, by then, we had moved to a world where 1% of Islamic portfolios where held in gold, current estimates suggest this might be worth $50-60 billion or, at current prices, between 1,200 and 1,500 tonnes of new demand. As I say, this will take time, but it certainly represents a very major new market for gold.

Rich: Does the change in the Shari’ah Gold Standard affect silver or other metals?

John: It is doubtful that it will affect other metals other than silver, for which it will likely have some relevance. But this Standard specifically deals only with gold.

Rich: So, the new standardization has an impact on both Muslim and non-Muslim investors?

John: Indeed, for Muslim investors, it clarifies appropriate products and gives them the confidence to invest in gold which was already attractive to them for many reasons I’ve already touched upon, but not the least of which is that it has outperformed most of the Shar’iah compliant assets on offer. For others – indeed, all gold investors, it will potentially expand the market and, as I’ve mentioned, widening the set of consumers for gold underpins its long-term performance profile – both in terms of price and its ability to offer balance and stability to portfolios.

This has been a defining factor of the gold market that is often overlooked; it is a long term story of growth and diversity, with gold now accessed by far more people across the world for a wider variety of reasons than at any time in human history. Global physical demand for gold has more than doubled over the last three decades and the value of that gold has risen by over 475%. We believe the Shari’ah Standard will contribute to its ongoing growth and value.

Rich: Thank you, John.

We couldn’t agree more with John’s assessment. And, if the currently low spot prices and low premiums weren’t enough to move you to purchase precious metals, perhaps an influx of 1.6 billion potential new buyers into the market over the next couple of years will persuade you to act.

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The Shari’ah Standard has been set. The buyers will come. Do you have all the gold and silver you need yet to Keep What’s Yours?

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