Precious Metals

How new Sharia law gold rules could affect investors

New standards for gold investing according to Sharia law could be a huge boon for the gold market.

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The international organization that sets Sharia law’s financial standards recently opened up gold-investing opportunities within the system of rules honored by many millions of Muslims around the world, potentially allowing for a huge number of new gold investors. 

The Accounting and Auditing Organization for Islamic Financial Institutions approved new rules on Nov. 19 that allow gold to be used in Islamic finance. The new Sharia rules were established in conjunction with the World Gold Council, which released a statement on the new rules’ approval Dec. 5

“The Standard will, for the first time, set specific rules for the use of gold as an investment in the Islamic finance industry. Until now, there have been no such rules,” the WGC statement reads. “The new Standard shows that investment in gold is permissible provided that all the relevant Shari’ah rulings are satisfied, including those relating to taking possession of gold and the proper calculation of Zakah.

“The Standard will help open up a new investment asset class, enabling Islamic banks and other financial institutions to grow their customer bases and facilitate the creation of a broader range of saving, hedging and diversification products.”

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Read the WGC's full statement here.

AAOIFI Secretary General Hamed Hasan Merah said in the WGC statement that the “all-important” new standard modernizes Sharia law’s approach to gold dealing and investing. 

“Hopefully, this would represent a progressive stride for the Islamic finance industry,” Merah is quoted as saying in the WGC statement.

WGC CEO Aram Shishmanian, who had been quoted in an AAOIFI statement at the outset of the new rules’ development that there had previously been limited guidance in Sharia law in terms of buying gold coins and bars and “virtually no guidance on gold elsewhere in the financial sector,” called the approval of the new rules “ground-breaking” for Islamic investors and the entire gold industry. 

“We are delighted that there is now definitive Shari’ah guidance on the permissibility of investing in gold,” Shishmanian said. “Gold is a proven wealth preservation asset that Islamic investors can now deploy to protect their wealth and diversify market risks.”

Before the rules were approved, in a June 28 post, published an article explaining what the changes could mean for the gold investing market: 

The proposal on which the AAOIFI and WGC have been working says that gold investments must be backed by physical gold.

So, gold futures contracts wouldn't be acceptable investments. But the gold standard draft does approve holding gold in derivative contracts, ETFs, investment accounts and Islamic bonds. ...

A definitive decision on investing in gold would mean that Muslim investors could choose from more Sharia-compliant gold investment vehicles. With a market of 1.6 billion people, this could have a big impact on demand for gold.

The WGC estimates that the Sharia gold standard could equal "hundreds of tonnes" of new demand from the Muslim world. To put that in context, the global demand for gold was 1,290 tonnes in the first quarter, which was 180 tonnes more demand compared with the fourth quarter, a 16% increase. ...

If the new Sharia gold standard is implemented this year, which looks like a good possibility, 20% of the world's population will have new access to gold as an investment. If the expected increase in demand lives up to expectations, we might only be in the opening stages of this gold rally.

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