One major development in the global gold market over the last decade has been the liberalization of gold ownership laws in China. This has opened up an incredible flood of new demand for precious metals from the world's most populous country.
There's still another huge swath of the world's population that endures restrictions on the private ownership of gold, however. Most of the 1.6 billion Muslims in the world do not own gold as an investment due to certain interpretations of Sharia law. But by the end of the year these millions upon millions of potential investors may finally be able to enter the gold market.
Investing Restrictions of Islamic Law
In Islam, there are very strict rules regarding how financial endeavors can be conducted. Three main principles that are prohibited are riba (accruing interest), al-maisir (gambling), and al-gharar (uncertainty, i.e. speculation). Sharia law outlaws these practices. This is a noble notion, but it places a huge constraint on the investment and wealth management industries, not to mention insurance and banking.
As a result, Islamic countries must use specially constructed sukuks—Islamic bonds. These are a popular and approved form of financing since charging interest is outlawed. Similarly, there is a brand of insurance known as takaful that adheres to Islamic law and serves as an alternative to commercial insurance.
When it comes to gold, Sharia law considers the metal a Ribawi item. This means that law-abiding Muslims can't use gold for speculation or trade it for any kind of profit. They are limited to using gold as currency and owning it as jewelry. Obviously, this essentially throws a wrench in using gold for investment purposes, but the proscription is also problematic: it certainly doesn't outlaw the private ownership of gold. It merely extends the rules against speculation and interest to how gold is used.
Gold Demand from the Muslim World
Due to the vagueness of these rules against gold, we are finally seeing an effort to clarify the standards for which observant Muslims can use gold as a means for protecting their wealth. Just like the innovation of sukuks and takaful, a new set of Sharia standards is being developed to make investment gold available to the Islamic world.
The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) establishes Sharia standards for finance within the context of Islam. The AAOIFI is partnering with the World Gold Council (WGC) to set up clearer rules that will make gold investment and gold savings programs within the bounds of Islam a reality.
According to Business Insider, Yusuf DeLorenzo, an AAOIFI member, said that “The hesitation about investing in gold when credible Shariah standards are unavailable is nearly universal in the Islamic world. On the reverse side of the equation, however, gold has historically been the choice of individual Muslims desirous of preserving wealth and value.”
The article continues:
"The new standard, which will allow banks to issue Sharia-compliant gold products, should ease much of the confusion and hesitation. According to the WGC, it will serve as an internationally recognised consensus on regular gold savings plans (gold accumulation plans), gold certificates, physically-backed gold ETFs, certain gold futures and gold mining equities."
The changes are expected to be finalized and introduced during the fourth quarter of this year. The biggest upshot of this development would be similar to China's experience: gold has a long history as a store of value in Islam, so it only makes sense that Muslims will be very interested in investing in gold once it is clear that they are free to do so. A steady rise of gold demand from the Middle East should follow. Some predict that this new gold demand may quickly total "hundreds of tons."
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.