Halal gold investment has become a fast-growing market due to restrictions on other financial assets and derivatives and clear guidelines regarding what Muslims are allowed to invest in following the teachings of Islamic law. In principle, Islam forbids gambling, which means that religious Muslims avoid excessive risk and speculation.
New rules: Halal gold investment
Because of Sharia, the religious law of Islam, Muslim investors have tended to focus on Islamic real estate and bonds. But now the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) and the World Gold Council (WGC) have introduced a legitimate gold standard. Here, for the first time, legal regulations for gold trading and Halal gold investment that complies with Islamic law are established. Among other things, the correct calculation of zakat, which is a mandatory payment for the needy, is also taken into account.
With this new standard, the Accounting and Auditing Organization for Islamic Financial Institutions hopes to have laid the foundation for developing and structuring new investment products by Islamic Sharia regulations.
What is Islamic law?
Sharia includes all laws according to Islamic law. It prohibits Muslims, for example, from selling pornography, weapons, alcohol, or pork. Investments that earn interest or investments similar to gambling are also prohibited.
Great opportunity for halal gold
Sharia-compliant systems currently have a global market share of only about one percent. However, the growth rate of Islamic financial products is much higher than that of conventional financial products and should increase further with the expanded scope.
Thanks to the new Shariah standard for gold, there is an increased opportunity for Halal gold investment to rise. This represents a groundbreaking initiative for both Islamic investors and the entire gold industry. The World Gold Council believes that investing in gold according to Islamic principles can increase the demand for precious metal by a few hundred tons.
With a total demand for gold amounting to 4200 tons, this will have a strong positive impact on the price of gold and Halal gold investment.
Are Shariah-compliant investments driving gold prices?
Sharia-compliant forms of investment are increasingly popular all over the world. This can also affect the demand for gold and Halal gold investment According to the World Gold Council (WGC), the organization for the gold mining industry, the demand for the precious metal with gold investments according to Islamic principles should increase by “hundreds of tons”. This would “fill an important gap in the market”.
Islamic investments in commodities
Islamic investors generally do not invest heavily in commodities. Islamic real estate and Sukuk are the most popular. The main reasons for this are the limitations on derivatives and the lack of clarity in the specifications regarding what is allowed and what is not. However, the World Gold Council has introduced a new standard of access to Halal gold investment that aims to serve as a guide for investors when trading gold in the future.
Fast growth
Leading gold analysts see a good chance that the new standard will encourage more Muslim investors to choose gold. The gold contracts must be deposited. The basic background in Islamic law is the prohibition of gambling, so Sharia-compliant derivatives avoid “excessive” risks.
Sharia-compliant systems are still a niche phenomenon. It accounted for about $1.7 trillion worldwide in 2015 – about one percent of the global market. But Islamic financial products are growing rapidly and have aroused the interest of Western financial institutions now.
Precise rules for investors
The gold industry hopes to introduce similar products soon. With a good overall gold demand of 4200 tons, this will have a strong positive impact on the gold price.
Pious Muslims must follow many rules when investing in gold halal. Dealing with alcoholic beverages, gambling, pornography, weapons, and pork is prohibited. But there are also other limitations. The interest is not justified. Speculation is similar to gambling and therefore prohibited, as is high-frequency trading.
Halal gold investment account
Islamic account in gold refers to bank accounts or trading accounts that comply with Islamic law and thus can also be used by devout Muslims. Such an Islamic account is offered by a group of halal brokers who deal with Islamic Sharia standards.
What is halal?
The term halal means everything that is ‘legal’ or ‘allowed’. The term is often used about food.
The opposite of halal is haram, which logically translates to “unlawful” or “forbidden.” For example, pork and drinking alcoholic beverages fall into this category. The Haram is not limited to the consumption of pork only, but also includes the consumption of products containing, for example, pork gelatin. It’s also important to be careful with cosmetics, as they also contain alcohol or products from pigs.
What is Sharia?
For Muslims, the terms “Haram” and “Halal” not only play an important role but also the role of Sharia. The definition of Sharia is as follows: Sharia represents the totality of all religious and legal norms, which also includes the mechanisms of creating norms and interpreting Islam.
Sharia is a constantly changing legal system. The Qur’an and the Sunnah of the Prophet. The Sunnah is a large collection of hadiths related to the behavior and sayings of the Prophet Muhammad.
Interest in Islam
There are different rules for an Islamic account that must be met for an account to be classified as Halal. Again, this is not the case when a financial product has any of the following characteristics: interest (usury), mudaraba (gharar), gambling (maysir), and betting (gambling).
Islamic law is very strict about interest rates: a Muslim is not allowed to receive any money to provide a loan. Instead, Islamic law requires that money always be given in exchange for something: this is the case, for example, when a tenant pays rent to a landlord for an apartment.
On the other hand, it is also possible for Muslims, for example, to invest their money in gold, although this is “speculation” in the strict sense of the word. However, Muslim traders are allowed to make money with an Islamic account as part of their day trading strategy.
Islamic trading account
To comply with the no-interest rule, an Islamic account is created differently from a traditional trading account. This can be well illustrated, for example, when trading gold.
However, you may not accrue any interest on an Islamic account. This is the case, for example, when positions are held overnight because in this case financing costs arise. So, brokers often advance in such a way that they close positions at night for a brief period and then open them again so that no interest is accrued.
Largest Shariah-compliant gold ETF
Halal gold investment in the SPDR Gold Fund is Shariah-compliant.
The world’s largest ETF on gold may see increased demand in the future if investors from Islamic countries increasingly put their money into this fund.
Because the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) has certified SPDR Gold Trust as compliant with Islamic Sharia standards, Reuters reports.
Since 2015, representatives of Islam have been working with the World Gold Council on a legal framework for the use of gold that complies with Sharia.
In particular, it concerns the extent to which various forms of investment in gold and gold trading can be practiced under Islamic law.
Gold market earthquake: Halal gold investment
He who has a gold ingot has a friend. He who has hundreds of bars has a complete fortune.
Gold is one of the most important safe-haven securities, that is, those that tend in times of crisis or uncertainty to maintain (or increase) the profits they make.
During the years of economic crisis, gold became the lifeline for many investors who wanted to sleep peacefully every night. It is also why, when a destabilizing event occurs or, simply put, the probability of that happening (Will Greece leave the euro? Who wins the election?), the value of gold increases exponentially.
Gold after Brexit
This is what happened, predictably, after Britain’s exit from the European Union. As the BBC reported, the real winner from Brexit was, without a doubt, gold. Its value rose by 5% immediately after the referendum, completing the 25% increase that occurred throughout 2016, its highest level in more than two years. In the first quarter of the year, the price of gold rose 17%, the best quarter since 1986.
Market volatility
High volatility in stock markets and other factors such as the oil crash caused Halal gold investment to be one of the most frequent investment destinations this year, reaching crisis-time highs.
Gold speculation can be the result of three factors:
- Economic uncertainty.
- Low or negative returns in fixed income.
- The possibility of a rate hike by the Federal Reserve of the United States.
The importance of Halal gold investment
As investors lose faith in central banks and paper money becomes less valuable day by day, gold looks more attractive.
Many Muslim billionaires believe that gold is the best refuge for their wealth. Resolving uncertainties related to Gold Certificates, Savings Plans and EFTs may break into strong markets in Bahrain, Qatar, Indonesia, Saudi Arabia, Malaysia, United Arab Emirates, Turkey, Kuwait, and Pakistan, strongly attractive markets.
Gold price
The reasons why major Muslim investors fix their eyes on Halal gold investment are the same as everyone else has when it comes to buying this precious metal. Therefore, this may lead to a small rally for gold in the short term after setting some benchmarks.
By the way, George Soros was one of the biggest investors in gold. In the first quarter of this year, the Hungarian billionaire decided to reduce his investment in US stocks and buy 264 million shares in Barrick Gold, the largest producer of gold bullion in the world.
Conclusion about investing in gold
At a time when investors lose faith in the power of central banks and paper money becomes less and less valuable every day, gold looks more attractive.
This is why many of the world’s largest investors are buying billions of dollars in gold-related investments.
