Gold Prices Expected to Move Up With Sharia Law Revisions
Since it was first proposed last April, trading gold as a commodity within Islamic finance is now a reality. The pro-gold law was first adopted on November 19 by the Accounting and Auditing Organization for Islamic Financial Institutions, which sets Sharia Law standards for finance groups.
Historically, Islamic investments have been guided by Sharia Law, which prohibits financial practices like earning and paying interest on loans. It also outlines requirements for the exchange of commodities like gold and silver. Islamic law sees gold as a substance sold by its weight and measures; a commodity that must be immediately exchanged in equal amounts. These types of substances are called Ribawi, and traditionally include silver, dates, wheat, salt, and barley. Therefore, the idea of using precious metals as an investment vehicle or as wealth retention is new.
The new revisions to Islamic financial guidelines have the enormous potential to impact world gold demand and prices, given that 1.6 billion Muslims will now be allowed to trade in precious metals. Gold bullion investments will be opened up to 25% of the world’s population, with the Islamic finance market expanded to “grow to US$5 trillion by 2020,” according to ZeroHedge.
Exchange traded funds that are backed by gold are expected to qualify for the new guidelines, while gold futures probably won’t, according to Bloomberg. Physical gold bars and coins may also qualify, according to Natalie Dempster, a managing director of the World Gold Council. However, the rules require that a bank selling gold has to “offer same-day settlement or has to demonstrate it can provide the exact gold being sold within one day,” Dempster said. This standard is expected to also apply to silver.
Gold now joins equities, real estate, Islamic bonds, and insurance as vehicles approved for finance.
“This is a ground-breaking initiative for Islamic investors and for the gold industry at large,” said Aram Shishmanian, chief executive officer of the World Gold Council. “We are delighted that there is now definitive Shariah guidance on the permissibility of investing in gold.”
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