On Monday, the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) and the World Gold Council (WGC) approved the Shari’ah Gold Standard. What does it imply for the gold market?
Sharia is the legal system of the Islamic world. Investment products must be compliant with that law. The complex treatment of gold in the Islamic tradition and the lack of uniformity in the treatment of the yellow metal (as a currency or commodity) has limited the development of gold financial products in Islamic finance. This is the reason why the AAOIFI and the WGC decided to create the Shari’ah Gold Standard, which is a “definitive guidance on the use of modern gold financial products in a Shari’ah-compliant manner”.
What does it mean for the gold market? Well, as the shiny metal is now acceptable as an investment in Islamic finance, as many as 1.6 billion Muslims in the world will have far greater access to the gold market. Therefore, many analysts believe that the yellow metal will get a huge boost in demand from about 25 percent of the world’s population and the price of gold will surge. For example, as the new rules allow gold to be used in the $1.88 trillion Islamic finance business, they could spur demand for hundreds of tons of gold, according to the World Gold Council.
We are not so optimistic. Why? First, the larger access of Muslims to the gold market does not mean that all of them will become buyers. There will be both buyers and sellers. And the mere possibility does not imply that all Muslim investors will suddenly buy gold like crazy. Second, COMEX gold futures will not qualify as gold investment compliant with Sharia guidelines. The new standard allows Islamic investors to invest in jewelry, gold coins and bars, vaulted gold, gold savings plans, gold certificates, gold mining shares (with certain parameters) and physical gold ETFs, including, most likely, the SPDR Gold Trust, the biggest exchange-traded fund backed by bullion. However, price discovery in the gold market largely happens on COMEX. Hence, the Shari’ah Gold Standard should not significantly affect the price of gold.
The bottom line is that the AAOIFI and the WGC approved the Shari’ah Gold Standard. It is good news for the gold market as the new rules increase the number of available gold investment products compliant with Sharia. Hence, Muslim investors could be more involved in the gold market. However, we believe that many analysts overestimate the potential impact of the new standard on gold prices. This is because the price of gold is set on Comex, to a large extent, but gold futures are not compliant with the approved guidelines.
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Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.
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Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
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