The original sources of Shari’ah, the Holy Quran and Sunnah have numerous moral and ethical warnings about gold and silver. These include few prohibitive uses and general guiding principles against hoarding gold and silver, which naturally limit the nature of investment of Islamic Financial Institutions (IFIs) into these metals and constrains gold and silver demand from the Middle East, Asia, Africa and other Islamic investors RoW.
The Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) together with the World Gold Council (WGC) developed a Shari’ah-compliant investment options standard for physical and exchange based transactions in the gold market.
A new Standard is expected to be endorsed by AAOIFI’s Shari’ah Board on 20 November and launched on 6 December 2016 at the World Islamic Banking Conference in Bahrain. This potentially opens a new era for Islamic investors, adding a much more liquid and dynamic instrument class to a rather limited choice of existing Shari’ah-compliant assets. According to WGC’s research, gold has also by far outperformed all major Islamic asset classes over the last 8 years, so it could bring together a combination of additional returns combined with some strategic hedging benefits for their investor portfolios. “Given that Islamic finance is growing on average by 16% per year, and Islamic finance assets are projected to reach US$2 trillion by 2020, a very conservative 1% allocation to gold would increase gold demand by US$20 billion by 2020”
One important detail not to be missed: according to the standard all these products need to be fully backed by physically allocated gold.
Source: Alexey Podkolzin, WGC, Gold Investor, Oct. 2016