Why Islamic Gold Demand May Surge

July 13th, 2016 by

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.

5 thoughts on “Why Islamic Gold Demand May Surge

  1. Abdulhakeem Keown

    With all due respect this article is false. Our way of life (Islam) does allow saving silver, gold and precious metals and has allowed it since the beginning of the time of Revelation of the Quran.

    Islam does not forbid saving up wealth in all cases, rather what is forbidden and what a stern warning is issued against is not paying zakaah (obligatory charity of 2.5%) on one’s wealth. But if a person pays zakaah (obligatory charity of 2.5%), he is not included in the condemnation.

    Allaah says (interpretation of the meaning):

    “And those who hoard up gold and silver (Al‑Kanz: the money, the Zakaah of which has not been paid) and spend them not in the way of Allaah, announce unto them a painful torment”

    [al-Tawbah 9:34]

    Abu Dawood (1564) narrated from Umm Salamah (may Allaah be pleased with him) that the Prophet (peace and blessings of Allaah be upon him) said: “That which reaches the level where zakaah is to be paid and its zakaah is paid, is not kanz (hoarded wealth).” Classed as hasan by al-Albaani in Saheeh Abi Dawood.

    Al-Bukhaari (1404) narrated that Khaalid ibn Aslam said: We went out with ‘Abd-Allaah ibn ‘Umar (may Allaah be pleased with him) and a Bedouin said: Tell me about the words of Allaah, “And those who hoard up gold and silver (Al‑Kanz: the money, the Zakaah of which has not been paid) and spend them not in the way of Allaah”. Ibn ‘Umar (may Allaah be pleased with him) said: The one who hoards them and does not pay zakaah on them, woe to him. That was before zakaah was revealed; when it was revealed, Allaah made it a purification of wealth.

    Maalik narrated in al-Muwatta’ (595) that ‘Abd-Allaah ibn Dinar said: I heard ‘Abd-Allaah ibn ‘Umar when he was asked about kanz – what is it? He said: It is wealth on which zakaah is not paid.

    Ibn Katheer (may Allaah have mercy on him) said commenting on the verse in al-Tawbah: With regard to kanz, Maalik said, narrating from ‘Abd-Allaah ibn Dinar from Ibn ‘Umar: It is wealth on which zakaah is not paid. Al-Thawri and others narrated from ‘Ubayd-Allaah from Naafi’ that Ibn ‘Umar said: That on which zakaah is paid is not kanz, even if it is buried beneath seven earths, but that which is not buried and on which zakaah is not paid is kanz. This was narrated from Ibn ‘Abbaas, Jaabir, and Abu Hurayrah in both mawqoof and marfoo’ reports. ‘Umar ibn al-Khattaab said something similar: Any wealth on which zakaah is paid is not kanz, even if it is buried in the earth. And any wealth on which zakaah is not paid is kanz with which its owner will be branded (on the Day of Resurrection), even if it is on the face of the earth. End quote.

    Thus it is clear that the kind of wealth that is blameworthy is that on which zakaah is not paid. As for that which is beneath the threshold (nisaab), or which reaches the threshold and zakaah is paid on it, it is not kanz.

    Thus it is clear that Islam does not forbid storing up wealth, rather it forbids not paying zakaah on it.

    So the problem is in nor paying the obligatory charity on the wealth stored up, one can have however much precious metals they wish as long as the obligatory charity of 2.5% is paid on it.

    And Allaah knows best.

    1. Everett Millman Post author

      Thank you for the very informative response! I greatly value the perspective of someone from within Islam who has more knowledge of what the Quran actually teaches and knows how investing in precious metals works within the faith. Your explanation about the zakaah and kanz was enlightening.

      I did make sure to point out in the article that Sharia does not forbid the private ownership of gold, and that gold and silver have a long history of preserving wealth for faithful Muslims.

      Nonetheless, the AAOIFI and World Gold Council will be discussing how banks in the Islamic world may adhere to Sharia standards as they potentially offer new gold products, e.g. “gold savings plans (gold accumulation plans), gold certificates, physically-backed gold ETFs, certain gold futures and gold mining equities.” The sentiment behind making these types of investment vehicles available to Muslim investors may be false, but I’m simply reporting on this news.

      Your thorough and informative comment is much appreciated. I think the lesson in all of this is that owning physical precious metals (as opposed to financial products supposedly backed by gold) is the best option for all of us!

      1. Abdulhakeem Keown

        I wanted to say thank you for your respectful reply Everett. I personally do not recall reading the quote from Yusuf yesterday regarding the “hesitation of investing into gold…” nor do I recall reading the “article continues” section. Nonetheless I am glad to know that we as humans regardless of lifestyle or Creed can come together on one agrement, to have a precious metals retirement portfolio is important.

        With regards to myself I have purchased from Gainesville Coins in the past and I do business with other well-known companies throughout the world when it comes to Precious Metals. As for me and my community I encourage the Muslims and non-muslims alike to invest into some type of tangible item that will help you in this life. Either for when you become older or when you are in a difficult situation financially.

        There are a few historical recordings that I would like to briefly share with regards to Precious Metals being used and Islamic history. During the time of the Prophet Muhammad (peace be upon him and all prophets that came before him) there were companions such as Uthamaan ibn Affaan that gave 10,000 gold dinars to help support the army.

        Another illustrious companion of the Prophet by the name of Abu Bakr, he was well known for purchasing a from their owner by exchanging gold dinars. Once he purchased the slaves he would free them and give them to you so that they could live freely within the Society of the Muslims. He was well-known for purchasing a slave for 5 ounces of gold, he bought the companion by the name of Bilal ibn Rabah who later became the great companion that first did the Islamic call to prayer heard 5 times a day throughout Muslim communities in the world. He supported the disabled by giving wealth and feeding them.

        These are only a very few of the many historical recordings that showed precious metals being used in the Islamic world for good causes.

        Again I want to thank you for your time, for your cooperation and for your kindness in reading and recognizing that precious metals has always played an important role in Islamic civilization of the past and present and the future

      2. Everett Millman Post author

        Great to hear from you, Abdulhakeem. You are quite right about the usefulness of precious metals in anyone’s portfolio. I love the historical background your provided about the role gold has played in even the earliest years of the Islamic community. People of all creeds and national origins will find similar accounts of the important place that precious metals have occupied in finance, charity, and the history of money. Their appeal is universal, and this is reflected in our personal and cultural histories.

        Again, thank you very much for engaging! The world could use more thoughtful conversations like this. We can all learn from one another.

    2. AbdurRahim Hynson

      As’salaamu alaikum AbdulHakeem this blog and sharing of information historical points in Islam were very enlightening, knew that one companion done the trading of precious metals to free slaves, but the rest I haven’t the chance to research the particulars, I must say I will for the sake of zakat my own family for understanding.. InshaAllah Jazakullah khairun.

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