One more reason to bet on gold: New Sharia rule

By Kim Iskyan

Right now, most of the world’s 1.6 billion Muslims don’t invest in gold. That will likely change before the end of the year – opening up a big new source of gold demand.

Gold’s status under Sharia law, which governs the lives of Muslims worldwide, is murky. Muslims can own physical gold. But there’s currently no “party line” among Islamic scholars outlining when, if ever, it’s acceptable to own gold as an investment. That’s about to change.
The Accounting and Auditing Organization for Islamic Financial Institutions ( AAOIFI), which establishes Sharia standards for Islamic finance, and the World Gold Council (WGC), are currently drafting a “Shariah Standard on Gold.” Natalie Dempster, a managing director at the WGC, said that they plan to release it by the fourth quarter of this year.

This new standard could clear the way for Islamic investors to participate in gold’s current rally.

For years, Islamic investors and financial institutions have shied away from gold-related financial products.

Sharia (also spelled Shariah) law considers gold a “Ribawi item.” That means Muslims can’t trade it for future value, or for speculation.

They can, however, use gold as currency and own it as jewellery and the like.

The real disagreement turns on whether Muslims can trade gold as a commodity.

Yusuf DeLorenzo, a member of AAOIFI, said that “The hesitation about investing in gold when credible Sharia 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 new standard, which will allow banks to issue Sharia compliant gold products, should help ease much of the confusion and hesitation.