Since the 2016 launch of the AAOIFI Shariah Standard on Gold in collaboration with the World Gold Council, gold has been playing an increasingly important role in Islamic finance as asset owners and managers seek effective portfolio diversification and wealth preservation. This is especially important in Islamic finance as the pool of available assets is more limited. Several new Shariah compliant gold products have been launched, and Malaysia in particular is becoming a hub for Islamic gold products with several new gold investment accounts, an exchange-traded fund (ETF) and digital gold platforms now available.
One of the main drivers behind a gold allocation is wealth preservation as well as risk mitigation. When the financial outlook is uncertain, investors increasingly look to gold. In this unprecedented year of economic uncertainty, governments around the world have had to deploy significant funding to soften the financial impact of COVID-19 and analysts are struggling to predict the timing and nature of the economic recovery.
Review of 2020
A combination of economic uncertainty and a low interest rate environment led to gold being one of the best-performing assets this year. Despite a recent pullback — due in part to the welcome news that effective vaccines are in the pipeline — gold is still up by about 17% this year (as of November). Much of this was fueled by inflows into physically-backed gold ETFs. Through September 2020, holdings in the 83 active gold ETFs we track totaled 3,880 metric tons, with total assets under management (AuM) of US$235.4 billion — record highs in both tonnage and value terms.
One of the reasons for this growth is the geographic diversification of gold investors compared to 17 years ago, when access to gold via ETFs was limited to a few funds, primarily in North America. While gold ETFs listed in North America continue to expand, maintaining their relevance on a global scale, funds in other regions of the world have also seen remarkable growth since their introduction. For example, total gold holdings in Asian gold ETFs grew from one metric ton in March 2007 — when the first Asian fund was introduced — to 121 metric tons in September 2020, adding seven new funds in 2020 alone.
2020 is a story of two halves. Investment demand has offset weaknesses in consumer demand, which tends to drop in times of economic uncertainty. Falling consumer confidence, plus widespread lockdowns, dampened consumer demand this year. In October, the latest ‘Gold Demand Trends’ report was published by the World Gold Council. Overall gold demand was down in the third quarter of 2020 (Q3) by 19% to about 892 metric tons. But there were positive signs — consumer demand has started to pick up again compared to Q2 as countries such as China moved out of widespread lockdowns.
Preview of 2021
Economic uncertainty and a low interest rate environment will likely persist. But there are a couple of issues that are likely to renew both investment and consumer interest in gold — both in Islamic and conventional finance.
Sustainability and sustainable investing are big themes. Indeed, responsible finance is a major tenet of Islamic finance. Recent figures suggest that funds with a sustainability lens are performing better than their conventional counterparts. One of the reasons for this is that sustainable businesses are often well-equipped to weather external financial or economic shocks. The World Gold Council has long supported a position that responsible gold mining can support sustained socioeconomic development for the communities and countries that host gold mining operations and to this end, we have published a report setting out how the gold industry is already supporting progress against the UN Sustainable Development Goals.
The second key theme is digitization. Fintech and online financial services platforms are new channels opening up access to finance for underserved communities. Regulatory sandboxes and government supported fintech incubators are facilitating the development of the sector. The gold industry is also going through a digital transformation, with digital gold accounts becoming an increasingly popular option for consumers, particularly millennials. However, as this is sometimes an unregulated sector, it is necessary for responsible industry players to adopt best practices. To help the retail gold industry fulfill its potential, the World Gold Council has created a set of principles for the retail gold market: the Retail Gold Investment Principles. These principles are designed to set the bar for product providers across the market and further encourage retail investors to place their trust in gold. It is envisaged that greater trust will benefit customers and product providers alike, creating value and driving demand across the retail gold industry.
2020 has been a difficult year but we can be optimistic as we move toward 2021. Recent positive news regarding potential effective vaccines has lifted market sentiment. And there is a positive sign of recovery in markets that have emerged from widespread lockdowns. The nature and timing of the recovery are hard to predict, so it is inevitable that economic uncertainty will persist in the medium term. This, coupled with a low interest rate environment, means that gold will continue to have an important role to play as investors and consumers seek to mitigate risk.
The digitization of finance — something we are seeing in the Islamic finance industry — is increasing access to gold for underserved consumers. This is a trend that will likely accelerate in the future.
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