IFN Sector Analysis: Gold

Gold holds a special place within the Muslim community and AAOIFI’s Shariah Standard No 57 has unlocked the asset class’s Islamic investment opportunity. Amid intense global market uncertainty, gold is proving to retain its favorability as a safe haven. VINEETA TAN provides an overview of recent market developments.

In the Islamic culture and world, gold has been a long-standing prominent feature. Until the release of AAOIFI’s Shariah Standard No 57 on Gold in 2016, launched in collaboration with the World Gold Council (WGC), the treatment of gold as a financial commodity or currency has been controversial. The long-awaited standard however provided much-needed clarity and has since spurred the introduction of new gold-based Islamic financial instruments such as physical gold exchange-traded funds, spot contracts, gold funds, gold-backed Sukuk, digital gold trading platforms and virtual tokens, among others. According to a 2021 Deloitte survey, approximately 85% of the respondents opined AAOIFI’s standard on gold would enhance investor confidence in Islamic gold financial products while about 87% believe the standard facilitated more opportunities to develop relevant products for the Islamic finance industry.

Global gold demand in 2021 increased an average 10% year-on-year as the yellow metal continues to hold its place as a hedging mechanism against high inflation, according to WGC. Gold has traditionally been valued as a safe haven asset class, particularly during tumultuous market conditions. Year-to-date however, gold has declined 5% in US dollar terms in the backdrop of appreciating yields and a stronger US dollar, although it continues to fare better in other currencies.

Qatar Central Bank grew its gold reserves to a record high in July at 72 metric tons after becoming the largest buyer of gold of that month with its 15-metric ton purchase. WGC noted that India (13 metric tons), Turkey (12 metric tons) and Uzbekistan (nine metric tons) were the other major buyers in July 2022.

Turkiye remains the only government in the world to have issued gold-backed Sukuk, with its first debuting in 2017. According to IFN calculations based on available data, the Turkish Ministry of Treasury and Finance collected 35,009 kilograms of gold from institutional investors for lease certificates from the January–May 2022 period.

Saudi Arabia welcomed the region’s first Shariah compliant gold exchange-traded fund (ETF) last year, the Albilad Gold ETF, which would have at least 95% of its assets invested in gold. The ETF joins a growing pool of similar ETFs from around the world including Malaysia-based Affin Hwang Asset Management’s TradePlus Shariah Gold Tracker launched in 2017 as well as Iran’s gold ETFs introduced by Lotus Investment Bank, Kian Capital Management, Omid Investment Management Group and Mofid Entekhab.

Bullion and gold investments
Both incumbent and emerging financial institutions are capitalizing on the demand for Shariah gold investments: Bank Syariah Indonesia partnered with gold jewelry manufacturer Hartadinata Abadi to allow BSI customers access to its EmasKITA program to facilitate the buying of gold; Bank Muamalat Malaysia, launched its mobile-based gold investment platform, EasiGold; and Warba Bank in Kuwait in June launched a mobile app feature allowing customers to trade gold bars. Meanwhile, Malaysia’s Meem Gold & Jewellery secured a Fatwa certifying the Shariah compliance of its system, process flow, handling, trading and saving of gold.

Halal robo-advisor Wahed Invest in June launched a physical gold portfolio in the UK, allowing investors to invest in physical gold, stored and guarded at the Royal Mint, while adhering to the tenets of Islam.

Other developments
In a bid to build new markets to serve as fresh growth avenues for its stakeholders, Bursa Malaysia in July revealed that it is planning to commercialize a new digital gold dinar solution.

The Dubai Financial Market (DFM), a Shariah compliant exchange, in August gained the approval of the Securities and Commodities Authority to allow Dubai Gold and Commodities Exchange-licensed brokerage firms, approximately 21 in number, to become DFM derivatives members.

Market outlook
It is possible that gold will remain under pressure if central banks continue to increase interest rates to control inflation; however, WGC opined that the risk of either stagflation or recession may offset this, given gold’s historical outperformance during such market conditions. The gold authority also expects gold trading volumes, which shrank to US$109 billion per day (lower than the second quarter monthly average of US$126 billion), to pick up in September on the back of a strong seasonal demand period in key markets such as India.

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