IFN Sector Analysis: Gold

Since the release of AAOIFI’s Shariah standard on gold in 2016, it has provided Islamic investors the opportunity to tap the gold market with products such as gold-backed Sukuk, gold funds and exchange-traded funds (ETFs). JEVITHA MUTHUSAMY writes.

In 2016, AAOIFI’s Shariah Standard No 57 on Gold was launched in collaboration with the World Gold Council and offers definitive guidance on the use of gold in Islamic finance. Since the launch, new Shariah compliant gold products including physical gold ETFs, spot contracts and gold savings plans have been developed. Adding to these products are gold-backed Sukuk, bullion, digital tokens, digital gold trading platforms, gold funds, collateralized financing and investment accounts/products.

Investment in gold has long been valued as it has no credit risk, minimizes risk, reduces volatility and potentially boosts returns. This makes the gold asset class a safe haven for investors, especially during instability of market conditions.

A report by Goldhub indicated that the global gold asset class performed strongly in the first half of 2020, increasing by 16.8% in US dollar terms, and subsequently outperforming all major asset classes as shown in Chart 1.

Turkey started to issue gold-backed Sukuk in 2017 and it is the only sovereign in the world to issue such facilities. Based on IFN calculations, from June 2019 to the 18th September 2020, the Turkish Treasury collected a total of 28,224 kilograms of gold from institutional investors for the issuance of gold-backed lease certificates.

Asset management
Iran’s first gold ETF was launched in 2017 by Lotus Investment Bank. Subsequently, four other gold ETFs followed suit from Kian Capital Management, Omid Investment Management Group and Mofid Entekhab. A fifth such vehicle is in the pipeline.

Over in Malaysia, Affin Hwang Asset Management released the TradePlus Shariah Gold Tracker in late 2017. The fund is the country’s first and only gold-based ETF and is managed by AIIMAN Asset Management.

More recently in June, the Dubai Gold and Commodities Exchange (DGCX) partnered with Albilad Capital to provide pricing data for the latter’s Shariah compliant, gold-backed ETF which uses the DGCX’s Shariah compliant spot gold contract for its benchmark pricing. In the same month, Albilad Capital requested to issue an indefinite number of units for its Albilad Gold ETF to maintain its liquidity and balance between its unit market price and net asset value.

Separately, the Saudi Stock Exchange announced the listing and trading of the units of the Albilad Gold ETF starting the 2nd June 2020 while the Capital Market Authority of Saudi Arabia in February approved the public offer of the FALCOM Gold Fund by Shariah compliant Falcom Investment Company.

Bullion and gold funds/investments
Independent pension provider Options UK partnered with Wahed Invest in August to launch a diversified, Shariah compliant Halal Workplace Pension which includes investments in gold.

Meanwhile, emerging gold trading app Minted is looking to bridge the gap in digital gold investment by allowing customers to buy and save in physical gold using an easy and secure mobile application.

In the fintech vertical, a number of gold-back cryptocurrencies have emerged over the past few years including Goldmoney in Canada, HelloGold in Malaysia and Emergent in California.

Meanwhile, Iran is set to launch PayMon, a Shariah compliant cryptocurrency backed by 30 milligrams of 24-carat gold.

Other developments
Over in Malaysia in February, the Securities Commission Malaysia (SC) liberalized the Private Retirement Scheme (PRS), a voluntary long-term savings and investment scheme set up by the SC in 2012. The measures will provide more flexibility in asset association for PRS funds, such as allowing PRS funds to invest in ETFs based on physical gold to increase asset diversification in alternative investments.

In June this year, Sudan published a new circular on the purchase and export of gold, which was approved by Sudan’s Higher Committee for Economic Emergencies. According to the circular, the Central Bank of Sudan is only allowed to purchase gold directly from the gold market to build reserves.

Meanwhile, in Turkey, selected jewelers will be allowed to collect gold from the public and deposit it at state banks, which customers would be able to withdraw, according to Bloomberg. This new initiative is part of the Turkish Treasury’s efforts to attract idle gold into the country’s economy.

Chart 1: Gold outperforms all major asset classes in first half of 2020

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