Sharia-compliant gold transactions good for gold?

Finance experts in Islamic law have at long last developed rules for gold transactions. This opens the way for Islamic institutions to trade gold and silver much more actively, and may impact physical demand for the metals substantially in the long run.

Although gold is much used in jewellery in the Islamic world, it has played a very minor role in finance because of uncertainty over what is religiously permissible. The new standards, which also apply to silver, could help to change this.

One of the directives is that gold transactions must be fully backed by physical metal. Another is that trades must be settled on the same day. Furthermore, gold may be purchased through agents, allowing for exchange-traded funds (ETFs). These directives are in place in order to observe Islam’s distinction between real economic activity and speculation.

The guidelines will help to increase acceptance of gold products among Islamic investors while giving Islamic banks new liquidity-management tools, as the standards are expected to be followed in whole or in part by sharia-compliant banks around the world.

Sharia-compliant gold products have existed at least since 2009, but have not seen a significant level of usage. Now that rules are in place, gold dealer GoldCore plans to offer a sharia-gold trading platform for use by Islamic financial institutions in the first quarter of 2017. It is designed to offer segregated gold accounts with the option of physical delivery. Konooz Capital plans to issue gold-backed sukuk, or Islamic bonds, through a $5 billion programme it originally registered in 2014.

ETF Securities said the new standards were unlikely to change the price of gold and that it would take time for markets in new products to develop, but we expect impact on physical demand in the long run may be significant, as general acceptance sets in.