#AAOIFI Shari’ah Standard on #Gold - does it move the price?

Gassner's picture

Dear Reader,

There has been quite some media echo (see e.g.: https://www.bloomberg.com/news/articles/2016-12-05/gold-standard-approve... ) on the AAOIFI Sharia Standard on Gold.

The standard was established in cooperation between the Accounting and Auditing Organisation of Islamic financial institutions (AAOIFI) and the World Gold Council, which defines itself as "the market development organisation for the gold industry."

Interestingly, the media reports are very enthusiastic in terms of creating lots of additional demand previously prevented to participate and invest in the Gold market.

Well, this is the point I like to challenge:

The standardization may increase efficiency, but will NOT create a new buyer segment, which has not existed before in my opinion – as already the first consultation draft just outlined the old classical Islamic legal positions regarding buying and selling of Gold.

There used to be a physical backed Gold Sukuk at DIFC once, which was dissolved and another attempt for years now to re-establish one. There are offers with a Fatwa in the market; quite doable just a matter of market demand.

Gold in Sharia terms is just money. And money should not be hoarded as per Quranic injunctions. Hence, Gold is not really an investment, which investor legend Warren Buffet agrees as there is no return attached. You buy some gold for holding emergency liquidity and some for your wife, that’s it. Gold positions are fully subjected to Zakat, while not providing any return to cover the 2.5% annually – thus limiting the appetite for it.

What drives the gold price these days is the spending program of the US with a potential rise in interest rates (negative for gold); the ongoing wars in the world, which may intensify (increasing demand and price for gold), the currency debate, whereby any turbulence may lead to discuss re-introducing a gold backed currency, which would be a massive boost to the gold price. The Sharia standardisation, however, is a minor factor of influence.

Nevertheless, it is an important contribution to the standardisation in Islamic finance! You find all details at:

http://shariahgold.com/

Best regards,

Michael Gassner

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