Cyprus: Shariah Gold Standard Encouraging Investors

Last Updated: 16 April 2019
Article by Shanda Consult Ltd

Wealthy individuals in Islam have often been shying away from investing in gold and other precious metals in order to safeguard their investment portfolio against risks (and not for the purpose of speculation), as it did not exist as an investible Shariah-compliant asset until lately. Since December 2016, the AAOFI Shariah Standard No. 57 on Gold has been opening doors to an entirely new vast, safe asset class; investment in physical gold and silver to provide guidance and less hesitation to invest in gold and silver as a means of portfolio diversification and hedging against risks such as banking, political, economic, credit and counter-part risks.

In Islamic tradition, gold has for far more than one thousand years, and still does, played a pivotal role as a means of payment, for wealth protection and to facilitate trade. Its use has however been restricted due to its Ribawi nature, putting it into a special category regarded as so important to life that they cannot be hoarded (others being silver, dates, wheat, salt and barley). In terms of Shariah compliance these items must be sold on weight and measure and cannot be traded for future value or speculation.

Islamic Investors have therefore been restricted in gold investment in the form of bullion bars and even mining shares.

Since inception of the Shariah Standard No. 57 on Gold jointly launched by the Accounting and Auditing Organization for Islamic Financial Institutions AAOFI and the World Gold Council (WGC) "Muslim consumers and investors can now benefit from exposure to gold, including its portfolio diversification properties, its status as a safe haven asset, and its role as a long-term preserver of wealth," Ms. Dempster says of the WGC.

A key element to meeting the Shariah Standard is that any investment must be backed by physical gold.

During 2018, a strong trend in the gold sector was witnessed from West to East, partly fueled by the increasing demand from Islamic investors both retail and institutional. Demand for gold bars and coins in the Middle East hit a five-year record high in 2018 amounting to 255,3 which denotes an increase of 6% on 2017. On a single market basis, the forerunners were Iran with 91,2 mt (+41%), Egypt with 27,2 mt (+11%) and Kuwait with 17 mt (+3%.

In Turkey, where investors are interested in Shariah Gold too, the Central Bank has vastly been increasing its gold deposits and investors' demand for gold surged. In 2018, Turkey's annual gold purchases increased to 74,1. The Turkish Republic launched the first sovereign gold-backed Sukuk in 2017, therewith demonstrating its leadership in Sukuk innovation and its national ambition to be an Islamic finance hub of the region. This development mobilized 2.200 mt of household gold (i.e. gold privately held at home) to enter the economy allow retail investors to invest in gold.

It is apparent that the MENA region, particularly GCC, as well as SEASIA will play a vital role in shaping the future demand of gold not only in terms of reducing the overall risk-profile of one's investment portfolio but it may well assist in Islamic banks meeting the regulatory requirements of Basel III. Basel III requires a bank to hold a higher amount of high-quality liquid assets to buffer against financial stress. Most banks prefer to use bonds. However, since bonds do not meet Shariah requirements, gold can now be used instead. Naturally, this growth will have a positive effect on the gold price in the near future. The Shariah Gold Standard will facilitate the creation of a broader range of saving, hedging and diversification products. This will furthermore become interesting to the shifting mindset in terms of investment techniques of the millennials, of the Middle East, who are already controlling 10% of the world's wealth which is likely to increase to 17% by 2020.

Advantages of investing in gold to hedge against risks

Gold practically exhibits no correlation to major Islamic asset classes such as major Islamic equity indices, sukuk and REITs and is therefore a powerful diversification tool. Since it is also less volatile it is also a safe asset class with no credit risk or third-party liability. Gold has produced 8% stronger returns over the last 8 years over other Sharia-compliant asset classes thus undermining its powerfulness as a diversifier of an investor's portfolio. For Islamic investors gold has become a strong new tool to protect Islamic investment portfolios as Islamic investors cannot use derivative-based risk management instruments. Gold provides a safe and accessible asset class to the illiquid and limited investible asset classes available for Islamic investors as it is one of the largest liquid asset classes. In fact, it is 24 times larger than the current volume of issued sukuk. Gold is safer than many sovereign sukuk and valued at USD 7,0 trillion in size.

Some important Shariah Rulings on Gold in terms of Constructive Ownership and Physical Possession

"Gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, and salt for salt; like for like, in equal amounts, hand to hand; and if these types differ, then sell as you wish as long as the payment is made hand to hand." ~ narration by Ubaidah bin al-Samit.

This lays out the framework of Hadith dealing with gold and establishes two key principles, namely:

  • Same type: equal amount and immediate delivery
  • Different type: immediate delivery

Constructive possession is only realized when there is a proof of ownership through holding of a certificate with the stated serial numbers, for example. The gold must also be clearly identifiable, allocated and distinguishable from others, i.e. best stored segregated and allocated. Unallocated storage is not permitted. Physical possession of gold must be a given and enabling the buyer to dispose of it at his wish.

Reference: The original Shariah Standard No. 57 on Gold
in English, Arabic and Turkish language.

Shanda Consult's Precious Metals arm now operates as Liemeta ME Ltd, based in Nicosia, Cyprus, a subsidiary of the Liemeta AG in Liechtenstein. For further information please visit our new website:www.liemeta.com.cy

Why LIEMETA ME Ltd?

LIEMETA ME Ltd, Nicosia, Cyprus, provides physical storage of precious metals at its prime location in Liechtenstein as well as trade services of precious metals, mainly gold, silver, platinum and palladium.

Your precious metals are safely and securely stored "segregated and allocated" and we are one of the few physical storage houses for precious metals that provide full-cover insurance, including embezzlement.

Stored assets are fully legally owned by the client, client assets are of course not on our companies' balance sheets.

LIEMETA is a privately owned, independent and non-bank company, meaning that its services do not fall within the scope of CRS or AEOI.

LIEMETA provides 100% discretion, 24/7 access to clients' stored assets at its sophisticated unit and high-security building.

LIEMETA is proud to be chosen by high net-worth individuals of the MENA region as their trustworthy custodian, in Liechtenstein.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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