Syariah-compliant gold will breathe new life into market
As a result of new standard, experts expect considerable rise in demand for the precious metal in South-east Asia
In Islamic tradition, gold is one of the six "ribawi" items, defined as staple everyday commodities where stringent transaction rules are applied to prevent injustice or inequality between parties involved.
This means Muslims have not been able to speculate in most gold-related investments.
But this has changed recently.
Last month, Singapore Exchange (SGX) announced that its Singapore Kilobar Gold Contract has become the world's first Syariah-compliant gold futures.
This comes two weeks after the Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions and the World Gold Council announced a set of guidelines that will expand the variety and use of gold-based products in Islamic finance.
For years, gold has played a minor role in Islamic finance beyond spot trading - which involves the purchase or sale for immediate delivery - partly because of uncertainty over religious laws.
At a press conference in Dubai on Dec 5 to explain the "Syariah Gold Standard" for the first time, Syariah scholar Mohd Daud Bakar said the SPDR Gold Trust, the world's biggest exchange-traded fund (ETF), will probably qualify under the guidelines as it is backed by bullion.
On the other hand, the Comex gold futures would not qualify because it does not have a physical backing requirement.
If just 2 per cent of current Islamic finance assets are allocated to gold, a huge new source of demand - roughly equal to China's total purchases in 2015 - will soon enter the market. Mr Kim Iskyan, founder of Truewealth Publishing
Yesterday, gold prices eased after hitting a three-week high in the previous session, with the US dollar hovering near 14-year peaks against a basket of major currencies.
Spot gold was down 0.2 per cent at US$1,156.96 an ounce, reported Reuters.
In light of a bullish outlook for the gold market this year, will the new rules breathe life into one of civilisation's oldest currencies?
After all, the rapidly growing Islamic finance industry is estimated to hold about US$2 trillion (S$2.9 trillion) in assets.
There will be approximately 100 million active Muslim investors who now have gold as an investment option, pointed out Mr Kim Iskyan, founder of Truewealth Publishing, a Singapore-based independent investment research company, in a blog post last November.
He said: "If just 2 per cent of current Islamic finance assets are allocated to gold, a huge new source of demand - roughly equal to China's total purchases in 2015 - will soon enter the market.
"And this could push gold prices higher… a lot higher."
For a start, industry players think that SGX's offering will provide new investment opportunities for the region.
Launched in October 2014, the Singapore Kilobar Gold Contract was meant to cater to the demand for physical gold in Asia.
Globally, about 60 per cent of the precious metal is traded in Asia.
Ms Natalie Dempster, managing director for Central Banks and Public Policy at the World Gold Council, said in a statement that she expects a considerable increase in demand for gold in South-east Asia as a result of the new standard.
She added: "(The SGX contract) will offer investors a great way of buying kilobars via an exchange."
Mr Albert Cheng, chief executive officer of the Singapore Bullion Market Association, said the contract will be attractive to new customers in the region, particularly those in Indonesia and Malaysia.Last year was a volatile year for the metal.
Gold was expected to be a sure bet for investors after the uncertainty following US President-elect Donald Trump's victory and Brexit.
Instead, the rising greenback has weighed on gold as it is priced in the US currency and becomes more expensive to foreign buyers when the dollar appreciates.
The Dec 14 Federal Reserve announcement that interest rates will be increased by 25 basis points, along with three rate increases projected this year, has also impacted gold as it is not an interest-yielding asset.
But gold is generally still considered a safe haven.
According to an SGX My Gateway report on Tuesday, gold and fixed-income assets continued to command significant investor interest last year.
One of the five most active ETFs by turnover last year was SPDR Gold Shares ETF.
The report said: "Gold as a commodity continued to command significant investor interest through 2016.
"A growing number of investors are recognising the potential of bullion to boost returns and improve the risk-mitigation attributes of well-diversified portfolios.
"Lingering global macroeconomic and geopolitical risks will also ensure elevated demand for the commodity as a haven asset, even after the Fed tightens monetary policy."
Investing in gold
Here are some other ways to invest in gold
In 2012, the goods and services tax for investment-grade precious metals was removed, prompting three banks to open gold vaults in quick succession.
Smaller precious metals retailers selling bullion have also set up shop in the past few years.
Investors can choose from gold bars, bullion coins and gold certificates (to prove that you own physical gold).
The certificates have no expiry date and can be exchanged for cash or physical gold.
Transaction fees and storage fees apply.
EXCHANGE TRADED FUNDS (ETF)
The SPDR Gold Shares ETF, which was listed on the Singapore Exchange (SGX) in October 2006, tracks the price of gold.
It is the largest physically backed gold exchange-traded fund in the world.
Like stocks, it is now designated as an Excluded Investment Product, accessible to retail investors without requiring any pre-qualification on their financial background and knowledge.
GOLD MINING STOCKS
SGX lists five gold mining stocks, of which the three largest - Wilton Resources, CNMC Goldmine Holdings and Anchor Resource - have a combined market capitalisation of $401.9 million, according to an SGX market update in July.
These mining companies are listed on the Catalist board, which caters to high growth and a correspondingly higher risk profile, compared to established firms listed on the mainboard.