The outlook for gold is unclear due to the current prices and uncertainties in the global economy. But it is expected to change in the long term because of the recent introduction of the shariah gold standard.
Industry players say the gold standard, launched by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) and World Gold Council last December, will drive up gold prices in the long run.
The gold standard, officially known as Shari’ah Standard No 57 and its Trading Controls, sets out specific rules for using the precious metal as an investment in the Islamic finance industry. Prior to the standard, Islamic financial institutions and Muslim investors kept physical gold based on shariah principles.
With the implementation of the gold standard, the industry can produce more sophisticated shariah-compliant gold investment products for saving, hedging and diversification purposes. These could take on different forms, including physical gold-backed exchange-traded funds (ETFs), futures contracts and equities, which will drive demand for the precious metal.
“The shariah gold standard is an important milestone in creating opportunities to innovate gold-based shariah-compliant investment products. It will increase demand for gold among shariah-compliant institutional investors and Islamic banks for their High Quality Liquid Assets requirements under the Basel III framework,” says Tutiana Jusat, chief investment officer (Malaysia fixed income and global sukuk) at Amundi Malaysia.
Basel III, a global regulatory framework, aims to strengthen banks’ ability to absorb economic and financial shocks as well as improve their risk management and governance. It requires banks to have a high capital requirement and liquidity coverage ratio that takes into account the amount of high quality liquid assets, such as gold.
“Gold prices have been trending up since December last year [after the launch of the standard]. Coincidentally, global inflation expectations also rose during that period, adding to the demand,” says Tutiana.
According to the XAU-USD Spot Exchange Rate, gold prices rose to US$1,234.25 per ounce on March 2 from US$1,170.38 on Dec 5, when the standard was announced.
According to Robin Lee, CEO of HelloGold, the first shariah-compliant gold savings platform that allows the public to invest in gold via a mobile application, the shariah gold standard is a long-term play. “The launch of the standard will see higher demand for gold and drive prices up. But instead of looking at a six-month horizon, it is probably six years,” he says.
Experts have mixed views on the direction of gold prices in the near term. Lim Suet Ling, CEO of UOB Asset Management Bhd, says prices could easily surpass the US$1,300 per ounce mark due to the uncertainties in the global economy. “The possibility of a European Union debt crisis contagion or US President Donald Trump’s missteps could easily see gold prices return to 2016 levels of more than US$1,300 per ounce.”
According to news reports, the EU debt crisis is far from over and the next one could be brewing in Greece and Italy. The Guardian reported last month that the Greek government had difficulties negotiating with its creditors on the additional austerity measures to be taken. Meanwhile, Italy — the third largest economy and second largest manufacturing nation in the EU — had amassed almost €300 billion in bad loans at the end of last year.
Trump’s executive orders (including the travel ban on several Muslim countries) have received a backlash from both within and beyond the US, adding another layer of uncertainty to the global economy.
Lee says even though the US and global stock markets have seen a rally since Trump took office, it remains unclear how he will lay out and execute his plans to “make America great again”. “The US dollar is strengthening due to his promises, which include increasing infrastructure spending and reviving the country’s manufacturing sector. But how is he going to revive the manufacturing sector with a strengthening dollar — stronger than the yen and renminbi?”
Rising anti-globalisation sentiment following the Brexit referendum in June last year and Trump’s election caught the world off guard. There are risks that the same scenarios could play out in these forthcoming European elections.
With all the uncertainties, investors should buy gold for hedging purposes instead of actively trading, says Lee. That is because gold prices are currently high with limited upside potential.
“Gold prices are on the high side now. But investors [who have not included gold in their portfolio] should look into it. It is like paying a premium when you buy an insurance policy. Its aim is to hedge or minimise losses when the global economy worsens.”
Chris Gan, vice-president of the Singapore Precious Metal Exchange, says, “Betting that gold prices will increase in the short term is pretty bold. It would have been a good time to enter the market and trade gold when the price was US$1,100 per ounce. But now, it is already on the high side.”
He advises investors to keep a close watch on the strengthening US dollar and Trump’s policy decisions. The US dollar, which usually has an inverse relationship to gold prices, has been strengthening since the end of last year.