A move towards gold and silver-based currencies?

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KUALA LUMPUR: As an alternate medium of exchange alongside the ringgit, gold dinar and silver dirham are generating a lot of interest domestically, said  Umar Ibrahim Vadillo, CEO of Kelantan Golden Trade Sdn Bhd.   

“We are experiencing a high demand for our gold dinars and silver dirhams to the point that our minted supplies are not enough to meet local demand. We have to wait several months before we can distribute them domestically,” he said.

Kelantan Golden Trade Sdn Bhd is a wholly-owned subsidiary of Kelantan Menteri Besar Inc.

Gold dinars and silver dirhams are minted for circulation and the payment of zakat. Their standards are regulated by the World Islamic Mint, an authorised body for the regulation of the Islamic dinar and dirham.

Kelantan adopted the use of dinar and dirham as an alternate means of trade a year ago. Since then, Umar’s company has sold RM40 million worth of gold and silver.

While paper-based currencies like the ringgit and the US dollar have a fixed face value, dinars and dirhams are valued according to weight. One dinar is equivalent to one ounce of gold, while one dirham is 59.5g of silver, both pegged to the prevailing market value.

“The establishment will accept your gold dinar at the exchange rate of the day. So if you have to pay RM200 and the dirham is now RM25 per ounce, you will have to pay eight dirhams equivalent to RM200. If the price is RM26 per ounce, you will have to pay a bit less and the difference will be paid back to you in ringgit,” Umar said.

Umar says nearly 3,000 shops currently accept dinar and dirham in exchange for goods.

“We’ve started in Kelantan and are currently expanding to other states in Malaysia. We are looking to Johor and Kedah,” he said.

Currently nearly 3,000 shops, mostly in Kelantan, accept dinar and dirham in exchange for goods, and the number is expected to grow, Umar said.

While some customers shy away from the use of dinar and dirham for everyday transactions given the fluctuating face value, some look to the coins as an alternative investment. In times of turmoil, precious metals are seen as safer as investors pull their money out of the volatile stock markets. And smaller investors who can’t afford to buy gold bullion may opt for the lighter dinar and dirham.

“There are about five million users of gold in the world and the number is growing exponentially. Why would these people prefer gold and silver accounts? If you had invested in gold a year ago, that gold would have doubled in value. Its the same with silver. We started with the value of silver at RM13 per ounce, on the Aug 12 last year, now, it’s RM25 per ounce” Umar explained.

Gold hit a fresh intraday high of US$1,867.95 (RM5,566) per ounce last Friday at press time, up from this year’s low of US$1,381.22 per ounce on March 15 2011. The precious metal has seen its price tripling in the past five years from the US$600 per ounce level.

However, it should be kept in mind that the price of gold and silver has seen substantial increases as of late as more investors flock to commodities as a safer haven, which means that the price increase could in the long run not prove sustainable. Silver spot prices closed last Friday at US$41.33 per ounce.

For merchants interested in adopting the system, Vadillo explains that they will have to pass a small seminar that teaches them to recognise the coins and basic procedures to find the pricing.

“We make sure they are well prepared. They know how to use the pricing system and once they pass the seminar they join our network. What we have now is a directory of people introduced to gold dinar” he added.

Another convenience that the company is looking to introduc to dinar and dirham users is the gold-back debit card. The card contains the amount of gold you have in your deposit.

“You have all the facilities that you have today with paper money and you have all the benefits that you have with gold. We haven’t entered into it yet, but eventually we will” he said.

This year, Umar targets around RM100 million in domestic sales of gold dinars and silver dirhams with international sales worldwide contributing RM120 to RM150 million in sales of the precious metals.

This article appeared in The Edge Financial Daily, August 23, 2011.