Shariah Gold Standard Could Reignite Gold Bull Market in 2017
Gold prices have been on a precipitous slide since Donald J. Trump won the U.S election back in early November. But the Shariah Gold Standard, which is set to be launched before the end of the year, has the potential to reignite gold prices, setting gold prices up for a massive rally in 2017.
Gold prices have taken a big hit since Donald J. Trump won the U.S. election. Since the start of November, gold prices have tumbled 11.5% to around $1,130 per ounce. With all the optimism surrounding President-elect Trump, investors have turned their back on previous metals like gold and silver, confident that Trump’s pro-business policies will be a boon for the U.S. economy. As a hedge against economic uncertainty, gold is not in vogue right now.
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But all of that could change in 2017.
Up until this point in history, most of the world’s 1.6-billion Muslims don’t invest in gold. That will change in 2017, when the new Shariah Gold Standard launches, opening up over $2.0 trillion in assets, most of which isn’t currently invested in precious metals like gold, silver, and platinum.
Islam’s 100-million investors have typically shied way from investing in gold-related financial products. That’s because under Islamic religious laws, gold is forbidden from being held with the intention of trading at a later date for an expected higher value. (Source: “Seminars on Shariah Standard on Gold,” World Gold Council, last accessed December 2016.)
Until the Shariah Gold Standard, Muslims have not been able to trade gold for a profit. Nor could they use gold investment products like exchange-traded funds (ETFs) and futures, or own gold mining stocks.
Under the new Shariah Gold Standard, gold will no longer be defined as a currency; it will be a commodity. As a result, gold transactions will be allowed as long as they are backed by real gold. This simple clarification of gold as an investment could open the floodgates for gold in 2017.
Muslim Gold Investors Could Drive Gold Prices
Until the Shariah Gold Standard came into being, Muslim investors within Islamic financial markets were limited to what they could invest in: real estate and sukuk (Islamic bonds).
The Shariah Gold Standard now allows Muslim investors to better diversify their assets. Once the Shariah Gold Standard is launched, gold prices are expected to start rising as an additional 1.6-billion Muslims and central banks will now be allowed to invest in gold. On top of that, the new gold standard will be able to help Muslim countries with weak currencies, including Malaysia, Indonesia, and Pakistan.
According to Standard & Poor’s, up to $3.0 trillion could enter the gold market after the Shariah Gold Standard launches.
Even if only a small percentage of the $2.0 trillion (or $3.0 trillion depending on your sources) in Islamic finance assets move into gold in 2017, the huge demand has the potential to reverse the current downtrend and send gold prices soaring.
I enter this as evidence: in 2015, gold imports through Hong Kong into mainland China came in at around 1,000 tonnes. If Islamic financial institutions put just two percent of their managed assets into gold, that would equal another 1,000 tonnes of additional demand. (Source: “Islamic investors could ignite the gold bull market,” Business Insider, November 13, 2016.)
Having another investor group as large as China enter the gold buying market out of the blue has the potential to send gold prices soaring. The Gulf Times (Qatar) explains that prices could soar as high as $3,000 in the medium term, a 165% increase from where gold prices currently stand. (Source: “Islamic gold standard to debut in December; price jump expected,” The Gulf Times, November 22, 2016.)
The new Shariah Gold Standard aside, there remain a number of excellent catalysts for higher gold prices. Interest rates are still near record lows, global economic growth is muted, and negative interest rate policies are putting pressure on many global currencies.
As a result, the underlying fundamentals are there to help reverse the pullback in gold prices. Moreover, the influx of 100-million Islamic gold investors has the potential to send gold prices soaring above current levels.
