Gold Standard Approved For Islamic Finance

We reported a month ago that changes to Islamic law could make gold an acceptable financial asset to hold for the first time.  Bloomberg this week reported that this did indeed happen, being approved on 19 November (but announced just Monday) after negotiations between the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) and World Gold Council.

The report states there is US$1.88 trillion in Islamic finance business that can now invest in gold.  Whilst yet to be confirmed, it appears this will likely include investment in ETF’s like GLD.  The move potentially opens avenues for Islamic central banks and also commercial banks who may use it to meet Basel III liquid asset requirements.

To quantify this in demand terms, if just 1% of the Islamic Finance institutions funds were deployed into gold it would increase demand by 500-1000 tonne per year in a market that sees around 4000 tonne of current demand and already inadequate supply.  It could be quite extraordinary.

There are 1.6 billion muslims worldwide, and as we reported yesterday, this potential new demand comes at a time of growing physical demand from China and India.