Why Islamic finance can help renew gold’s safe-haven status

U.S. one-dollar currency notes; taken September 2018.U.S. one dollar bills.

Gold has long been viewed as a safe-haven play, but despite recent geopolitical turmoil and market fluctuations, the yellow metal hasn’t kicked into gear to match the milieu. However, some analysts are pointing to its importance to Islamic finance as a new source of demand.

Investing in gold had been a fuzzy area for Shariah compliance as it was considered one of the items necessary to daily life, and therefore unable to be hoarded or kept in hopes it would appreciate in value or traded on speculation.

But in 2016, Bahrain-based Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) and the World Gold Council set out standards for gold as an investment, opening the door to greater investment flows from the Muslim world.

Even with that new potential market, gold still hasn’t lived up to its reputation for a safe-haven play, with the spot price of gold dropping from around US$1,358 an ounce in late January to around US$1,203 on Friday, according to Bloomberg data.

Robin Lee, CEO of HelloGold, a company which created a mobile gold-trading platform, said that the metal was essentially competing on the institutional side for safe-haven fund flows.

Speaking at the IFN Forum at the Singapore Exchange on Friday, he noted that wealthier people will have access to a “smorgasbord” of financial products to provide diversification in their portfolios. But Lee added that the “man on the street” doesn’t have the ability to invest in U.S. inflation protected bonds, called TIPS, or in sovereign bonds.

Lee added that his company’s target market didn’t have any choice but to invest in gold, noting that HelloGold had around 27,000 customers in Malaysia and the average transaction size was around $20.

“A lot of these folks, within the context of Malaysia, don’t really have much choice. When you think about $20, you can’t even put money into the simplest banking product,” he said. “For them, gold becomes potentially their only savings product” outside of their pensions.

Lee also noted that institutional investors are very concerned about the movement of the U.S. dollar, while for the unbanked he’s targeting, the demand for gold will persist because they don’t care about the greenback. His customers are looking at the movement of gold or the U.S. dollar against their local currencies and looking for inflation protection, Lee said.

“They care about what they can buy with their local currency,” he said, noting that when local currencies such as Malaysia’s ringgit, Indonesia’s rupiah or Thailand’s baht depreciate, U.S.-dollar-denominated products, such as petrol, become more expensive.

Lee said his company, which is already operating in Malaysia, was looking to expand to Thailand, Indonesia, Turkey, Egypt and other parts of Africa.

Even for Islamic customers at the higher end of the income spectrum, gold may grow in importance as an investment.

Andrew Naylor, director of central banks and public policy at the World Gold Council, said on Friday the Islamic world would likely need to look to gold for its diversification benefits in portfolios.

“Gold is obviously the ultimate safe-haven asset, but I would say the penultimate safe-haven asset is Japanese government bonds [or] U.S. Treasurys. They’re not available to consumers in Islamic finance,” Naylor said at the IFN Forum.

Others said they expected that gold’s attraction as a safe-haven asset in general would eventually reassert itself.

“It makes sense that gold is not doing that well relative to equities because equities are going up,” Robin Tsui, a gold ETF strategist for Asia Pacific at State Street Global Advisors, said at the IFN Forum.

“The long U.S. trade is quite crowded at the moment and the short gold trade is also very crowded. There could be some reversal in the coming months” because the U.S. stock market can’t rally forever, Tsui said.

But Tsui added, “it is very hard to time when is the correction, so potentially, if there’s a correction in the dollar and also equities, then gold will actually help you as a safe-haven asset.”

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