These investors are driving new demand for gold

Retail gold jewelery counter in Singapore’s Little India neighborhood; taken October 2018.Retail gold jewelery counter in Singapore’s Little India neighborhood; taken October 2018.

Gold, already enjoying a rally on the back of increased geopolitical tension, is getting a demand fillip from new Shariah-compliant investors seeking a safe-haven play.

Investing in gold had been a fuzzy area for Shariah compliance. Under Islamic law, the yellow metal was considered one of the items necessary to daily life; that meant it couldn’t be hoarded in hopes it would appreciate in value nor could it be 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.

Robin Tsui, Asia Pacific gold strategist for SPDR exchange-traded funds (ETFs) at State Street Global Advisors, said there’s been a “huge uptick” in Shariah compliant investors seeking out gold investments since the new standards were set. 

“The response has been quite good from both the Middle East and also Islamic countries Indonesia and Malaysia,” Tsui said at the IFN Forum in Singapore Thursday. He noted State Street’s largest gold ETF obtained Shariah compliance in January of 2017. 

Since then, the ETF has seen a 60 percent uptick in investments from Islamic countries, with Islamic investors putting around US$160 million into the ETF, up from around US$100 million in 2016, Tsui said. 

He also pointed to how the new Shariah standards have led to the creation of new gold products, with more banks willing to create Shariah-compliant gold products.

“So you’ve seen a lot of banks, asset managers — including us — pushing out more Shariah-complaint gold products, which means that going forward, there will be more money going into those products,” Tsui said. 

Among the new products is a Shariah-compliant gold-backed crypto-currency, he said. 

How to play gold

When looking the best ways to invest in gold currently, Tsui said he had a bias toward using gold ETFs, depending on how conservative and how strategic an investor might be. 

“Gold ETFs are efficient; they’re simple,” he said, noting they can be purchased through brokerage accounts. “Also, gold ETFs actually track the gold price so the spread over the stock price is quite limited.” 

When it comes to physical gold, the benefit is holding it on hand, but it becomes “quite inconvenient when you have to go to the shop. Usually, they’ll charge you a premium to the spot price,” Tsui said. 

SPDR Gold shares were down 0.72 percent at US$144.12 Thursday, but have gained around 19 percent so far this year; XAU, a spot gold price, was at US$1,525.13 at 4:11 P.M. SGT, down 0.16 percent on the day, but up around 19 percent year-to-date.

Futures can be a more tactical play, but because of margin calls, it’s not suitable for most investors to hold long term and fluctuations can be large, he added. 

Tsui was downbeat on gold mining shares, saying they don’t provide a safe haven as they tend to correlate more closely to the equity market during downturns. 

“In an uptick market, of course, gold miners can outperform the spot price. But during a down market for equities, you’ll find the downside of the gold miners is more than the spot price,” he said. “You invest in gold for a hedge. I wouldn’t advise you to invest in gold miners at all.”

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