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Gold a Shariah compliant investment

Prior to the outbreak of virus in China, analysts were of the view that gold prices will hold above US$1,500/oz in 2020 and make modest gains in 2021. It was also believed that low interest rates and geopolitical uncertainly will bolster appeal of the precious metal. Lately price of precious metal, falling in the list of safe-haven assets has been hovering around US$1,600/oz.

Prices shot up 18% last year — the biggest annual gain since 2010 — as global economic growth faltered and central banks responded by easing monetary policy. Gold has re-established its safe-haven status and analysts expect price to touch new highs. A combination of technical and fundamental forces has allowed gold prices to hitting new seven-year highs this quarter. Inflows into gold exchange-traded funds (ETFs) have already hit seven-year peaks.

Demand for gold is also being reflected in the multi trillion dollar exchange traded funds (ETFs) market. Year 2019 marked the fourth consecutive year of net inflows into gold-backed ETFs. Some Bloomberg reports suggest the amount of money held in these funds is estimated around seven-year highs.

Bloomberg analyst Ranjeetha Pakiam said it’s not just virus driven gains. The decision of the US Federal Reserve to lower interest rates and keep them anchored well below the historic average has also boosted the appeal of the precious metal. As a non-yielding asset, gold is an attractive investment when interest rates are low. Although, the Fed has signaled that rates are likely to remain stable during 2020, there are reasons to believe its next move will be to lower them. Futures traders are pricing in at least one rate cut after September this year.

At present, gold is sought after, not just for investment purposes and to make jewellery, but it is also used in the manufacturing of certain electronic and medical devices. It may be worth exploring the factors that are driving price of precious metal higher.

Central bank reserves

Central banks around the world hold paper currencies as well as gold in reserve. As the central banks diversify their monetary reserves and move away from the paper currencies, the next choice is to accumulate gold. Many of the world’s nations have reserves that are composed primarily of gold. Reportedly, central banks around the world are buying gold, ever since the US abandoned the gold standard in 1971. Russia has been the biggest buyer, followed by Turkey and Kazakhstan. In all, governments have bought around 651 tons gold in 2018 alone.

 

Jewellery and industrial demand

In 2019, jewellery accounted for approximately half of gold demand, which totaled more than 4,400 tons, according to the World Gold Council. India, China, and the US are large consumers of gold for jewellery in terms of volume. Higher offtake of gold is also attributed to increase in consumption by technology and industrial consumers. The precious metal is used in the manufacturing of medical devices like stents and precision electronics like GPS units. Therefore, gold prices can be affected by the basic theory of supply and demand; as demand for consumer goods as well as jewellery and electronics increases.

Wealth protection

During times of economic uncertainty, as seen during times of economic recession, more people turn to investing in gold because of its enduring value. Gold is often considered a ‘safe haven’ for investors during turbulent times. The interest in gold investing increases, when the expected or actual returns on bonds, equities, and real estate fall. Gold is used to protect against economic events like currency devaluation or inflation. In addition, gold also provide protection during periods of political instability.

Investment demand

Gold also sees demand from exchange traded funds that hold the metal and issue shares that investors can buy and sell. SPDR Gold Fund is the largest fund that held 915 tons gold in late-2019. In all, gold purchases from various investment vehicles represent approximately 25% of the total demand for gold, according to the World Gold Council.

Gold bars

When it comes to substantial investment in gold, the preferred choice is bars, available in different weights. Heavy bars are best suited for large investors, because they can be efficiently stored in an insured facility that specializes in precious metals.

Dozens of mutual funds are operating in Pakistan that invests in the shares of listed companies, term finance certificates and government securities. Shariah scholars do not approve investment in interest bearing instruments. This offers an opportunity to asset management companies to go for gold backed funds. Keeping in mind the current geopolitical situation, investing part of total investment in gold appears a prudent approach. It offers other multiple incentives that include: 1) SBP increasing its gold holding, investors investing in safe haven asset, and jewellers to buy officially imported gold to comply with FATF requirements.

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