The significance of this new program is that to accommodate Islam's religious mandate for gold backed money, a new and extremely large buying program will have to take place among several Middle Eastern nations, with demand for gold stretching already short supplies to a breaking point, and where prices will skyrocket from this new source of demand.
“Shariah-compliant gold demand may be `hundreds of tons’ … Gold products used in Islamic finance would need to be physically-backed and allocated to the underlying asset, according to a draft of a standard for Shariah gold being developed. “We are almost there” with a final proposal, said Mohd Daud Bakar, a Shariah scholar who is writing the draft for the Accounting and Auditing Organisation for Islamic Financial Institutions, the Bahrain-based industry group that sets Shariah standards in finance.”
Shariah finance is non-interest based finance. It’s religiously unacceptable to extract interest from others if you are a Muslim – that’s usury, also known as riba. So financial instruments have to be tailored to Islamic communities to ensure that they are not in violation of the Koran.
Shariah compliant gold investing will be configured so no precious metals are borrowed, loaned out or earn income. Thus the investor – consumer or institutional – will be confident that the actual gold holding consists of physical precious metals. The bars will be numbered and noted. The only profit to be earned will be based on the value of gold moving up. This will involve physical precious metal purchases, but ETFs can be structured similarly and already have been.
The Bloomberg report quoted above indicates the committee formed to develop the Shariah standard is moving fast. It will “meet once more next Sunday and then submit the proposal to AAOIFI’s Shariah Board.” The physical gold backing is the most important aspect and disqualifies COMEX gold futures. However, the Singapore gold contract will qualify as Shariah compliant, according to the Bloomberg analyst. - Dollar Vigilante