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For both savvy investors and central banks, gold has long been part of the mix. It tends to be a safe haven investment, so it performs well in down markets.
That makes it a great choice for diversifying your portfolio. It’s also a store of value, meaning it can hedge against inflation.
Currently the price of gold is up more than 30 percent year-to-date. Does that mean it’s the right time to buy in?
Below we unpack the different ways you can dive into gold, and what Muslim investors should consider to keep their gilded investments halal.
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The difference between gold investment versus trading has to do with the time horizon. As a trader, you might buy and sell gold in a single day in order to capitalize on short-term price movements and volatility.
Trading is about making a relatively quick profit. Traders often use technical analysis (using charts and data to spot trends in price movements) to make carefully timed buy and sell decisions. Speed and timing is the name of the game.
Investors are typically the opposite. They’re playing the long game. They may hold gold in a portfolio for months, if not years, perhaps as a store of value or a way to diversify their assets.
For the investor, price swings on any given day are generally unimportant, as they’re using gold as part of a long-term strategy. Investors are looking at how gold can help them deal with inflation or economic instability.
They may look at global economic trends and monetary policy to decide if gold is a good long-term play.
In Islamic finance, gold trading is considered haram if it involves things like futures contracts and options.
These can involve gharar (excessive uncertainty), speculation, and can entail trading gold without physically owning it. That said, some types of spot trading, like sharia compliant gold ETFs, are permissible (more below).
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There are three key factors that can determine the profitability and risk of gold investments.
Gold tends to do well during times of instability. During the Covid-19 pandemic, gold hit an all-time high. Deepening conflict between Russia and Ukraine similarly drove prices higher. If you’re convinced trouble is ahead, gold might be a good move.
The price of gold and the US dollar typically move in opposite directions. That’s why central banks keep bullion in their vaults.
If their dollar reserves drop in value, the rising value of gold reserves can offset some of the losses. Recently gold demand has surged on the back of huge central bank purchases worldwide.
Rising interest rates can reduce the price of gold. That’s because gold does not yield interest, making it relatively less attractive when rates are rising. Conversely, during rate-cutting cycles, investors become bullish on gold.
If you’re thinking about investing in gold, what should you buy? Many people simply buy gold jewelry.
But as an investor, you can do better. Jewelry tends to come with a high premium relative to the spot price of gold.
It also tends to have a lower resale value. Gold coins are a big step up, offering better value.
Better yet, gold bars tend to have lower premiums over the spot price compared to coins. If you’re in Dubai, you can head to the world-famous Gold Souk for options.
Read more: Short-Term vs. Long-Term Investment Strategies: A Comprehensive Guide
When buying physical gold, you want it to be 24 karat (99.99% pure). This means your gold holds the highest value per gram. This makes it a better investment than say 22 karat, which is mixed with a small amount of other metals to make it more durable.
Be sure to ask for a certificate from a credible authority, like the Dubai Multi Commodities Centre (DMCC) or a relevant institution. It should include details like weight, purity, and price.
Gold prices are tied to the international spot price. You’ll pay a small premium over this price in order to cover the costs of manufacturing and distribution.
Remember: the bigger the bar, the smaller the premium. You can ask the dealer for a breakdown of the cost, detailing the spot price and the premium per gram.
If you’re keeping gold at home, it’s wise to get a high-quality safe (at least ½ inch thick high-strength steel walls and doors). If you’re buying a large quantity of gold, you might also want to consider insurance.
The other option is to store your bullion in a bank safe deposit box or vault storage company. Some gold dealers offer storage services as well.
You don’t have to buy physical gold to invest in it. Here’s a few other options:
you can buy units of digital gold that are backed by real-world gold. This allows smaller investors to buy fractional amounts and makes it easy to buy and sell.
It offers a cryptocurrency backed by gold that it bills as sharia-compliant.
Gold ETFs track the spot price of physical gold and are likewise backed by actual gold.
Some are explicitly certified as sharia compliant, like SPDR Gold Trust, ensuring that the gold is owned outright and the fund operates without riba (interest) or gharar (excessive uncertainty).
With ETFs, you should compare fees to decide which is best.
buying shares in gold mining companies is a way to invest in gold indirectly. The share price will be tied to gold prices as well as how well the company is performing. It’s a relatively higher risk option, but may come with a higher payout.
Read more: How can a Muslim investor choose the right ETF?
As noted above, trading gold is all about making money from short term price movements.
This can become problematic from a sharia-compliance perspective.
However, scholars say that under certain conditions, trading is halal. The Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) has set out detailed standards.
The key takeaways are as follows:
- The exchange of gold and payment must happen immediately (within a few days) to avoid gharar and riba. No deferred payments.
- When gold is traded for gold, it must be of equal weight and purity.
- Avoid trading gold futures or derivatives like CFDs (contracts for difference), which may involve trading without ownership over the underlying metal.
Read more about: Is Buying Gold With Credit Card Halal?
Ultimately that depends on when you buy it, and what you compare its returns to. Take an example: from 1990 to 2020, the price of gold increased by 360 percent.
That’s an incredible return, unless you compare it to the Dow Jones Industrial Average, which rose a whopping 991 percent during the same period. Conversely, during other periods gold beat major indices, particularly during downturns.
References
Commodity Gold
Gold surges on softer dollar, Russia-Ukraine tensions
Why Central Bank Buy Gold?
Gold demand hits record levels as central banks buy at 'eye-watering' pace
What are the Best Safes to Store Gold Bullion at Home?
What is the digital gold?
OneGram lists Islamic cryptocurrency on its own virtual exchange
Top gold ETF gets Islamic finance certification to tap new markets
Gold vs Stock Market Crashes: 100-Year Analysis
Gold spot price vs S&P 500: historical performance
Disclamer:
This post is for educational purposes only, and the Firm does not directly or indirectly provide these services.
