Fatwa: Gold Investment Parameters

The 96th Discourse of the Fatwa Committee of the National Fatwa Council for Islamic Religious Affairs Malaysia convened on 13th-15th October 2011 had discussed the Parameters of Gold Investment and made the following decision:
After hearing the briefing and explanation given by Y. Bhg. Dr. Ashraf Md. Hashim and Y. Bhg. Ustaz Lokmanulhakim bin Hussain from the International Shari`ah Research Academy for Islamic Finance (ISRA), the Discourse has agreed to accept and approve the following Gold Investment Parameters:
General Conditions of Sale and Purchase
1. Sale and purchase transactions of gold must comply with all the conditions of sale and purchase as prescribed by Shari`ah, namely the contracting parties, items of exchange and pronouncement according to the customary practice. If a particular transaction fails to fulfil one of the sale and purchase conditions, the said transaction shall be considered void.
Contracting Parties
2. The Contracting Parties must be those having the capacity to execute a contract (Ahliyyah al-Ta’aqud), that is, by fulfilling the following criteria:
i. Age of majority, sound mind and discerning (rasyid)
A sale and purchase transaction by a contracting party who is insane or a child, whether prudent (mumayyiz) or imprudent (not mumayyiz), is void.  An offer and acceptance made by a prudent child is invalid on the ground that the sale and purchase involves highly valuable goods.
ii. Consent
The contract of sale and purchase must be concluded by two consenting parties, without elements of coercion, pressure and exploitation.
Purchase Price (al-Thaman)
3. The purchase price (al-Thaman) must be clearly known to the contracting parties during the sale and purchase transaction.
The Purchased Goods (al-Muthman)
4. The purchased goods (al-Muthman) shall be something that is in existence, and entirely owned by the seller during the occurrence of the sale and purchase contract. Therefore, the sale and purchase of something that does not physically exist and is not owned by the seller is void.
5. The purchased goods (al-Muthman) must be something that is transferrable to the buyer or his representative. In the event that the purchased goods are not capable of being transferred to the buyer, or the seller makes it a condition not to transfer the goods to the buyer, then the contract is void.
6. The purchased goods (al-Muthman) shall be known to both contracting parties during the sale and purchase transaction. This is possible through the following mechanisms:
  • Personally viewing the goods to be purchased during the sale and purchase transaction, or if viewed prior to the contract it must be within a timeframe that will not affect the characteristics of the goods.
  • Viewing the sample of the goods to be purchased. This usually takes place during the ordering process and prior to execution of the contract.
  • Identifying features and rate of the purchased goods in detail, which customarily will not give rise to a dispute. In the context of gold, its identification is performed by defining the level of authenticity of the gold, using the old standard based on carat  (such as the 24 carat gold), or the new standard based on percentage (such as the 999 gold). This feature identification must also cover the gold forms, either in the shapes of coins, wafers, blocks, etc). Accuracy in the weighing of gold is also a condition in the identification of the gold features.
7. In a sale and purchase transaction, pronouncement indicates consent of both parties to conclude a sale and purchase contract. It can be materialized either verbally, or through a method that can possibly bear the values of an oral speech such as writing, and the equivalents. Meanwhile, sale and purchase through Mu’ataah is regarded as a credible pronouncement by some jurists.
8. The element of time contigency must not be included as part of the pronouncement in a sale and purchase transaction. For instance, a person says,
“I am selling these goods to you at the price of RM100 for the period of one year”.
9. Offer and acceptance must match and be identical with one another in terms of attribute and rate.
Specific Conditions for Sale and Purchase of Gold with Usury Attribute
10. Due to the reason that gold and money are two items containing the element of usury and sharing the same effective cause, therefore the following additional conditions must be fulfilled:
  • Taqabudh (transfer) of the two items involved in the transaction must take place before the contracting parties depart from the contract session.
  • The sale and purchase of gold must be executed on the spot without any delay. The said conditions only applicable to the types of gold having an usury attribute, such as gold blocks and gold coins. These conditions will not apply to gold jewellery as it falls outside the scope of the effective cause of usury (riba).
The particulars of taqabudh and other on-the-spot transactions are as follows:
The first condition: Taqabudh
11. Taqabudh (transfer) must apply to both sale and purchase items namely the price and purchased goods (gold), and it must be executed prior to the departure of both parties from the contract session.
12. The consideration may be executed through the following methods:
  • Cash payment
  • Payment by certified cheques (e.g. banker’s cheque)
  • Payment by personal cheques
  • Payment by debit card
  • Payment by credit card
  • Cash transfer from a savings or current account
Traditionally (by ‘urf) all of the above modes of payment, except for (c) are regarded as cash payment by the seller. Payment through the credit card is still considered as cash due to the seller being able to claim the selling price in full from the credit card issuer. Any debt, if it does exist, is a matter between the credit card holder and the card issuer, not the seller.
This cash term is still customarily acceptable to the seller notwithstanding that in actual fact, the payment is physically obtained or gets transferred to his account several days after the transaction takes place.
13. The actual transfer of the purchased goods (the gold) must take place or done through an acceptable method that can replace the actual transfer. The latter will have the same effects as the actual transfer, namely:
  • Transfer of dhaman (pledge) from the seller to the buyer
  • The buyer’s capacity to obtain his purchased goods at anytime without any deterrence.
14. The contract session in a sale and purchase transaction may take place by way of physical meetings, or through constructive means (maknawi). An example of the latter is an offer and acceptance via telephone, short message service (sms), email, facsimile, etc. For this category of contract session, it is a condition that taqabudh shall take place, for instance through a wakalah transfer (transfer by one’s representative).
It must be noted that a contract session in the form of writing shall only begin when (the written document) is received by the contracting party. For example, the buyer signs a sale and purchase agreement and subsequently mails it to the seller. After three days, the agreement reaches the seller. In this situation, the contract session begins at that point of time and if the seller agrees, he shall complete the contract session by affixing his signature to the agreement. The purchased goods shall be transferred to the buyer through actual or constructive means.
The second condition: On the spot
15. The sale and purchase transaction shall take place on the spot and there must not be any element of delay, either in the transfer of consideration or gold.
16. The prohibited delay in the transfer of consideration shall cover purchase by full credit or purchase by instalments.
17. Any delay in the transfer of gold that exceeds three days after the conclusion of the sale and purchase transaction is totally prohibited.
As for the delay in the transfer of gold that is less than three days, the Discourse is aware that there exist different views by scholars on this matter. Despite that, the Discourse is in favour of adopting the opinion that forbids any delay even if the period is less than three days. In other words, the transfer of gold shall take place in a contract session without any postponement. This is because in gold trading, the delay of three days is not an urf, unlike in the case of a foreign currency exchange.
In a foreign currency exchange, the period of T+2 is necessary as it goes through a certain process that involves the different working hours between countries, electronic money transfer, clearing house, etc. The processes mentioned here do not exist in the sale and purchase of physical gold. Therefore it is inaccurate to apply qiyas (analogical reasoning) to the foreign currency exchange process.
However, practically, the seller will transfer the gold after the amount of payment, made by cheque, etc is credited to his account. This process usually takes three working days. In dealing with the period between the cheque transfer and the receipt of gold, the seller and the buyer may adopt the following rules:
The buyer shall only make an order to the seller by mentioning the type and weight of gold that he wishes to buy. This order shall be accompanied by his remittance of money to the seller’s account. At this stage, the following must be given due attention:
  • At this stage, the contract of sale and purchase of gold has not taken place.
  • The money that has been deposited to the seller’s account is not yet his. It still belongs to the purchaser and is kept on trust by the seller. In this case, it is better for the seller to open a special trust account.
  • The gold is still owned by the seller and he is fully responsible for it.
  • At this stage, the purchaser may still be able to cancel his order and but in such case the seller shall return the money to the purchaser. However, if there is any actual loss due to the cancellation, a condition may be imposed to the effect that it shall be borne by the buyer.

For instance, the buyer made an order of 100gm of 999 gold at the price of RM 20,000. At this point, the seller will have reserved the said gold and not sell it to any other party prepared to purchase it. After three days, when the seller is ready to execute the sale and purchase contract and thereafter transfer the said gold to the buyer, the buyer decides to cancel his order. On the very same day, the gold price has dropped to RM 19,000. In other words, the seller would suffer a loss of RM 1,000 if he sold it to another party. In this case, the actual loss is RM 1,000.

Once the bank has cleared the money order, then the sale and purchase contract must be executed. The money in the trust account (if any) can be transferred to the seller’s account and the gold shall be handed over to the buyer.
Contract and Additional Elements
18. The involvement of hibah (gift) in a sale and purchase transaction whether in kind or cash is permitted if it fulfils the conditions of hibah, and does not involve elements that are contrary to shari`ah. It must be pointed out that hibah is in fact a voluntary contract and is not in the typical form (of transaction). In other words, if an undertaking (to grant) hibah is not fulfilled by the seller, the purchaser cannot compel him to grant the said hibah.
19. The involvement of wadiah (safekeeping) in the gold investment plan shall comply with the rules and regulations of wadiah, which include among others that the holding of wadiah must be based on Yad Amanah (savings with guarantee).
20. A person who buys gold is free to deal with his gold (tasarruf), including granting loans (qardh) to others. However it must satisfy the criteria of qardh allowed by the shar’iah, which inter alia include, being free from the elements of interest and “salaf wa bay”, namely a debt that is tied to the sale and purchase.
21. A person who buys gold is free to deal with his gold (tasarruf) including using it as a security against a cash loan, as long as the concept of al-Rahn (pledge) that is applied is in line with shari`ah. However in theory, this is not encouraged as it leads to unnecessary debt-contracting activities.
22. Wa’d (promise) can be included in a gold investment, so long as it is a wa’d on one side and not muwa’adah (promises) on both sides. An example of application of wa’d in this context is making a purchase order i.e. when a customer makes an undertaking to buy gold at a certain price. This purchase agreement is known as ‘price-locking’. If the process of price-locking is similar to a contract of sale and purchase, then it is prohibited as it would lead to delay.

23. Sale and purchase transactions must be free from elements of usury, gambling, excessive uncertainty and oppression. If any of such elements exists, it is presumed that the sale and purchase transaction does not fulfil the shari`ah criteria.

Of Course The Gold Price Is Manipulated

Of Course The Gold Price Is Manipulated…That’s The Point! | Gold Eagle.

Throughout history, there have been a constant flow of schemes to try to manipulate the gold price and gold itself in terms of paper money. These have come from governments, institutions as well as from individuals. The aim has always been to either establish the value of currencies or enhance that value in terms of gold. The first key to this is to ensure that the gold price is made in the paper currency and not the price of the paper currency in gold.

At school you probably read the book called the Alchemist, where villains tried to invent formulae where they could transform lead to gold. While what they managed to do was a good confidence trick, they could not replicate gold. Today the process continues, but now the boldness of government has gone as far as to say that paper money is better than gold in terms of its value. But gold is gold and for the prudent and those wanting to preserve their wealth over the long term, nothing can replace it.

Experiments using fiat currencies have been carried out since the days of distant Chinese dynasties in attempts to emulate or replace the real money of gold. The reason is simple and explained in a quote I borrow from Mr. Popescu, “Aristotle, the Greek philosopher, student of Plato and teacher of Alexander the Great, was mentioning fiat money 2,400 years ago when he said, “In effect, there is nothing inherently wrong with fiat money, provided we get perfect authority and godlike intelligence for kings.” But we can’t, which is why in history, there has never been a ‘money’ that can retain its value or replace gold as real money, in all seasons weathered by economies.

It is because we don’t have perfect authority and governments do not have godlike intelligence that central banks need to attempt to manipulate the gold price in attempts to build and hold confidence in fiat currencies. Why do governments keep coming back to these different types of money? They have a need to govern/control all types of money, their economy and their people. Without control over money the majority of a government’s power dissipates. That’s man’s history and his future, in this world.

That’s why governments find themselves in opposition to real money, such as gold and silver, which essentially restrict and, in the end, governs governments when extreme times hit. This will happen in the near future once the monetary system fragments and when it does, governments will turn back to gold and later silver and try to hold as much as they can. But this does not mean they will move away from fiat money, no, they will use precious metals to add credibility to the rising quantity of paper money.

Please note we did not say backed by, or issued against it. Within the need for government issued money to retain credibility the concept of reformation of government issued money is unacceptable, because that in itself would be read as an admission of failure and give rise to falling confidence in it, an unacceptable option for governments. The level of control over an economy must be maintained at all costs. Precious metals will be used to reinforce that control. As always, this will be done in the interests of the nation and its citizens.

Likewise, when governments manipulate the gold price, it is with the intention of enhancing the acceptance of fiat money and our dependence upon it as both a measure of value and a means of exchange.

Often legislation and taxation are used to enhance its use and restrict the use of alternatives, either foreign money or precious metals. Manipulation has also been used by governments acting in concert such as after the ‘closing of the gold window’ by President Nixon in 1971.

Let’s now look at the various examples of manipulation of the gold price through history.

Gold’s Confiscation and subsequent dollar devaluation:

 FDR Issues Executive Order 6102 Banning Gold Ownership

In 1933 the most complete form of manipulation was enacted by the U.S. when it confiscated citizen’s gold allowing them only to retain $100 worth of gold, at the time this was five ounces of gold.

This brought the gold market to a halt with dealers [except where these coins were defined as rare coins] closing down, storage systems handing over client’s gold to the Fed and the gold market going into hibernation in the U.S. for the next 41 years. Two years later the U.S. government devalued the dollar to $35 to one ounce of gold.  While the reasons appeared plausible [to boost U.S. money supply and protect the banking system, in the nation’s and its citizen’s interests, was what the public was told – listen to the actual speech hyperlinked above].

Many believe that today there are better ways of achieving the same objective without gold confiscation, so why could it happen again?

The world has become inter-dependent with the U.S. dollar which is the center of the global monetary system at the moment and from which nearly all other currencies stem. But the emerging nations, while feeding off the developed world’s economies are building a large degree of economic and monetary self-sufficiency. Recently they agreed to set up an institution replicating the I.M.F. for the emerging world. Its headquarters will be in Shanghai. Their path to an international currency that will be an alternative to the dollar is well under way.

China is at the forefront of this as its economy is expected to become the largest in the world by the end of this year or next. It will bring its own currency forward as a global reserve currency, breaking away from the dollar in the process.  Without the U.S. dollar‘s hegemony, the dollar cannot stand as the only measure of value and as the sole global reserve currency. With this in mind the demand for gold by central banks will rise to reinforce confidence in all currencies.

And with the supply of gold at 3,050 tonnes of newly mined gold and ‘scrap’ sales, at best, at 1,200 tonnes, the gold market will not be able to supply the world’s needs for monetary purposes, in the event it is needed to reinforce confidence in local currencies. Hence gold confiscation, for completely different reasons than in 1933 is, in our opinion, a distinct probability. With potential Yuan convertibility coming at the earliest in late 2015 we are very close to that event.

After the confiscation of gold in 1933 followed by the devaluation of the dollar by 75% in 1935, the bulk of the developed world’s gold moved across to the U.S. The devaluation of the dollar was not reflected in foreign exchange markets in 1935, so gold continued to be sold at $20 an ounce in countries outside the U.S. while the U.S. was paying $35. This is why the U.S. amassed over 26,000 tonnes of gold before the Second World War. We see this as part of the strategic alliance that matured in the Allies coming together in that war. The control of gold had to be out of the reach of the war in Europe. This price manipulation ensured that this happened.

After the war and a period of recovery, we saw the next blatant exercise in price manipulation of gold.