Why Gold Is Headed Much Higher

By Michael Pento
At Gold Eagle
November 24, 2014

gold price risingWhat really drives the price of gold? Some say it’s a fear gauge. Others prefer to look at the demand coming from the Indian wedding season. But the silliest of all conclusions to reach is that the dollar price of gold should be determined solely by its value vis-à-vis another fiat currency.

The truth is the primary driver of gold is the “intrinsic value” of the dollar itself, not its value on the Dollar Index (DXY). The “intrinsic value” of the dollar can be determined by the level of real interest rates. Real interest rates are calculated by subtracting the rate of inflation from a country’s “risk free” sovereign yield. Right now the level of real interest rates in the U.S. is a negative 1.55%.

A key factor is to then determine the future direction of real interest rates. The more positive real rates become, the less incentivized investors are to hold gold. And the opposite is also true. The more negative real rates become, the more necessary it is to own an asset that is proven to keep pace with inflation. The Fed has threatened to begin lift off from its zero interest rate policy in the middle of next year. However, the Fed has made it clear that it will only raise nominal yields if inflation is rising as well. Therefore, there is no reason to believe real interest rates will rise anytime in the near future.

The “intrinsic value” of the dollar is not rising; and most likely will not increase for the foreseeable future. The dollar is only rising against other currencies because the value of those currencies are being pummeled by their central banks to a greater extent than our Fed. The weightings in the DXY favor the performance of the dollar against the euro and the yen. Therefore, just because the nations of Europe and Japan are determined to completely wreck their currencies does not mean that the “intrinsic value” of the dollar is improving or that the dollar price of gold must go down. In fact, holders of the euro and yen should be more compelled to own gold than ever before.

The sophomoric view held on Wall Street is that gold must go down if the dollar is rising on the Dollar Index. Their specious argument is that it’s more expensive to buy gold because of the dollar’s strength, and therefore demand for the commodity must decrease. However, this argument completely overlooks the increased motivation to buy gold emanating from the continued attack on the yen’s “intrinsic value” by the bank of Japan. For example, real interest rates in Japan are a negative 3% and are promised by the Bank of Japan to keep falling. Japanese citizens should be scrambling to own gold in this scenario even if it will take more yen to buy an ounce of gold. And from all evidence available demand for the physical metal remains strong.

  • Supply demand metrics for gold are currently favorable.
  • Central bank demand increased to 335 tons so far this year, up from 324 tons in 2013.
  • Investment demand is up 6% YOY, while supply was down 7% YOY in Q3.
  • Nevertheless, gold is down about $100 an ounce YOY, and
  • Gold mining shares have plummeted by about 30% during the same time period.
  • This is due to short selling of gold futures by banks that wish to see the gold price lower.

In the short-term financial institutions may be able to manipulate gold prices lower, as they bring to fruition their self-fulfilling prophesies.

However, in the long run there exists three great risks to markets and the global economy in general that will be very supportive for gold:

  • A collapse of the yen that becomes intractable;
  • spiking interest rates in the United States due to the Fed’s unwillingness to get ahead of the inflation curve; or, more likely,
  • a significant weakening in U.S. economic data that puts serious doubt in the sustainability of the recovery and corporate earnings growth.

At least one of these events is guaranteed to occur because the free market price discovery mechanism has become completely abrogated and has been replaced by government manipulation of all asset prices. When these massive bubbles break it won’t be so easy to put them back together again because central banks and sovereign balance sheets are already at a breaking point. Therefore, the recovery won’t be as easy to engineer like it was back in 2009.

Equity prices have been propelled to record highs by the money-printing frenzy of central banks. And the Fed Funds Rate is near zero percent, instead of a more normal 5%. The total debt in the United States is near an all-time record 320% of GDP. U.S debt is up $7 trillion (14%) and global debt has increased over $30 trillion (40%) since 2008. Most importantly, the record amount of debt has been coupled with interest rates that have been artificially manipulated to record lows around the world for the past six years and counting.

This is why I know it will all end very badly once interest rates normalize. Regardless of bank manipulations and the BOJ’s kamikaze mission to commit Hara-kiri with its currency, gold will be an increasingly-necessary asset to own. Especially after this current illusion of prosperity comes crashing down.

You can learn more about the coming economic chaos by getting a free trial subscription to my Mid-week Reality Check podcast located at www.pentoport.com.

Michael Pento is the President and Founder of Pento Portfolio Strategies and Author of the book “The Coming Bond Market Collapse.”

How to spend our money?

Middle Class: 10 Years Ago And Now

By Fiona Ho 29 October 2014

Once upon a time, being middle class draws on the rosy notion of a family with a nice house, who drives a Volvo, goes on beach or skiing vacations once or twice in a year, sends their kids to college, and lives a generally carefree and comfortable life.

Unfortunately, as living costs continue to rise and salaries struggle to catch up, the term “middle class” seems to have taken on a new and greyer meaning in recent years.

In Malaysia, middle class is loosely defined by those who take home a monthly income of RM3,000 and above. Government data from the year 2012 showed that 27.8% of households in the population of 30 million earned between RM3,000 and RM4,999 a month.

BIG_House Price RM v GoldAbout 39% of households fall below that income bracket. Meanwhile, the upper middle class and highest income groups – households earning RM5,000 and above, account for 33.6% of households.

Although there has been a steady increase in income, the amount is hardly significant enough to match the country’s soaring inflation rates, driven by aspects such as rising electricity costs, and subsidy reduction in fuel and sugar prices.

Prices of consumer goods are also expected to increase when the Goods and Services Tax (GST) come into force in April 1, 2015.

Economists and academics reiterate what most of us already know: the term “middle class” no longer has the same connotation as having a comfortable life as compared to 10 years ago. In fact, with many in the income stratum now struggling to make ends meet, middle class may well have become the new poor.

Let us have a look at the prices of some of our daily essentials in 2004 and now.

1. Fuel prices


A leading indicator of inflation is the hike in fuel prices. In 2004, RON92, a lower-octane petrol was available at RM 1.38 per litre.

The fuel was later found to be not environmentally-friendly and RON95 was subsequently introduced to the Malaysian market in 2009 at RM1.75 per litre.

RON95 has seen substantial incremental rises over the years. Most recently in October, the price of RON95 was raised from RM2.10 to RM2.30 per litre. This came just a little after a year it was raised from RM1.90 to RM2.20 per litre in September 2013.

The Domestic Trade, Cooperatives and Consumerism Ministry said the reduction of fuel subsidy was necessary for the Government to keep to its subsidy rationalisation plan.

But this means that Malaysians are now paying an average of 60% more for fuel compared to 10 years ago. For example, in 2004, if you own a sedan with a fuel tank capacity of 50 litres, you will need to pay just RM69 for a full tank. Meanwhile, if you own a sedan of similar tank capacity in 2014, you will need to fork out RM115 for a full tank.

Urban dwellers have it worse as highways grow increasingly congested due to rapid urbanisation and infrastructure construction works, such as the Mass Rapid Transit (MRT) project. People are also living further away from the city centre due to lower property prices and are hence, required to clock in more mileage on the road.

High-income earners with monthly income of RM10,000 and above will also have to start paying for the market price for RON95 at RM2.58 per litre once the petrol subsidy rationalisation mechanism comes into force in June. Meanwhile, those earning between RM5,000 and RM10,000 per month will get a partial subsidy, and those earning below RM5,000 will receive full subsidy.

The mechanism might involve the use of MyKad or other formal documentation, and is still being refined by the Finance and the Domestic Trade, Co-operatives and Consumerism ministries. However, details such as full and partial subsidy rates have yet to be finalised.

2. Property prices


There is no denying that the prices of property have skyrocketed in recent years. Statistics show that property prices in the Klang Valley has been rising between 15% and 18% per annum.

These days, a 1,000-square-foot condominium unit in prime locations like Petaling Jaya or Kelana Jaya can easily command the starting price of RM550,000.

With soaring home prices, coupled with dwindling purchasing power, it is no wonder that many middle-income earners are now part of the “homeless generation” – middle-class young working adults who are unable to afford their first home.

Theoretically, with RM550,000 you will only be able to purchase a property of about 1,000 square feet today. But back in 2004, you will be able to fetch a cool 2,500 square feet double-storey terrace with the same amount.

Recent adjustments in interest rates and maximum loan tenures also mean that the homebuyer now has to pay a heftier monthly home instalment. In 2014, when you purchase a RM550,000 property, with 4.45% interest over a maximum 35-year loan tenure, you will need to fork out at least RM2,539 every month.

Back in 2004, a RM550,000 property will only cost RM2,104 a month, with 3.54% interest over a maximum 40-year tenure.

The bad news is, property prices are expected to go up even more once GST is implemented. Although housing is exempted from 6%, GST will still be imposed on various aspects of property building such as land, raw material and labour cost. The hike in material prices will no doubt manifest into higher property prices.

The Real Estate and Housing Developers’ Association Malaysia (Rehda) speculates that home prices will rise by about 2.6% margin of increase in a post-GST era.

Upcoming infrastructure projects such as the new Light Train Transit (LRT) and MRT lines is also expected to drive property prices.

3. Electricity tariffs


Power tariffs rose by an average of 15% effective January 1 this year, after Putrajaya announced in December 2013 that it had approved the increase by utility firm Tenaga Nasional Berhad (TNB).

The rates were purportedly raised as a measure to reduce Government subsidy and to boost development spending.

Consequently, the average electricity tariff in Peninsular Malaysia went up by 4.99% per kWh or 14.89% from the 2011 average rate of 33.54 sen/kwH.

According to the Energy, Green Technology and Water Minister Datuk Dr Maximus Johnity Ongkili, consumers do not have to worry as 70.67% will not be affected by the tariff hike. Only consumers who use electricity at a rate exceeding 300kWh a month will be subject to the hike.

However, statistics show that the average two-storey and air-conditioned household in the Klang Valley consumes up to 714 kWh every month.

With 60% increment in power tariffs over the last decade, an average household will now have to pay an estimated RM294.04 a month compared to just RM108.79 a month in 2004.

4. Food items


We, Malaysians love our sugar. We have it in our teh tarik, our tea-time snacks, and our sumptuous and diverse assortment of sweet and savoury desserts. So it is no wonder that Prime Minister Datuk Seri Najib Tun Razak drew some bitter reactions when he announced that the sugar subsidy of RM0.34 per kilo will be abolished during Budget 2014.

Sugar prices went up from RM2.50 to RM2.84 per kilo this year – that’s a 96% increase from sugar prices in 2004, which stood at only RM1.45 per kilo!

Besides increasing public coffers, Datuk Seri Najib said the removal of sugar subsidy would help tackle some prevalent health problems faced by many Malaysians, including diabetes and heart disease.

While sugar itself is not a food item, it is a kitchen staple and input in many food products. A hike in sugar prices has no doubt, created a multiplier effect on the cost of living, as evidenced by the price increments in food and drinks following the announcement.

With the huge quantum in sugar price hikes, it is hardly surprising that your cup teh tarik that used to cost RM0.80 some 10 years ago, now costs you RM1.20.

With many already struggling to cope with the high cost of living, the subsidy cut has forced many to further tighten their belts.

With the examples highlighted above, a middle-class family today may be spending well over RM3,065 a month just on these basic essential items — car repayment, contingency saving, retirement fund, insurance premium, and other living expenses not included.

These days, given the rising prices of everyday essentials and petrol hikes, the term middle class may simply mean owning a too-small condo you can barely afford, living from pay cheque-to-pay cheque, worrying sick about putting your children through school and surviving on RM8 “economy” rice.

A Signal Of Coming Collapse

A Signal Of Coming Collapse | Gold Eagle.
Keith Weiner November 6, 2014

I proposed seven drivers of financial implosion in my dissertation. My recent writing has focused on two of them. One is the falling rate of interest on the 10-year government bond. As interest falls, the burden of debt rises. Since the falling rate incentivized more and more people to borrow, the number of indebted people, businesses, corporations, and of course governments is large. When the rate gets to zero, the burden of debt becomes theoretically infinite.

In the US, the downward trend is still in a deceptively mild phase (though there was a vicious spike down on Oct 15 to 1.87%). The rate on the 10-year Treasury is 2.3% today. In Germany, it is down to 0.82% and in Japan the metastatic cancer is much closer to causing multiple organ failures, with a yield of just 0.46%.

Two is gold backwardation, which has also been quiescent of late. Although it is worth noting that with these lower gold prices, temporary backwardation has returned. The December gold cobasis is over +0.2%).

I haven’t written much about a third indicator yet. What proportion of government bond issuance does the central bank have to buy? I theorized that when the central bank is buying all of the bonds issued by the government, that this is another sign of imminent collapse. I phrased it, as with the other indicators, as a value that is falling. Collapse happens when it hits zero, if not earlier. Here is what I wrote:

“the average amount of new Treasury bond issuance minus new central bank Treasury bonds falling towards zero (i.e. the central bank is buying a greater and greater proportion of Treasury bonds issued).”

Bloomberg recently published an article about the Bank of Japan’s announcement of a new bond-buying program. Bloomberg presents two facts. One, the Bank plans to buy ¥8 to ¥12 trillion per month. Two, the government is selling ¥10 trillion per month in new bonds. This is an astonishing development.

The Bank of Japan will buy 100 percent of the new government bond issuance.

Popular theory holds that a currency’s value falls as the quantity issued rises. In this view, the yen falls as the yen supply increases. While admittedly not scientific, here are graphs of the Japanese yen supply and the price of the yen in dollars from 1970 through present.

japan money supply

The yen has been falling since 2012, but not because of its quantity. It has been falling because the market is questioning its quality. One way to do this is to borrow yen, trade the yen for another currency, and buy an asset in that currency. This carry trade is equivalent to shorting the yen. So long as the yen is falling, and the interest rate on the bond in the other currency is higher than the interest rate paid to borrow the yen, this is a good trade.

What happens as the yen falls faster? Contrary to populist economics, it’s not good for Japanese businesses. However, it is a free transfer of wealth to those engaged in the carry trade. They can repay the borrowed yen at a cheaper and cheaper cost. When the yen goes to zero (which may take a while to play out), their debt is wiped out.

That’s what a currency collapse is. It’s a total wipeout of debt denominated in that currency. Since the currency itself is just a slice of debt, the currency itself loses all value. While on the surface it may seem good for debtors, it’s a horrific catastrophe. No one who understands the human toll, the cost in terms of the lives wrecked (and lost) would look forward to this with anything but dread.

The objective of my writing is to try to prevent it from happening. We need a graceful transition to gold, not an abrupt collapse like 476AD. It may be too late for the hapless Japanese. I hope it’s not too late for the rest of the civilized world.

The Fourth Central Bank Gold Agreement

The Fourth Central Bank Gold Agreement…Started Sept 27, 2014…What gives? | Gold Eagle.

by Julien Phillips October 9, 2014

On May 19, 2014, the European Central Bank and 20 other European central banks announced the signing of the fourth Central Bank Gold Agreement. This agreement, which applies as of  September 27, 2014, will last for five years and the signatories have stated that they currently do not have any plans to sell significant amounts of gold.

Collectively, at the end of 2013, central banks held around 30,500 tonnes of gold, which is approximately one-fifth of all the gold ever mined. Moreover, these holdings are highly concentrated in the advanced economies of Western Europe and North America, a statement that their gold reserves remained an important reserve asset, a statement made in each of the four agreements since then.

After 29 years of implied threats that gold was moving away from being an important reserve asset and the potential sales of central bank gold the gold price had fallen to $275 down from $850 in 1985. But the sales that were seen were so small that with hindsight they were seen as only token gestures. Today the developed world’s central banks continue to hold around 80% or more of the gold they held in 1970.

It only became clear subsequently that the real purpose behind these sales [from 1975] were to reinforce the establishment of the U.S. dollar as ‘real money’ and the removal of gold as such. The U.S. government would brook no competition from gold, but continued to hold gold [as money ‘in extremis’] in ‘back-up’.

Then in 1999 the euro was to be launched. It too needed to ensure that Europeans, who had a long tradition of trusting gold over currencies, would not reject the euro in favor of gold and turn to gold and its potentially rising price. So it was decided that while gold was to be retained as an important reserve asset, its price had to be restrained for some time, while Europeans were made to accept the euro as a reliable, functioning money in their daily lives.

To that end, major European central banks signed the Central Bank Gold Agreement (CBGA) in 1999, limiting the amount of gold that signatories can collectively sell in any one year. There have since been two further agreements, in 2004 and 2009. By the time you receive this, the fourth Central Bank Gold Agreement will be in operation. It begins on the 27th September. Here is the statement on the Agreement from the signatories:

ECB and other central banks announce the fourth Central Bank Gold Agreement:

The European Central Bank, the Nationale Bank van België/Banque Nationale de Belgique, the Deutsche Bundesbank, Eesti Pank, the Central Bank of Ireland, the Bank of Greece, the Banco de España, the Banque de France, the Banca d’Italia, the Central Bank of Cyprus, Latvijas Banka, the Banque centrale du Luxembourg, the Central Bank of Malta, De Nederlandsche Bank, the Oesterreichische Nationalbank, the Banco de Portugal, Banka Slovenije, Národná banka Slovenska, Suomen Pankki – Finlands Bank, Sveriges Riksbank and the Swiss National Bank today announce the fourth Central Bank Gold Agreement (CBGA).

In the interest of clarifying their intentions with respect to their gold holdings, the signatories of the fourth CBGA issue the following statement:

  • Gold remains an important element of global monetary reserves;
  • The signatories will continue to coordinate their gold transactions so as to avoid market disturbances;
  • The signatories note that, currently, they do not have any plans to sell significant amounts of gold;
  • This agreement, which applies as of 27 September 2014, following the expiry of the current agreement, will be reviewed after five years.


  • The first clause confirms the ongoing role of gold as an important reserve asset.
  • The most important part of the statement is the third part, where the signatories confirm “they do not have any plans to sell significant amounts of gold.” In other words they have completed their sales. We do not expect them to resurrect their sales as they have fulfilled their purpose. Their sales stopped in 2010 in effect, bar some small sales by Germany of gold to be minted into coins. We did not consider these a part of these agreements.
  • The statement clarifies that none of the signatories will act independently of the rest and sell gold. They will coordinate any future transactions with the other signatories should a situation arise where a signatory wishes to sell again. We believe that this will not happen because of the financially strategic and confidence building nature of their gold reserves.

This agreement in lasting for five more years reassures the gold market that none of the signatories will sell gold for five years and even then they will likely make a further agreement for five more years.

To us this statement and agreement removes the specter of central bank gold sales in the future. As we have seen since these sales were halted in 2010, emerging market central banks have been buyers of gold steadily and carefully, without chasing prices. We have the impression that the bullion banks go to prospective central bank buyers and ‘make the offer’ of gold available on the market, which the central bank then buys.

They do not announce their intentions and act so as not to affect the price barring taking stock from the market. This not only reassures gold-producing countries and companies, who can be reassured that there will be no policy of undermining the price of gold with uncoordinated sales of gold, but tells the rest of the world including emerging central bank buyers that there will be no supplies from them put on sale. Such buyers will have to find what gold they can on the open market or from their own production.

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.


Determinant of Gold “Price”


It is not supply and demand which is currently driving the gold price

– if it were the very movement of the huge volume of gold from west to east, which has been so well documented in recent months, would have been sufficient to drive the price far higher – even taking into account the outflows from the ETFs, which have been way more than countered by the eastwards gold flow.

There are other bigger forces at play here, forces that are also responsible for changing sentiment with regard to gold and thus persuading weak holders to offload their holdings.