Fatwa Nomor: 77/DSN-MUI/V/2010
Dewan Syariah Nasional Majelis Ulama Indonesia
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.
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.
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.
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.
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.
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.
The contract of sale and purchase must be concluded by two consenting parties, without elements of coercion, pressure and exploitation.
- 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.
- 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).
- 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
- Transfer of dhaman (pledge) from the seller to the buyer
- The buyer’s capacity to obtain his purchased goods at anytime without any deterrence.
- 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.
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.
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:
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.
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.