Shaokai Fan: Gold's New Frontiers in Asia
2017-03-30 IMI
Islamic investors
Gold remains popular with global investors as a result of unconventional monetary policies, political uncertainty and market volatility. However, several investor groups, for differing reasons, have had limited contact with gold as an asset class. Islamic investors, who historically have had little exposure to gold investment, represent one such group. Gold is subject to special Islamic rules, while existing guidance is limited and fragmented.
To address this, the World Gold Council and the Accounting and Auditing Organisation of Islamic Financial Institutions, the global standard setter in Islamic finance, are developing a new Sharia (Islamic law) standard for gold, to be launched before the end of 2016. The standard will provide definitive guidance on Islamic rules pertaining to gold investment and the permissibility of individual products.
Asian gold demand could benefit significantly. Malaysia, already a vanguard in Islamic finance, has a prosperous middle class seeking greater investment options. Indonesia, the world’s largest Muslim country, is beginning to promote Islamic finance, making it ripe for new investment opportunities. Standardising gold transactions will bolster gold’s accessibility to Asian investors seeking Sharia-compliant products and asset classes.
Gold can offer sovereign funds an important solution as they seek to diversify their investments in a low rate environment. The metal’s role as a long-term store of value complements sovereign funds’ mandate to sustain intergenerational wealth. There is also an opportunity to present gold’s benefits through direct engagement, as sovereign funds are increasingly making their investment decisions internally.
Asia’s sovereign funds are largely funded through foreign exchange reserves or fiscal surpluses, and require a different investment approach to resource-based funds. They have been less affected by the decline in oil prices, giving them more flexibility to determine their investment mix. Gold can be a useful portfolio component because of its diversification benefits.
Changing macro trends are deepening the case for gold holdings by central banks. Unconventional monetary policies have rendered almost 40% of developed country sovereign debt either zero- or negative-yielding, limiting central bank investment options. Asia’s reserve managers are finding it difficult to find suitable assets for the region’s reserve stockpiles.
Reserve diversification
Aside from the impact of negative interest rate policies, central bank gold-buying goes hand-in-hand with reserve diversification away from the dollar. This is particularly relevant in Asia, where the renminbi’s internationalisation has had a pronounced impact on trade and reserves.
Research by the World Gold Council indicates that, for every one percentage point increase in renminbi reserve holdings, central banks should increase their gold holdings by 0.5 percentage points, to hedge their portfolios against uncertainty stemming from structural changes in currency allocations. As Asian central banks embrace the renminbi, official gold holdings are likely to increase.
Demand for gold is likely to continue to rise as Asia becomes more prosperous. However, the narrative for gold is shifting too, as investors contend with continuing global political and financial uncertainty. Gold’s unique qualities offer a safe haven for new Asian investor groups such as Islamic investors and sovereign funds, while Asian central banks can be expected to continue to turn to gold.
