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Investing in gold has long been considered a safe haven in times of economic uncertainty, offering a tangible asset that historically retains its value. This precious metal has captivated investors for centuries, serving as a hedge against inflation and a portfolio diversifier.

Its unique properties and enduring appeal make it a fascinating subject for both seasoned and novice investors.

In this article, we delve into the various aspects of gold investment, examining its historical performance, the different ways to invest in gold, and its role in a diversified investment portfolio.

Additionally, we address a crucial question for many investors: whether investing in gold aligns with Islamic financial principles, determining if it is considered haram or halal.

 

What does it really mean to invest in Gold?

Gold is often viewed as a safe investment, particularly during economic instability. It is considered a hedge against inflation and is seen as a way to safeguard wealth against risks like political turmoil, market volatility, and banking instabilities​​​​.

Unlike digital currencies or stocks, the value of gold never falls to zero. Its durability, scarcity, and historical significance contribute to its consistent worth​​.

Gold’s value increases with inflation, maintaining its purchasing power over time. For example, gold’s value has significantly outpaced a dollar’s value over the past century, demonstrating its ability to preserve wealth against inflationary pressures​​.

Adding gold to an investment portfolio can help reduce volatility and risk. It provides a different asset class that often moves independently of stocks and bonds, thereby diversifying and potentially stabilizing an investment portfolio.

How to invest in Gold?

As an investor, you must be wondering how you can start investing in these assets and what are several ways you can approach to start investing in gold. Worry not! I am here to clearly outlined every single way in the world that is available for you to kickstart your gold investment journey.

PS: Not all of the ways here are halal, and there is a dedicated section below on halal gold investment.

  1. Gold Bullion: This is the most direct form of gold investment. Gold bullion refers to pure or nearly pure gold, which has been certified for weight and purity. It includes gold bars and coins. While large gold bars are less liquid, smaller bars and coins are more common and offer greater liquidity.
  1. Gold Coins: These are issued by sovereign governments and are a popular way for investors to hold gold. They usually carry a premium over the gold value and are available in smaller sizes, making them a convenient investment option.
  2. Gold ETFs and Mutual Funds: These funds invest in gold bullion and provide an easier and more cost-effective way for small investors to invest in gold. They can be bought and sold like stocks and are suitable for inclusion in brokerage accounts or IRAs.
  3. Gold Futures and Options (Not Halal): These are more complex financial instruments suitable for experienced investors. Futures contracts involve agreeing to buy or sell gold at a future date, while options give the right to buy these contracts at a preset price within a certain timeframe. However, this method is not Shariah-compliant for Muslim investors.

(3 Reasons Why Forwards and Futures Are Not Permissible)

  1. Gold Mining Companies: Investing in companies that mine and refine gold can effectively profit from gold. These companies’ stocks may offer lower risk than other methods but require due diligence in company selection. However, Muslim investors must ensure the company complies with the Shariah screening criteria. Musaffa Halal Stock Screener helps you to find the halal stocks and ETFs to invest in.
  2. Gold Jewelry: While not the most profitable investment, buying gold jewelry allows for physical ownership of gold. However, it involves a substantial markup and is more of an art form than a practical investment strategy.

What are the best ways to invest in Gold?

Selecting the most appropriate method to invest in gold hinges on your financial capabilities and investment objectives. Those with substantial capital seeking direct gold exposure might consider purchasing gold bullion, which entails additional costs for premiums and storage.

Alternatively, gold-focused ETFs and mutual funds provide more affordable access to gold with lower initial investment requirements. Nonetheless, thorough research is essential due to variations in these funds’ investment strategies and fees.

Investing in gold mining companies offers a different approach, although their stock performance may not always align closely with gold’s long-term trends.

Purchasing gold jewelry is another option, though it is generally more for personal enjoyment than profit generation.

Risks of investing in Gold

  1. Not a Passive Income Asset: Gold itself does not generate income, such as dividends, which can be a drawback for those seeking income-generating investments​​.
  2. Historical Risk and Volatility: While gold can be a stable investment, it has historically experienced volatility and does not always correlate with other asset classes like stocks or bonds. For example, it may lag during stock market booms​​.
  3. Physical Risks and Costs: Investing in physical gold involves risks such as theft and costs associated with storage and insurance​​.
  4. Liquidity Concerns: While gold stocks and funds offer liquidity, physical gold can be harder to sell quickly at market value​​.
  5. Market Risks for Gold Stocks: Gold stocks are subject to market risks and the performance of the respective mining companies. Their value can fluctuate based on factors beyond just the price of gold.

Investing in Gold: Is it Halal or Haram?

Gold from an Islamic perspective

Under Shariah law, gold is categorized as one of the Ribawi items. The guidelines governing gold investments are derived from a hadith narrated by ‘Ubadah bin al-Somit R.A that Prophet Muhammad PBUH said:

“Gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, and salt for salt – like for like, equal for equal, and hand-to-hand; if the commodities differ, then you may sell as you wish, provided that the exchange is hand-to-hand.” (Sahih Muslim)

Prophet Muhammad emphasized the importance of holding wealth with intrinsic rather than nominal value, specifically highlighting commodities like gold, silver, wheat, barley, dates, and salt. This guidance, which focuses on “like for like, equal for equal, and hand-to-hand” transactions, underscores the proper conduct in trading these goods.

For Muslims, recognizing the value of the gold dinar and silver dirhams based on their fine gold and silver content, respectively, aligns with this teaching. This principle upholds the value of tangible assets and advocates for fair and immediate exchanges in trade.

Read Also: Investing Strategies for Muslims in 2023

Which type of gold investing is permissible in Islam?

Investing in physical gold through bullion, coins, websites, or jewelry is generally considered halal (permissible) in Islamic finance. However, ensuring that the investment involves a real physical asset with clear ownership records and the ability to take delivery of the gold is crucial.

ETFs that hold physical gold are deemed halal. However, ETFs that involve gold futures and options are considered haram (not permissible) as they do not involve owning physical gold and often entail speculation, which is not allowed in Islamic finance.

Investing in gold stocks and shares is generally permissible, but investors should know the company’s debt and interest levels and other business activities. Excessive debt and interest can make an investment haram due to the involvement of interest (riba), which is prohibited in Islam​.

Futures or options in gold and Contracts for Differences (CFDs), spread betting, and other derivatives are generally seen as not halal. This is because they often involve speculation and uncertainty (gharar), which are prohibited in Islamic finance.

Shariah Standards for Gold Investment by AAOIFI

In collaboration with the World Gold Council, the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) has established a Shariah Standard on Gold, which outlines the conditions for Sharia-compliant gold investments.

These conditions include trading gold on a spot (hand-to-hand) basis, allowing for physical or constructive ownership, ensuring full allocation in the case of constructive possession, allowing allocation through immediate settlement or receipt of a certificate specifying bar ownership, and permitting joint ownership with each partner owning an undivided beneficial interest in a Trust​.

Learn more here: The Shari’ah Standard on Gold.

Is November – December 2023 the right time to invest in gold?

Determining whether it is a good time to invest in gold in November – December 2023 presents a complex picture with varying perspectives from different analysts and sources. Here’s an overview based on current market analyses:

Positive outlook for gold investment

  1. Potential for Increase in Gold Prices: Analysts have suggested a positive outlook for gold in 2023. Factors like increased central bank purchases, rising jewelry demand, and limited gold mine supply are expected to increase gold prices. Central banks, particularly in China, Turkey, and India, have been purchasing gold at record levels, which is expected to continue. Additionally, gold jewelry demand, especially in China, is on the rise as COVID-related restrictions relax. Combined with stagnant mine production, these factors could tighten the supply and increase gold prices​​.
  2. Global Economic Conditions Favoring Gold: Recessionary pressures and the anticipation of reduced interest rates by central banks could make gold more attractive. Lower interest rates generally benefit gold prices as they reduce the opportunity cost of holding non-interest-bearing assets like gold​​​​.
  3. Weakening US Dollar: A weakening US dollar traditionally favors gold prices. Analysts predict the dollar to depreciate during the second half of 2023, which could increase gold prices​​.

Bearish perspectives and concerns

  1. Recent Decline in Gold Prices: Despite the long-term positive outlook, recent market movements show a decline in gold prices. The price of gold tried to move above $2,000 but experienced a downturn, reflecting a bearish trend. This decline is seen in the context of broader market movements influenced more by sentiment and emotions than by real events​​​​.
  2. Comparison with Other Metals and Stocks: While gold moved close to its all-time highs, it’s important to note that the same can’t be said for silver or mining stocks, indicating a more complex scenario in precious metals and related stocks

Investing in Gold FAQ

1. Is investing in gold safe?

Gold is often considered a safe investment, especially during economic uncertainty, as it maintains its value and is less volatile than other assets.

2. How does gold perform during inflation?

Gold is traditionally seen as a hedge against inflation. Its value often increases as the cost of living rises.

3. Can gold be a part of my retirement plan?

Gold can be included in retirement plans, especially through gold IRA options.

4. How is gold taxed?

Gold investments are subject to capital gains tax, similar to other investment assets. The tax rate may vary depending on how long you hold the asset.

5. Is it better to invest in physical gold or gold stocks?

This depends on your investment goals and risk tolerance. Physical gold is tangible and less risky, while gold stocks can offer higher returns but come with greater market risk.

6. What are the risks of investing in gold?

Risks include market volatility, liquidity issues, storage and insurance costs for physical gold, and potential underperformance compared to other investments.

7. How much of my portfolio should be allocated to gold?

This varies depending on individual risk tolerance and investment goals. Financial advisors often recommend a small percentage, like 5-10%, for diversification purposes.

Wrapping up

Investing in gold offers a reliable safeguard in times of economic instability, serving as both a hedge against inflation and a diversification tool for investment portfolios. Its enduring value and various investment methods, including physical gold, ETFs, stocks, and more, cater to various investor preferences and goals.

We have also highlighted gold’s compliance with Islamic financial principles, emphasizing the importance of ethical trading practices.

While gold investment poses certain risks and lacks passive income potential, its intrinsic value and historical performance make it a compelling choice for many investors.

Understanding these facets helps in making informed decisions about integrating gold into one’s financial strategy.

 To read more about Islamic Finance-related topics, please visit our academy here.

Besides, feel free to sign up for our free stock screening services at musaffa.com.

Disclaimer: Important information

 




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