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How to Invest in Gold as a Muslim | IslamicFinanceGuru

Gold has increased 76% over the last 5 years giving approximately 15% returns every year. Those are impressive numbers and this article digs into whether gold still remains a good investment, the best ways to invest in gold, and whether gold is a halal investment for Muslims.

There are a plethora of ways you can now invest in gold either offline or online. However only a few of these options are permissible for Muslims. And only a few of those are a commercially viable way of investing that will result in lucrative outcomes long-term.

This article is all about uncovering what those rare options are.

To do that we examine:

  1. The main ways to invest in gold
  2. How to invest in gold in a halal way
  3. Is investing in gold worth it?
  4. Best times to invest in gold

Overall Conclusions

  1. Gold has significantly increased over the past 5 years and outperformed the market especially in recent months given market volatility.
  2. You will typically pay 5-10% above spot price for gold, both when buying and selling gold. That is not an insignificant cost and should be factored in.
  3. Two relatively cheap and effective ways of owning gold are (i) ETFs and (ii) buying physical gold but letting a company hold it for you.
  4. A range of sharia-compliant gold ETFs are available via Hargreaves Lansdowne if you are in the UK, and via M1 Finance if you are in the USA.
  5. Two effective ways of buying physical gold are via Bullion Vault and Minted.
  6. I personally (no financial advice intended) incline to holding a steady 5% of my portfolio in gold and just maintaining that over time regardless of price fluctuations.

How to Invest in Gold for Beginners

There are 7 main ways to invest in gold for an everyday investor:

  1. Physical gold via bullion or coin websites
  2. Physical gold via jewellery
  3. Exchange-traded funds (ETFs) that buy gold
  4. ETFs that trade in gold futures or options
  5. Gold mining companies
  6. Futures or options
  7. CFDs, Spread Betting or other derivative products

Let’s take each of these in turn.

Investing in gold bullion and gold coins

The first and most ancient way of investing is by holding actual chunks of gold. The standardised two forms of this are either gold bullion or gold coins (or shares in these).

A gold bullion is a rectangular chunk of gold worth around $750,000 these days, so probably not an investment most people can make or should make unless you are confident of being able to safely store that gold bullion effectively.

Gold coin is a much smaller and more affordable size of gold in the shape of – you’ve guessed it – a coin.

You can also buy percentage shares in both of these types of gold shapes via a gold dealer or online. You can also buy gold by weight too.

There are a whole range of gold brokers online but two that we’ve particularly interacted with and found to be decent are Bullion Vault and Minted. They each do slightly different things.

Bullion Vault allows you to either buy gold coins, or to actually trade gold with other sellers live on the internet. This cuts out the middleman and the fees associated with that.

Minted allow you to buy one-off amounts of gold, or to set a direct debit so you slowly save up in gold. They also have plans to bring out a card to accompany their app, so eventually they could come up with a gold-backed online bank – which sounds intriguing.

You can compare them both side by side along with other options on our investment comparison here.

Investing in gold via jewellery

Investing in gold jewellery is a popular way of investing in gold and the positives are you get to actually use the gold, look nice, and you know the gold is safe if you literally have it around your neck for example.

The downsides are considerable though – especially if you look at it from a pure investment lens:

  1. You will likely be paying for the workmanship of the piece, not just the gold price. So bear that in mind.
  2. You will likely be buying a less than completely pure 24 carat gold piece – as 24 carat is very soft and easily scratches so is not usually used for jewellery. Given this, make sure you are not paying 24 carat prices for the jewellery.
  3. To safely store and insure the gold is an absolute nightmare. Here in London we’ve had so many Asian households targeted as burglars know that we like to keep gold in the house.
  4. When you wear gold, it has the potential to get lost. If you left it in storage on the other hand it is less likely to get lost – but then its not much use as jewellery!
  5. When you come to sell it, because each piece of jewellery is different, you won’t get a standarised price, you’ll spend time shopping around and bargaining, and you will likely not get as good a price as a pure gold coin or the like. This is because the buyer knows he will need to melt the gold down to remake something – so he passes that cost onto you.

All in all, if you are buying gold jewellery for jewellery – that’s great. If for investment only, then there are probably better ways to invest in gold.

Investing in gold ETFs

US Gold ETFs:

Here is a list of gold ETFs available in the USA. The two highlighted ETFs in the below list are not sharia-compliant as they do not actually hold gold. Rather they create the same effect via holding gold futures and options.

Everything else is fine. You can invest in most of these ETFs via M1 Finance here. I have included their ticker code in the brackets.

  1. Invesco DB Precious Metals Fund (DBP)
  2. GraniteShares Gold Trust (BAR)
  3. iShares Gold Trust (IAU)
  4. Aberdeen Standard Physical Gold Shares ETF (SGOL)
  5. SPDR Gold MiniShares Trust (GLDM)
  6. Perth Mint Physical Gold ETF (AAAU)
  7. Van Eck Merk Gold Trust (OUNZ)
  8. SPDR Gold Trust (GLD)
  9. Invesco DB Gold Fund (DGL)

UK Gold ETFs:

All of the below ETFs are a way to invest directly into physical gold in the UK. You can invest in these via Hargreaves Lansdowne here.

  1. Xetra- Gold (OGLD)
  2. WisdomTree Physical Swiss Gold (SGBX)
  3. Invesco Physical Gold A (SGLP)
  4. iShares Physical Gold ETC (SGLN)
  5. WisdomTree Physical Swiss Gold (OGZU)
  6. Xtrackers Physical Gold ETC (EUR) (OXA5)
  7. Xtrackers Physical Gold ETC (XGLD)
  8. WisdomTree Physical Gold (PHGP)
  9. Gold Bullion Securities (OGG9)
  10. Gold Bullion Securities (GBSS)
  11. HANetf The Royal Mint Physical Gold ETC Securities (RMAP)
  12. Xtrackers IE Physical Gold ETC Securities (XGDU)

To compare directly between the fee structures for each of these ETFs/ETCs see here.

Investing in gold ETFs that trade in futures or options

As mentioned above, under Islamic law most scholars opine that futures or options trading is not permissible (though a small minority disagree). See our Fatwa Forum or a detailed comparison and analysis. When it comes to gold and precious commodities in particular, scholar are particularly careful about any deferment in delivery or payment.

As such, any ETFs or ETCs (Exchange Trade Commodities) are best avoided where they link their return to gold via futures or options holding.

Investing in gold via CFDs, Spread Betting or other derivative products

Investing in CFDs and spread betting is unambiguously haram. This is because there is no real gold trading taking place and the economic effect is exactly symmetrical to that of gambling.

There’s a reason why spread betting has “betting” in the name.

How to invest in gold mining stocks and shares

The other way to invest into gold is to invest in gold mining stocks. This is relatively effective as gold mining stocks naturally rise in price when gold prices rise (as what they are mining is now worth more).

However, if you choose to invest in gold stocks, understand that you are buying a company with all its complications and subtleties. You are buying a business and no two businesses are alike. Just like buying Shell or BP isn’t the equivalent to buying oil directly, buying gold miners isn’t equivalent to buying gold directly.

For each of the below stocks you should check that it is sharia-compliant from a debt perspective. To find out how, see here. To actually buy these stocks you’ll need to register with a broker like Hargreaves Lansdowne.

FTSE 100 Gold Stocks

Here’s a list of some companies in the FTSE 100 that mine gold:

  1. Polymetal International
  2. Antofagasta (does only a little gold mining)
  3. Fresnillo (does only a little gold mining)

FTSE 250 Gold Stocks

Here’s a list of companies from the FTSE 250 that mine gold:

  1. Centamin
  2. Petropavlovsk
  3. Highland Gold Mining
  4. Hochschild Mining (only does a little bit of gold mining)

Small Cap Gold Stocks

Finally, you have some smaller companies that also mine gold. Typically, smaller companies are higher risk and higher reward.

  1. SolGold
  2. Greatland Gold
  3. Pan African Resources
  4. Chaarat Gold Holdings
  5. Shanta Gold
  6. Trans-Siberian Gold

How to Invest in Gold in the UK and Globally in a Halal Way

As mentioned above, there are 7 main ways of investing in gold. Here is the sharia take on each of those methods:

Method of buying gold Sharia analysis
Physical gold via bullion or coin websites Halal (but do make sure you’re actually buying a physical asset and there is clarity over ownership records and when ownership transfer to you. Ideally you should also be able to take delivery.)
Physical gold via jewellery Halal
ETFs that hold physical gold Halal
ETFs that hold gold futures and options Haram
Gold stocks and shares Halal (but do check for debt levels)
Futures or options Generally seen as haram (but minority do view them as permissible)
CFDs, spread betting and other derivatives Haram

 

Should I Invest in Gold?

Now we know where you can invest in gold, and which are the halal ways of investing in gold, let’s consider if its actually a good idea.

Let’s run through the pros and cons.

Pros

  • Stable and safe: gold has held its value through millennia, doesn’t corrode much, and there is only a finite amount of it available in the world.
  • Diversification and not linked to market directly: As a hedge against currency inflation and macroeconomic policies like quantitative easing and debt issuances, it is a great little investment. Gold is also largely uncorrelated to other asset classes. So, for example, if oil prices rise, airlines start struggling. But there’s no equivalent causal relationship between gold prices and other assets.
  • Very liquid market: When you invest in an asset you want to be able to exit it quickly and not be stuck with it while you find a buyer. Gold is very much that sort of asset. You can buy and sell it online within minutes, or in person with a local gold dealer. This makes it a nice low risk investment that you can store some value in that won’t get eroded by inflation.

Cons

  • Doesn’t earn anything: If you held £100 of gold for 20 years, after 20 years you would have roughly the equivalent of £100 of gold after adjusting for inflation. However if you invested £100 in a property with a 5% yield, you would have ended up earning £200 in the yield, and most likely much more than that, as your yield will increase as inflation increases, and as you reinvest your rental profits back into other property investments.
  • Storage: Gold storage costs a lot if done properly, and best left to the professionals. Insuring for gold is also expensive business – as insurers know how much burglars like to go after it. But you can avoid this cost (or reduce it dramatically) by not actually taking delivery of the gold and letting the gold broker hold it for you.
  • High premiums on spot price: Gold brokers will sell to you at a mark-up of 5-10% above the spot price. You will then also lose roughly that much when selling it too. So in order to break even you need the gold price to go up by about 15-20%. That is a significant amount of movement you are relying on. Gold prices have been rising on average around 15% over the last 5 years to be fair, but this won’t go on forever.

 

Is this a good time to invest in gold?

To come to a conclusion on whether now is the best time to invest in gold, I would consider the following factors:

  1. Will gold go higher? (i.e. do we think governments will print more money and that stocks will take a pounding and uncertainty will continue?)
  2. What are the alternatives? Property – how that will fare?
  3. Ease of purchase and cost

On (1), while I am no expert in gold prices, I am fairly confident that we will see macro instabilities, government printing more money, and uncertainty in the markets to continue for a year or two at least. Based on that, I would expect gold prices to at least hold their value.

On (2), I think there are a whole range of alternative investments to consider (see here) but in order for there to be a truly effective comparison to gold, the investment class should be safe and easy to exit from. The only real alternative is a savings account. And relative to a savings account you’re probably more likely to see growth in gold prices compared to savings returns (which are very low currently).

The other option is property – but I would only consider this a viable alternative if you are happy to hold whatever you invest in for around 5 years. This is because property is relatively illiquid so harder to get out of than savings accounts or gold.

Finally, on (3), if I did buy gold I would buy it via an online broker such as Bullion Vault and Minted. Alternatively, I would buy via a gold ETF using Hargreaves Lansdowne or M1 Finance. I would not buy physical gold and take actual delivery, or buy gold jewellery thinking it is a great investment.

Concluding thoughts

Having done a fair bit of research and thinking around gold, my preferred approach is to hold a steady 5% or so of my portfolio in gold and just maintain that regardless of price. So if gold prices rise and my gold holding becomes 10% of my portfolio, I would sell it to get back to 5%. And if gold prices fall and my holding is worth 3%, I would buy more gold to get to 5% of my overall portfolio again.

The reason I take this approach is, I think of gold as essentially an equivalent to cash, but one where there is a potential for a little growth.

But I don’t like putting too much in gold as I don’t consider it a productive asset – and I like to invest in productive assets as they are going to make me much more money long-term.

 

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  • Bullion sizes vary from 0.5 gram (c. £25) to above 1kg so its possible for somebody to invest in bullion at a much lower price. You don’t need $750k to invest in bullion bars. The premiums will be lower the higher the weight.

    Gold should be seen as an alternative to saving cash in my view so not necessarily fair to compare to other investments – That £100 of gold held its value while the same amount in cash hasn’t.

    Reply
  • Robert Hannah
    August 26, 2020 6:50 pm

    Regarding the “cons” of investing in gold, I would add that gold mining is an unproductive activity in terms of economic welfare to society. We use society’s resources (labour and capital) to produce bars of metal which sit in a vault to be traded back and forth by brokers. Gold production also can be quite polluting as cyanide, a deadly chemical, is used in parts of the production and refining and has spilled in the environment from time to time.

    Reply

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