Sunday, August 31, 2008

Shariah Compliant Gold and Silver ETF

In London recently, ETF Securities (ETFS) launched what is claimed to be, the world's first Shariah Compliant precious metal exchange-traded commodity, (ETC) based on physical platinum, palladium, silver, gold and a basket of the above metals.

According to Meralli, formerly with Goldman Sachs and Deutsche Bank, an Exchange Traded Commodity (ETC) is very similar to an ETF (exchange-traded fund). However, it is a security structure not a fund. "Conceptually, an ETC offers investors a simple, efficient and cost-effective way to access commodities via a priced security listed on a regulated exchange. ETCs trade and settle the same as equities. ETCs are open-ended and can be created and redeemed to demand. ETCs are simple to access as they are traded in three currencies (euros, US dollars and sterling)." he explained.

"In Shariah, the common issue of a commodity Murabaha contract is that it cannot feasibly be structured for gold and silver. With the ETFS physical precious metals ETCs, the nominate transaction is an entirely different structure. In purchasing the security, the investor obtains an allocated physical entitlement to the underlying bullion and his return is tied directly to the spot price of that precious metal less the management fee." he stated.

This appears to be ETFS answer to entering the multi billion dollar Islamic finance and Sameer Meralli, head of sales for Middle East and North Africa at ETF Securities, then stated, "... they are a purer form of Islamic commodity transactions, for instance compared with Murabaha (cost-plus financing). In an ETC, investors do not have to worry about margins, delivery or the underlying assets."

What makes the ETC Shariah complaint is that, according to ETF Securities, all of the physical precious metal ETCs are backed by allocated metal - uniquely identifiable bars and ingots which carry no bank credit risk. The bars and ingots are held in trust in London by custodian HSBC Bank NA (USA), the leading custodian for ETCs in the world. Unlike the usual gold Exchange Traded Fund (ETF) where one is betting on the value of the fund going up and the fund is not directly related to specific bars of precious metal, gold in this case.

The precious metals conform to the rules of good delivery of the London Bullion Market Association (LBMA) and the London Platinum Palladium Market (LPPM) and securities are only issued once the metal is confirmed as being deposited into the company's bullion account with the custodian. Also consistent with allocated gold, no precious metal is borrowed, loaned out and nor does it earn any income.

This then is an assurance for the Islamic investor that his or her holding is actually precious metal in the form of gold rather than an account reflecting the price of gold and interest is not earned on the precious metal but one is relying on the value of gold moving up in order to recoup ones investment is necessary to ensure that one is Shariah complaint and not violating the law with regard to usury or riba as it is called in Islamic law.

The five ETCs that are Shariah-approved are specifically the ETFS physical precious metals products - the ETFS physical gold, ETFS physical silver, ETFS physical palladium, ETFS physical platinum, and the ETFS physical precious metals basket (an aggregation of the four precious metals). Each of these securities, said Meralli, are backed by physical allocated metal held by the custodian. These are designed to track the spot price of the underlying physical bullion less the management fee.

Meralli also explained, "Three weeks ago, after an extensive approval process, the Shariah Advisory Board at Al-Qalam Group approved the product as being fully Shariah-compliant. Since the security is backed by physical allocated bullion, which is held in trust on behalf of the security holder, the underlying transaction enables investors to obtain a spot return on the basis of a precious metal that they actually hold (in a vault in London or Zurich to be exact). The logistics of this transaction are in pure concordance with Shariah financial tenets,"

Also Shariah Complaint and where stability and security is paramount and where one can monitor the existence of the precious metals such as gold and silver, one could be better off looking at buying gold and silver from such places as rather than as an ETC.

In this case there is no interest or riba and it is a safe and secure way to hold assets and not lose value due to inflation and other reverse interest penalties. besides which one can now take delivery of the gold in the form of 1000 gram gold bullion if one wants to. This makes GoldMoney a great safe haven for storing gold.

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