The Role of Gold in Islamic Finance and Investment

Introduction

Before the advent of fiat currencies, gold played a pivotal role in global financial systems. Most countries operated under the Gold Standard—an era that underscored gold’s enduring value and historical significance—until its eventual phase-out in the 1970s.

In Islamic tradition, gold has long been esteemed not only as the medium of exchange during the time of the Prophet Muhammad (peace be upon him) with the use of gold dinars and silver dirhams, but also as an asset governed by ethical and legal guidelines.

Furthermore, gold is categorized as one of the “Ribawi” items in Islamic jurisprudence, meaning its trade is subject to specific rules to ensure fairness and transparency.

Preservation of Wealth

Amongst the aim of Maqasid al-Shariah (the higher objectives of Islamic law) is to preserve wealth.

In Islamic finance, safeguarding wealth is of paramount importance. Gold—being a tangible, universally recognized asset—has historically served as a reliable hedge against inflation and economic uncertainty.

For instance, many investors in the Gulf region have traditionally included gold in their portfolios to counterbalance currency fluctuations and protect their purchasing power.

Shari’ah Compliance

In accordance with Islamic principles, gold holds a special status as a permissible asset.

Unlike many modern financial instruments rooted in debt or speculation, gold is a physical asset with intrinsic value.

Authentic Hadiths provide guidance on the trade of gold, emphasizing that transactions should be conducted on a spot basis to avoid uncertainty (Gharar) and the accrual of interest (Riba).

This makes gold a robust, Shariah-compliant investment, aligning neatly with the prohibitions against Riba and speculative transactions.

Zakat and Gold

Zakat, the obligatory form of charitable giving in Islam, is collected on one’s accumulated wealth and is essential for wealth redistribution within society.

According to guidelines on Zakat from the Muslim authorities in Singapore, when gold is held primarily as an investment (such as bullion or gold bars), zakat becomes due if the total weight reaches or exceeds a specific threshold (approximately 86 grams).

The calculation is performed by multiplying the current market price per gram by the total weight of the gold and then applying a zakat rate of 2.5%.

For example, consider an investor who owns 600 grams of gold, with the current market price at around $48 per gram. The total value of the gold would be 600 grams × $48/gram = $28,800. Applying the 2.5% zakat rate results in a zakat liability of $720.

Similarly, for savings held over a full Hijri year (355 days), the zakat calculation is based on the lowest balance maintained during that period, with a rate of 2.5% applied to that amount.

These practices help ensure that wealth is redistributed fairly, and that social welfare is maintained.

Asset-Backing and Currency

Historically, many national currencies were backed by gold to provide a measure of stability and public trust.

By anchoring their currency to a tangible asset, nations aimed to inspire confidence in their monetary systems.

Even though modern economies now rely on fiat currencies, gold remains a favoured “safe haven” asset during periods of economic uncertainty and inflation.

Conclusion

In summary, gold continues to hold a prominent position in both Islamic finance and broader investment practices. Its tangible nature, long-term stability, and compatibility with Shariah principles make it an attractive asset for wealth preservation, portfolio diversification, and charitable giving. Whether serving as a safeguard against economic instability or as a benchmark for zakat on wealth and savings, gold remains a cornerstone of Islamic financial practice worldwide.

Resources:

1. Accounting and Auditing Organization for Islamic Financial Institutions. (n.d.). Shari’ah Standard on Gold. Retrieved from https://aaoifi.com

2. Investopedia. (n.d.). What is the gold standard? History and collapse. Retrieved from https://www.investopedia.com/terms/g/goldstandard.asp

3. Majlis Ugama Islam Singapura. (n.d.). Zakat on gold. Retrieved from https://www.zakat.sg/types-of-zakat/zakat-on-gold/

4. Majlis Ugama Islam Singapura. (n.d.). Zakat on savings. Retrieved from https://www.zakat.sg/types-of-zakat/zakat-on-savings/

5. World Gold Council. (n.d.). Gold as a safe haven asset. Retrieved from https://www.gold.org/goldhub/research/gold-as-a-safe-haven

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