Assalamu Alaykum Warahmatullahi Wabrakatahu:
Honorable Scholar Ata’ Bin Khalil, may Allah sustain you and provide for you;
Economic questions related to gold:
What are the factors affecting the price of gold?
Why did the price of gold fall since the end of last year?
To what is the sudden decline, approximately a month ago, attributed?
Does the Shariah permit the saving of gold instead of paper currency while taking care of the Zakah payment (is this considered to be hoarding)? And if it were permissible, is it recommendable from an economic perspective?
Barakallahu Feek!
Answer:
Wa Alaikum Assalaam Wa Rahmatullahi Wabarakatahu:
1. As you know, money was formerly gold and silver, and even when some states in the late 19th century and early 20th century issued paper money, this paper money was in exchange for gold and silver. The owner of a banknote could take it to the State Bank which had issued it and exchange it for the value it held in gold.
2. This situation wavered during World War I in 1914 and World War II in 1939 and in particular with the occurrence of the Great Depression in America in 1929, which also spread to other countries, thereby placing several constrains on the exchange of paper money for gold.
3. When World War II ended in 1945 and America came out of it with minimal losses, while Europe, Germany and Japan were afflicted with great loss and destruction in factories and architecture… From then on most gold was with America after the war. Through its military and economic strength America was able in the Bretton Woods Conference to make its paper currency the dollar a standard for other nations’ currencies as gold used to be a standard, meaning that nations could not print money and promote it unless they had a cover for it in either gold or dollars. America set a price for the dollar, which was 35 dollars per ounce of gold, and pledged to pay the countries the value in gold at the aforementioned price if they wanted.
4. This helped America with its stock of gold being equal or even higher than the stock of printed paper dollars at home or abroad. It was important that the American stocks of gold were able to cover the dollars in the hands of foreign countries or foreign individuals, since dealing with the paper dollar at home is easier than dealing with the one abroad.
To make the image clear, America’s stock of gold in 1946 after the Bretton Woods Agreement was worth the price defined in the agreement = $ 20.6 billion, while the paper dollar abroad with states and individuals was $ 6.1 billion. The situation remained like this, such that America was able to ensure the mentioned dollar price until 1960, when the American gold stock amounted to18.8 billion. The amount of paper dollars abroad was 18.7 billion, such that they were able to secure the price of the dollar. After that the dollar stocks abroad started to exceed the gold stock in America.
5. The result of the deterioration of the golden standard for the dollar caused America to ask for help from major countries in the world. They agreed to establish an association of gold with the aim that if the price of gold rose in the market for any reason the banks would hurry to intervene immediately by putting an additional quantity of gold for sale as to rearrange the price at the equilibrium level. On the contrary if the price fell, the banks would hurry to buy the excess amount of gold, such that the price rises to the initial level.
The association continued for some years, but then it gradually started to openly intervene in the market, especially between 1965 and until its abolition on the 17th of March 1968, which threatened the gold stocks of the associated countries to melt away. France withdrew from the association in June 1967 and then the crises accelerated (the Sterling crises in the fall of 1967, then the gold crisis in 1968). These two crises caused the countries within the gold association a loss that amounted to 2.5 billion dollars in gold within 6 months. A meeting was held in Washington on the 17th of March 1968 in which the decision was taken to cancel the gold association and to leave the price of gold unrestricted, to be determined by the forces of supply and demand.
6. The aforementioned gold crisis caused the gold stocks of America to decrease from $14 billion in 1965 to 10.48 billion in March 1968, when the gold association was abolished. This American gold stock was the minimum amount required by the law at the time in order for the interior gold to cover the dollar (25%). At that time America canceled the conversion of privately owned dollars abroad into gold and kept only the replacement of official foreign gold stocks. The amount of gold remaining in America, which was the aforementioned minimum, was enough for the official external stocks only, meaning that the gold backing for the dollar at home (25%) had been removed. Nevertheless America was unable to exchange the official foreign stocks as a result of the import and export of the private sector, as well as transactions of the public sector in its international relations with others.
7. As a result America under President Nixon canceled the exchange system with gold entirely in 1971, and since then there is no longer a gold standard to back the paper money. Rather the value of paper money is defined by the countries’ economies, meaning the balance of their payments, their security status and the emergency crises… This in addition to the money market speculation, also oil prices are an important component and their exposure to security situations or disorder.
8. In order to clarify this we say:
A. Gold, like any other commodity, ever since history is affected by supply and demand. If the supply increases, some countries sell part of its stock of gold to strengthen the economy, i.e. the amount of gold on the market increases while the price of gold falls… If some countries or some individuals turn to buy gold for a certain speculative demand, then the demand increases and the price rises.
B. Furthermore when the restrictions on the import of gold are lifted or reduced, the import and export are stimulated and then the supply of gold in the markets increases, which in turn causes the gold price to decrease, as happened in the Gulf in early 2011 after the exemption of gold from custom taxes had been imposed on gold manufactures and jewelry crafting. Another factor was the standardization of stamps on gold between these countries, which led to the decline in gold prices due to the increased movement of import and export of gold between them.
C. Also if the dollar deflates for economic reasons or military reasons or others, people turn to gold reserves instead of the dollar. Even the countries try to reserve gold in their assets instead of the dollar, increasing demand for gold and thus raising its price. As soon as the dollar rises to the improvement of the American economy or what comes close to it, people regain confidence in the dollar, selling some of their savings in gold, such that the supply rises and they reserve the dollar instead, causing the price of gold to decrease again.
D. Then there is the issue of oil. The rise in gold prices today or its decline is proportional to the rise in the price of oil or its decline. When the price of a barrel of oil rises, the gold price rises with it, and the lower the price of the American dollar, the higher the price of gold.
9. Based on this, one can understand the answers to your questions:
A. The decrease of the gold price in 2012:
Two remarkable things happened during that year:
First: A relative improvement in the price of the dollar after the severe suffering that hit it during the previous years that followed America ‘s economic crisis caused by the collapse of the real estate market… This improvement in the price of the dollar led to a decline in the price of gold as mentioned above, as the price of gold is inversely proportional to the price of the dollar…
Second: Russia sold about 4 tons of gold reserves for the first time in five years. This sale contributed to an increase in gold supply on the market, thus lowering the price of gold.
There are other minor reasons, but what we have mentioned above have had a major impact.
B. The sudden drop of the gold price during the month of July 2013 was connected to what happened on 06/19/2013 when the head of the American Federal, i.e. the U.S. Central Bank, announced a possible agenda for the progressive reduction of the quantitative easing program. This led to a strong support of the dollar and the decline in gold prices to an unexpected degree, as the price of an ounce dropped to nearly 1180 dollars! This price is only slightly higher than the cost of extracting gold from the mines, which lies between 1135 and 1150 dollars per ounce, prompting Pankaj Gupta, managing director of SMC Comex, to say: “I do not expect prices to fall below these levels, for the main reason that the cost of extracting gold from mines is up to one $1135 per ounce, and a $1150, which means that the price falling below these levels would lead miners to stop the extraction and the reduction of gold supply in the market, which will in turn raise the prices again.”
This statement is true to a certain extent, since the prices in the month of August 2013 returned to a slight increase to 1310 dollars per ounce, despite the precautions of the U.S. Federal Reserve to reduce the bond-buying program which is worth $ 85 billion per month. This means the reduction of the supply of dollars, consequently increasing the price of the dollar and simultaneously decreasing the price of gold. However the price did not fall under the rate of July 2013, although the price of gold is still down nearly to cost price. But as Gupta said, the closer the gold price comes to its cost price, some mines will decrease production and then at least the supply of gold in the market rises, raising its price at least slightly…
C. Regarding your question about savings of gold and silver instead of paper currency, the legal provisions for gold do not differentiate between gold in the form of minted coins or in the form of an alloy etc. The hoarding of gold is Haram even if the Zakah was paid on it, and this is the correct view of the matter according to the Shar’i evidences relating to it. Except savings for a need, for example if you wanted to build a house or wed your daughter …then this is permissible with the Zakah payment on it.
Brother Ata’ Bin Khalil Abu Al-Rashtah
17 Shawwal 1434 AH
24 August 2013 CE