The Malaysian state of Kelantan started issuing gold coins in 2006. Although the federal government of Malaysia does not recognise these coins as legal tender, the demand for these coins has been overwhelming. PHOTO: FILE
In an environment of high domestic inflation, deteriorating exchange rate of local currency against major foreign currencies and decreasing interest rates, preserving the value of savings and investment is certainly a challenging task. Most people, especially unsophisticated investors, tend to seek refuge in real estate in an attempt to preserve the value of investments. However, small savers and investors who prefer liquidity find it difficult to lock their savings in illiquid investments like property.
In the Indian sub-continent, there has been an historical obsession with gold as an enduring investment: women tend to try and convince their husbands to ‘invest’ in jewellery. All of us, however, know that gold jewellery has never been a good investment. The story is different when it comes to gold metal. Gold has always proven to be a safe haven for most investors, especially for the long run. In a country like Pakistan, which at present is facing all kinds of economic problems, it is becoming increasingly difficult for investors to preserve the real value of their investments. Meanwhile, local savers are also disheartened by the prospect of earning low, or in some cases negative, real return on their savings (and hence incurring a capital loss in real terms). This is also a deterrent for many foreign investors who may wish to invest in the country.
One viable option for many savers is to open up foreign currency accounts in local banks to hedge against exchange rate fluctuations and rising domestic prices. This remains a preferred option for many, especially those who receive foreign remittances on a regular basis. However, while most of the local and foreign banks operating in the country offer foreign currency (US dollar, British pound and euro) accounts, there are nearly zero gold-based savings and investment products.
Given the macroeconomic conditions, it is probably high time for the introduction of gold coins in Pakistan, as an attempt to introduce a stable currency for saving. The current share of Islamic banking in overall banking in Pakistan is about 8%, and we can expect that a very significant proportion of the banked individuals and households would be interested in saving in bullion. Islamic banks in the country can exploit this opportunity to win more business by introducing bullion accounts.
If the introduction of gold coins is successful, monetary authorities – ie, the State Bank of Pakistan – may consider using gold coins to bring about monetary reforms in the country. Indeed, advocates of monetary reform have for long advocated a return to the gold standard. Some prominent economists, like Nobel laureate Robert Mundell and James Robertson, have written a lot on the benefits of returning to the gold standard. In the context of Islamic banking and trade, the likes of the former prime minister of Malaysia, Dr Mahathir Mohamed, and activists like Tarek elDiwani have been influential figures advocating the introduction of gold dinars and replacing the fractional reserve based banking system.
In fact, the Malaysian state of Kelantan rather controversially started issuing gold coins in 2006. Although the federal government of Malaysia does not recognise these coins as legal tender, the demand for these coins has been overwhelming. Since then, some silver coins have also been sold to savers who would like to save them for the longer term.
While it may be a far-fetched idea to expect the State Bank of Pakistan to start issuing gold and silver coins, the increasing demand for Islamic banking in Pakistan offers Islamic banks a window of opportunity, to exploit which they can start offering bullion-based investments to those who consider gold coins to be more Shariah-compliant than conventional money, which is created through an interest-based credit system.
THE WRITER IS AN ECONOMIST AND A PHD FROM CAMBRIDGE UNIVERSITY
Published in The Express Tribune, January 28th, 2013.
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COMMENTS (9)
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A gold standard will stop all wars. It will stop government from cheating it's people by printing money and creating inflation. The standard of living has been reduced by continued inflation. The Austrian School of economics has explained all this, and it's not taught in our schools. We continue to be taught Keynesian Economics even though it is what brought us into this crises.
The US dollar has lost 98% of it's value since the creation of the Federal Reserve. Gaddafi who tried to make a gold backed currency, look what happened to him.
Now China is making moves towards a gold backed currency. It can either succeed and the dollar will collapse, or it will cause World War III. Maybe WW III has already started.
Whether the author has obtained a degree by offering a bag of flour to his supervisor? A childish contribution by the author.
@John B: Don't think author is peddling the gold standard because it is sharia compliant, in fact, being sharia compliant can attract a significant demographic from Islamic countries towards gold investment. That's what the author is getting at ...
As for Govt. selling cheaply acquired gold at market price to its citizen, well bullion reserve is worth what bullion reserve is worth, no Govt. will sell its citizen gold acquired in 1940 at 1940 prices, is this really nonsense to you?
Finally, buying Govt. issued gold coins may have a little minting markup (got some australian kangaroos at market rate from a dealer .. buyin from mint maybe diff, never done it so don't know, I'll take your word for it) .. but its no more than what any gold bar in open market will have you pay. I've bought gold from Karachi sarafa bazar all the way to Gold souk and even Dubai duty free .. skip the local castings and you are required to pay a premium on top of the gold price (suisse, pamp etc.) ..
Gold standard is a good debate and I think the author has made a good point here.
As far as I know, Pakistan doesn't produce gold but imports it. So the only thing this move will do is to hasten the balance of payments crisis.
Salam. The gold dinar and silver dirham are not being introduced as an "investment vehicle" but as the only practical way in which Interest (riba) can be eliminated from our financial system. For every wealthy person wanting bullion denominated investment in rupees, we will insha Allah get ten more God-fearing people who will want nothing to do with rupees and convert their assets purely into gold so as to usher in a riba-free monetary system. The long term goal is to provide gold coins through public or non-profit institutions that can provide coins on brassage price and eliminate seiniorage. The benefit of gold currency is much much more useful to the whole community then mere gold investment.
Very aptly portrayed. We have been unablke to introduce Gold based accounts for investors in Pakistan. With a gazillion banks operating in the Country we have yet not ventured this way. In spite of the knowledge that there is an inclination towards gold purchasing as investment and as saving instrument in the sub continent. Introduction fof Gold based accounts will not only help banks gain liquidity for a longer term but also the ability to offer Investors inflation hedged returns.
There are however a few Asset Management companies that are offering gold based mutual funds which are an execllent way to invest in gold and avail the returns without taking too much risk. The regulators must facilitate the introduction of such faciltiies for investors. It is still not too late for banks to wake up and introduce the gold based accounts. this will get more money in the system. TheNBP offer for loans based upon placement of Gold jewellery as security is the only gold related offer available but that too is not focused on investments. Although this will be crucial in bringing the un accounted for gold into the system.
Excellent Article.
We (common people) need such an investment advises.
Sincere Thanks to the writer.
Not this nonsense again.
Why should anyone care if the money is sharia compliant or not. Does it make any money more valuable than the other?
Whenever a government issues gold coins from treasury gold,It is either selling the cheaply acquired excess gold at high market rate ( ie. Government is making profit out of its citizen) or it is trying to raise money easily and cheaply from the public ( government is desperate) and the coins issued do not have investment gold value and the buyer pays a worthless premium price for the mint. The government will issue coins of national symbols or religious symbols to entice the gullible public in the name of patriotism. So, public beware. If you want to buy investment gold buy an ounce bar of 99.999% purity and you pay the spot market rate with no mint charge.
Buying gold does not necessarily retain the original money value as gold is traded as a commodity and its price fluctuates like any other commodity. Unlike money gold does not earn interest or dividend and costs real money to store in bank safe. Never buy gold certificates.
People in PAK can make more money in energy sector than in gold. Yet, gold can be a part of investment portfolio, if one has excess money to spare for the joy of it.