(Series of Answers by the Scholar Ata bin Khalil Abu al-Rashtah, Ameer of Hizb ut-Tahrir, to Questions from Visitors to His Facebook Page)
To: Y. S
Questions:
Assalamu Alaikum Wa Rahmatullahi Wa Barakatuhu,
The honorable scholar Ata bin Khalil, may Allah protect and preserve you.
Economic questions related to gold:
What are the factors affecting the price of gold?
Why has the price of gold dropped since the end of last year?
What is the reason for its sudden drop about a month ago?
Is it Islamically permissible to save gold instead of paper currency while ensuring the payment of Zakah (is this considered kanz/hoarding)? If it is permissible, is it recommended from an economic perspective?
May Allah bless you.
Answer:
Wa Alaikum Salaam Wa Rahmatullahi Wa Barakatuhu:
As you know, currency (naqd) was previously gold and silver. Even when some countries issued paper notes in the late 19th and early 20th centuries, they were representatives of gold and silver and were exchangeable at any time; the holder of the paper note could go to the central bank of the issuing country and exchange it for gold at its face value.
This situation was disrupted during the First (1914) and Second (1939) World Wars, especially with the occurrence of the Great Depression in America in 1929, which extended to others as well. Consequently, several restrictions were placed on the exchange of paper notes for gold.
When World War II ended in 1945, America emerged with the least losses, while Europe, Germany, and Japan suffered great losses and destruction to their factories and infrastructure. Consequently, most of the world's gold was held by America after the war. Due to its military and economic strength, it was able at the Bretton Woods conference to make its paper currency, the Dollar, a cover for the currencies of other countries, similar to a gold cover. That is, countries could not print paper money unless it was backed by gold or Dollars. America fixed the price of the Dollar at 35 dollars per ounce of gold and pledged to pay countries holding paper Dollars the gold value according to the aforementioned price if they so desired.
America was helped by the fact that its gold reserves were sufficient or exceeded the paper Dollars printed domestically or abroad. The important thing was that its gold reserves were capable of covering external Dollars held by countries or individuals; as for the paper Dollars inside America, dealing with them was easier than those abroad.
To clarify the picture, America's gold balance in 1946 after the Bretton Woods agreement was valued at the price set in the agreement at 20.6 billion dollars, while the paper dollars held abroad by countries and individuals amounted to 6.1 billion dollars. This situation remained—meaning America was able to guarantee the mentioned Dollar price—until 1960, when gold reserves in America were 18.8 billion and the volume of paper dollars abroad was 18.7 billion, meaning it could almost guarantee the Dollar price. After that, Dollar balances abroad began to exceed the gold balances in America.
As a result of the deterioration of the Dollar's gold cover, America requested aid from major countries in the world to assist it. An agreement was reached to establish the "Gold Pool." Its function was that if the price of gold rose in the market for any reason, the banks would immediately intervene by offering an additional amount of gold for sale to bring the price back to the equilibrium level. Conversely, if the price fell, they would quickly buy the surplus gold to raise the price back to its original level.
The Pool continued for several years, but gradually it began intervening in the market mainly as a seller, especially between 1965 and its end on March 17, 1968. This threatened the gold reserves of the member countries with depletion. France withdrew in June 1967, and then crises accelerated (the Sterling crisis in the autumn of 1967, then the gold crisis of 1968). Both crises caused the Gold Pool countries to lose 2.5 billion gold dollars within six months. A meeting was held in Washington on March 17, 1968, where it was decided to abolish the Gold Pool and leave the price of gold free to be determined by the forces of supply and demand.
The aforementioned gold crisis caused the reduction of gold reserves in America from 14 billion in 1965 to 10.48 billion in March 1968 when the Gold Pool was abolished. This gold balance for America at the time was the minimum amount required by law for the internal gold cover of the Dollar (25%). Consequently, America abolished the conversion of Dollars owned by the private sector abroad into gold and maintained gold exchange only for official foreign balances. The remaining amount of gold in America, which was the aforementioned minimum, was sufficient for official foreign balances only. This meant that the 25% internal gold cover of the Dollar was removed, but America could not fulfill the exchange of official foreign balances resulting from private sector imports and exports, as well as public sector transactions in its international relations with others.
Consequently, America decided during the era of President Nixon to completely abolish the gold exchange system in 1971. After that, paper currency no longer had any cover exchangeable in the short or long term. Instead, the value of paper currency became determined by the economy of countries—namely their balance of payments, the country's security situation, and sudden crises—in addition to speculation in financial markets and, significantly, oil and its prices, and whether its sources are subject to security or instability.
To clarify this, we say:
a- Since that date, gold, like any other commodity, is affected by supply and demand. If supply increases—such as when some countries sell part of their gold reserves to strengthen their economy—the supply of gold in the markets increases and the price of gold drops. If some countries or individuals turn to buying gold for certain speculations and demand increases, its price rises.
b- Similarly, if restrictions on gold imports are lifted or reduced, import and export activity flourishes, and thus the supply movement of gold in the markets increases. This leads to a decrease in the price of gold, as happened in the Gulf states in early 2011 after exempting gold from the customs duty rates imposed on gold jewelry and products, and unifying the hallmark between these countries, which led to a decrease in gold prices due to increased gold import and export activity between them.
c- Likewise, if the Dollar falls due to economic or military reasons, people turn to saving gold instead of the Dollar, and countries also try to save gold in their reserves instead of the Dollar. This increases the demand for gold and its price rises. If the Dollar rises due to an improvement in the American economy or similar factors, people's confidence in the Dollar returns; they then sell some of their gold savings, increasing the supply, and save the Dollar instead, causing the price of gold to drop.
d- Furthermore, there is the matter of oil. The rise or fall of gold prices today is directly proportional to the rise or fall of oil prices. Whenever the price of a barrel of oil rises, gold prices rise with it, and whenever the price of the US Dollar falls, gold prices increase.
Based on this, the answers to your questions can be understood:
a- The drop in gold prices in 2012:
Two notable things happened during that year:
First: A relative improvement in Dollar prices after the severe suffering it faced during the previous years following the American economic crisis resulting from the collapse of the real estate market. This improvement in Dollar prices led to a drop in the gold price, as we mentioned above, because the gold price is inversely proportional to the price of the Dollar.
Second: Russia sold about 4 tons of its gold reserves for the first time in five years. Consequently, this sale—meaning an increase in supply—contributed to the drop in the gold price.
There are other secondary reasons, but what we mentioned above had the greatest impact.
b- As for the sudden drop in the price of gold during July 2013:
On June 19, 2013, the Chairman of the US Federal Reserve (the "US Central Bank") announced a potential schedule for the gradual reduction of the Quantitative Easing program. This led to strong support for the Dollar and consequently a drop in gold prices to an unexpected level, where the price per ounce reached nearly 1180 dollars! This is slightly higher than the cost of extracting gold from mines, which ranges between 1135 and 1150 dollars per ounce. This prompted Pankaj Gupta, a director at SMC Comex, to say: "I do not expect prices to fall below these levels for a primary reason, which is the cost of extracting gold in mines being around 1135 to 1150 dollars per ounce. This means that prices falling below these levels will push mines to stop extraction and limit supply in the market, which will raise prices again."
This statement is correct to some extent, as prices returned to a slight rise in August 2013, reaching 1310 dollars per ounce, despite the US Federal Reserve starting to reduce the bond-buying program valued at 85 billion dollars monthly. This means reducing the supply of Dollars in the market and thus raising its price, which results in a drop in the price of gold. Nevertheless, it did not fall below the July 2013 level. Although the gold price is still low and near the cost price, as Gupta said, whenever the price of gold approaches the cost, some mines will reduce their production, thereby reducing the supply of gold and its price will rise, even if only slightly.
c- Regarding your question about saving gold and silver instead of paper currency:
The Shar'i rulings regarding gold do not differ whether it is minted as currency or otherwise, such as bullion, etc. Hoarding it (kanz) without a need is haram (prohibited) even if its Zakah is paid. This is the weightier view on the matter according to the Shar'i evidences related to it. However, hoarding or saving is permissible with the payment of its Zakah if it is for a need, such as wanting to build a house or marry off your son.
Your brother, Ata bin Khalil Abu al-Rashtah
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