Gold and It’s Trading Parameters in Shariah

Introduction:
Gold is one of the most recognizable metals that is found on earth. Gold is a commodity that is
fungible, this means that it can be easily replaced by another item that is identical to it and it is
measured in weight. It is a commodity that is measured by weight and then sold accordingly, it is one
of the six substances that is known in Islamic Finance as Ribawi along with silver, dates, wheats, salt
and barley. It can be used as part of currency exchange that is known as Bai-Sarf.

Shariah Rulings for Trading in Gold:

The Shariah ruling for the trading in Gold are based on the following conditions:

On the Basis of Equality or Disparity in Weight:

Gold can be part of a sales transaction, if the values are equal in weight even if the gold is used and
old or new and unused, the commodity must be exchanged as per the requirements that have been set
in the “trading of currencies” in Shariah standards.

If any organization whose primary purpose is not the trading of gold, silver and currency, and the
organization or a part of the organization is sold along with the gold then that sale does not come
under the jurisdiction of Shariah rulings for currency exchange which is known as Bai-Sarf. On the
other hand, it is not permissible to be involved in any business that is intentionally involved in the
trading of gold, silver or currencies unless it complies with Shariah standards.

It is permissible for gold to be sold for silver even if there is a great difference in the weight of the
commodities and gold can also be exchanged for currencies at any price that is agreed upon by both
parties. However, in both of these scenarios that being gold for silver and gold for currencies, they
must be exchanged on the basis of equality as described in the Shariah standards.

Gold can be sold for any commodity other than gold, silver or currency; this is the case when gold can
be sold for commodities or usufruct (right of use) or a service – this is allowed at any price and does
not require the spot exchange of counter-values. (difference of value between the commodities such as
gold, silver or currency).

On the basis of Immediate or Deferred Exchanged of the Counter-Values:

If gold is sold for silver or a currency then during the contracting process – both the parties must
provide the counter-values either physically or constructively. If the sale of gold is for any other
commodity then one of the counter-values may be deferred (to a future date) and this is permissible in
Shariah. This ruling is applicable to gold in all states such as used, unused, new or old.

Sale contracts cannot be dependent on a future event, neither is it allowed for the contract to be
deferred to a future date. Furthermore, gold cannot be sold on the basis of a stipulation (Khiyar-e-
Shart).

If a stipulation is added that both counter-values are deferred in the sale of gold then such a stipulation
is not permissible in Shariah, as the requirement of exchange of counter-values as explained in
Shariah will not be met.

On the Basis of Gold Purity:

Gold Alloy:

Gold that is combined with other elements or substances can be classified into the following
categories:

The First Type:

The first type is gold that is mixed with another metal in which every metal is mixed as intended in
itself. It comes in the following forms:

The First Form: When gold and silver are mixed together, in such situations it is acceptable if it is
sold for gold or silver that are pure but the counter-values must be provided immediately and the
weight of the pure gold, silver or counter-value must be more than the mixed counter-value. If such a
situation arises that the weight of the pure gold, silver or counter-value is equal to or less than the
mixture then such a sale is not allowed. The spot exchange of counter-value is the only requirement, if
the mixture of gold and silver is exchanged for pure gold or silver, and if the mixture of gold is
exchanged for a currency.

The Second Form: If gold is mixed with a substance or an element other than silver. It has two types:

First Type: If the percentage of pure gold exceeds 50% then the sale is acceptable if it is exchanged
for:

 This is the scenario in which pure gold is exchanged on the spot and it weighs more than the
gold that is in the mixture, this is because then the surplus of the pure gold is the counter-
value to the non-gold substance that exists in the mixture.
 In this case pure silver or gold is mixed with an element besides silver, or for currencies but
the counter-values must be spot.
  If the substances/elements besides silver or currencies then in such situations counter-values
do not need to be exchanged on spot.

Second Type: If the percentage of pure gold is 50% or less then it cannot be considered as a sale of
gold, but if the sale is for gold, silver or currency then it is required that the counter-values are
exchanged on the spot.

The Second Type:

In a situation where the gold is mixed with an element not intended in itself but rather it is intended
for the purpose of coloring the gold or for the purpose of standardization.

The Third Type:

If gold that is proportionally insignificant in amount and it is not intentional, then is mixed with
another substance that is greater in amount to the gold but it is mixed intentionally. Gliding gold and
decoration of non-gold articles are not part of Shariah standards.

Sale of Gold Ingots for Currencies:

In a transaction that involves the sale of gold ingots, the counter-values must be shared in the
contracting phase. The ingot must be possessed by the buyer or his agent – physically or
constructively. In constructive possession, the buyer has rights to the ingot and can dispose of it, the
buyer must be given a certificate that is a form of proof of ownership of a specific ingot and that ingot
can be differentiated through serial numbers or other distinguishable marks but the certificate must be
provided on the day that the contract is executed. Agencies which will allow the buyer to take lawful
possession of the ingot, so it is not acceptable to sell an unspecified ingot without physical possession.

Shariah Rulings for Joint Ownership of Gold:

Both of the partners own an undivided share of a percentage in the pool of gold but that percentage
has been specified. This is permissible in Shariah but depends on the rulings which were defined in
the sale of gold ingots.

When the owner of the undivided share asks that his share be segregated (separated) but without
causing damage to the share of the other partners then he may sell his share.

All partners shall bear any losses/damages in case of loss or damage, it will be divided on pro rata
(proportional) basis.

Ingots which are stored in a warehouse and cannot be differentiated by serial numbers are considered
to be unallocated, these are under the jurisdiction of joint ownership. On the other hand, if the ingots
can be differentiated through serial numbers then every owner will be liable for his own share but if
the owners agree beforehand that the share will be undivided and, in such situations, the Shariah
rulings shall be applicable for joint ownership. If any damage or loss is suffered then it will be divided
amongst the owners according to pro rata basis if the amount in the warehouse or storage is specified
at all times.

Gold in contracts of Musharakah and Modern Corporations and

Companies:

Gold can be used as capital in Musharakah, Mudharabah and investment Wakalah if the golds
monetary value in currency has been determined in agreement by both the parties during the
contracting sessions. The purpose of determining the value is in order to decide the shares of every
partner in Musharakah or the capital in Mudharabah and investment Wakalah. If it is not possible to
measure the value then the use of gold as capital is not permitted.

If the parties were to distribute the profit in the form of gold and it is distributed according to the
market value of gold then it is permissible.

If the organization is liquidated then the partners can reclaim their capital in gold but it must be
according to the market value of gold at the time it is being distributed. This is permissible according
to Shariah.

A company that extracts gold, its shares can be bought if Shariah parameters are complied with.

Gold in Commutative contracts (Mu’awadhat):

Gold in Sale contracts:

An organization can purchase gold from a supplier on the spot and can sell it on spot through
Murabahah or Musawamah,, but it is necessary for Shariah standards to be met.

Gold cannot be purchased through letter of credit unless it is done by following Shariah requirements
including the payment of the price without deferring it.

An agent can be appointed for the purpose of purchasing and taking possession of the gold (Wakalah).
It is acceptable for the agent to purchase the gold by means of Wakalah through Ijab-o-Qabul (Offer
and acceptance). This would mean that the liability has been transferred to the agent as is the case in
any contract.

Gold in the contracts of Salam and Istisna’a:

Gold can be used as capital in a Salam transaction, if the subject matter (Muslam Fehi) is not gold,
silver or currency.
It is acceptable to purchase gold via Salam contract, if the capital that is being used in Salam contract
is not gold, silver or currency.

An Istisna’a contract can be performed in gold but only if the price of the Istisna’a contract is not in
gold, silver or currency.

Gold in Ijarah (Lease and Services) Contract:

Gold can be leased whether in the form of jewelry or ingot on the condition that the principal amount
(corpus) is not used during the lease. The rent can be paid in advance or in arrears (payment that has
exceeded deadline or that can be paid after the service has been executed) and it also depends on if the
rental contract is for identified asset or Ijarah Mawsufah Fi Zhimmah.

It is acceptable for the lessee to purchase the gold that has been leased from the lessor on the
condition that it is purchased for a spot price that was mutually agreed by both parties at the time of
purchase agreement.

Rent amount (Ujrah) can be paid in gold even if the asset that has been leased is gold.

The Ijarah contract is permitted for gold smithery, if gold is provided by the service recipient and the
work is performed by the goldsmith or service provider. The wages (Ujrah) can be paid in advance or
in arrears, the laborer’s wages (Ajr) can be paid out in gold.

Gold in Deposit contracts (Wadi’ah):

Gold deposits shall be held in the depository, the depository where the gold is stored is not permitted
to use or dispose of the gold deposits, nor can it commingle (mix) its gold with any other gold that is
held in its depository without allocation. If the depositor has permitted that his gold deposits be mixed
(commingled) with gold that is held in the depository then this is permissible in Shariah.

The depository can charge for safekeeping the gold. The depository can charge the fees in lump sum
amount or as a percentage of the value of the gold that was deposited. If the gold has been deposited
as collateral against any loan that has been acquired by the depositor then the fees can only be charged
not exceeding the actual cost that was incurred in safekeeping the gold.

In any such circumstance that the deposited gold has been damaged due to the negligence or
mismanagement by the depository. In this case, the depository shall be liable for any damage to the
depositor and the depository must compensate the depositor in equal amount of the same kind of gold.
If this is not possible then the depository must compensate the depositor by the value of the defected
gold at the time of occurrence of the damage or defect.
Gold in Noncommutative contracts (Uqud al-Tabarru’at):

Fungible (replaceable or identical) gold or non-fungible can be lent (I’arah) if it is identifiable, this is
permissible.

If gold is fungible then it is acceptable to loan (Qard) it.

Gold can be provided as Waqf, such as providing for lease whereas the rent amount constitutes the
yield (Ray) or to provide it for lending (I’arah) or to give it as a loan (Qard).

Gold in Security Contracts (Uqud al-Tawtheeqat):

Use of Gold as a Pledge/Collateral (Rahn):

According to Shariah, gold can be used as collateral for loans and debts, in the form of jewelry or any
other form and the collateral could be the gold itself or it can be a certificate of its ownership.

Gold can be held by a pledgee in a fiduciary capacity, the pledgee shall not be liable unless in cases
such as misconduct, negligence or any violation of the contract’s terms and conditions. In such
circumstances, the pledgee shall be liable to compensate the pledgor in equal amounts of gold of the
same kind. If not, compensation shall be equal to the value of the gold that had been damaged.

In circumstances, where the debtor is unable to settle his debt at the maturity date, then the lender may
ask that the gold be sold in order to recover his dues from the sale, and return the remaining amount
from the sale to the debtor. The sale of the gold will be at the current market value with the funds
from the sale be used to recover the debt.

A pledgee cannot stipulate any entitlement to dispose of the gold that was pledged through sale or by
using it as a pledge in another sale transaction or by renting it even when the pledgee has accepted
that he will return it to the pledgor.

When the pledgee has ownership certificates of the pledged gold that is stored in a warehouse that is
constructive possession, but the pledgor/owner cannot dispose of the gold without presenting proof of
his ownership in the shape of the ownership certificates.

The owner of the gold (pledgor) shall bear the expenses that are incurred in maintaining and
safekeeping the gold. If the expenses are paid by the pledgee even without the pledgor’s permission,
the pledgee has the option to ask the pledgor for repayment of the amount that was paid or may
benefit from the pledged gold to the extent of amount of expenses without consuming the principal
amount. The expenses may be borne by the pledgee if it has been specified in the contract.
Use of Gold as Hamish Jiddiyyah:

It is acceptable when an amount is taken from the customer who is wants to purchase in Murabaha
transaction. This amount is taken as Hamish Jiddiyyah (security deposit) in gold to secure a promise
that is binding (Wa’d Mulzim). The amount will be not considered as Arboun (down payment) but
will be held as trust, the reason that it will not be considered is down payment is due to the fact that
there is a lack of any contract at that time. If there is a default then only the actual loss shall be
deducted. The evaluation of the gold will be at the current market price of gold at the time that there is
a deduction.

It can be agreed upon in a commutative contract that the gold is given as Hamish Jiddiyyah is to be
made a part of the price or rent. In such a situation, the evaluation of the gold will be made according
to the current market price at the time that the payment will be made.

Hamish Jiddiyyah will depend on the rulings that are related to expenses which are associated with
pledged items (Marhoon).

Use of Gold as Arboun (Earnest money):

Gold may be used as Arboun in a commutative contract where it is permissible, on the condition that
the subject matter is not gold, silver or currency. The seller has ownership of Arboun regardless of the
fact that the sale is completed or has been terminated.

Gold in Debt Assignment (Hawalat al-Dayn):

Gold can be used as subject matter in a debt assignment but it is dependent on Shariah requirements.

If gold is the subject matter (Muslam Fihi) in a Salam transaction then the seller (Muslam Ilahi) can
assign the buyer to the assignee (sellers’ debtor) but on the condition that the debt or assigned portion
of the debt are equal.

If the seller’s debtor has chosen to prepay the Salam’s gold to the principal creditor (Muhaal), in this
case the Muhaal or principal creditor may choose to relinquish part of the Salam’s gold which is the
subject matter of Salam, and the assignee can prepay the rest of the amount.

Set-off (Muqassah) in Gold:

Set-off (the authority to possess assets when payments are defaulted) is permitted when the debtor has
defaulted on two subsequent debt payments denominated in gold. The amounts of the debts may differ
then set-off will be initiated on the debt that has the lesser amount.
Set-off can also be conducted on two subsequent debts, where one of the debts is gold and the other is
silver or denominated in currency, on the condition that the Shariah rulings of currency exchange (Bai
Sarf) are complied with.

Unilateral and Bilateral Promise (Wa’d and Muwa’adah) in Gold:

A unilateral promise to sell gold is permitted but a bilateral promise for the purpose of selling gold is
impermissible.

If a unilateral promise to purchase gold is contingent on the performance of a specific index then such
a condition is permissible.

Hamish Jiddiyyah can be paid when a promise is made to purchase gold. If such a situation occurs in
which the promisor is not able to fulfill his promise then he is liable to pay the promissee for the
actual damages that he has incurred resulting from his failure to fulfill his obligations.

Trading in promises in any form is impermissible.

Zakat of Gold:

It is obligatory to pay Zakat of gold when the pertinent Shariah rules have been met.

General Shariah Rulings and Applications:

All Shariah rulings related to gold are also applicable to silver.

Except under the condition when the seller has explicitly released himself from any liability related to
the sold gold, the buyer has a right to revoke due to defect. In this case the buyer can terminate the
contract and return the defected gold to the seller.

Investment Sukuks, units of investment funds and units of exchange traded funds (ETF), are also
under the jurisdiction of Shariah rulings of gold, if the entirety of their assets is gold.

Gold can be purchased via a credit, debit and charge card or any other options that are Shariah
compliant, even if the seller of gold is a banking institution that issues these cards.

It is acceptable for someone importing gold to deposit a certain amount of money with the exporter
but on the condition that when the exporter has a specific amount of gold available for delivery, a sale
contract for the gold will be performed at a pre-agreed price which was decided on the date of the
contract. The gold will be sold then delivered and the price will be deducted from the deposited
amount on the day that the contract is executed. If the exporter has used the deposited amount then the
gold needs to be sold at the current market price on the day that the contract is executed.
The Shariah rulings for gold are also applicable to white gold, but the rulings do not apply to other
metals such as platinum, palladium and nickel which are considered as white gold in some countries.

A fee can be charged for safekeeping, allocating, minting and the delivery of gold along with other
services. If the services are based on exchange of gold for gold then the fee charged depends on the
expenses incurred.

It is acceptable for a current account to be opened in which gold which is specific weight and carat is
deposited. The account known as gold denominated account will be dependent on the rulings of
Shariah for current accounts.