Gold a Shariah compliant investment.

Byline: Shabbir Kazmi

Prior to the outbreak of virus in China, analysts were of the view that gold prices will hold above US$1,500/oz in 2020 and make modest gains in 2021. It was also believed that low interest rates and geopolitical uncertainly will bolster appeal of the precious metal. Lately price of precious metal, falling in the list of safe-haven assets has been hovering around US$1,600/oz.

Prices shot up 18% last year - the biggest annual gain since 2010 - as global economic growth faltered and central banks responded by easing monetary policy. Gold has re-established its safe-haven status and analysts expect price to touch new highs. A combination of technical and fundamental forces has allowed gold prices to hitting new seven-year highs this quarter. Inflows into gold exchange-traded funds (ETFs) have already hit seven-year peaks.

Demand for gold is also being reflected in the multi trillion dollar exchange traded funds (ETFs) market. Year 2019 marked the fourth consecutive year of net inflows into gold-backed ETFs. Some Bloomberg reports suggest the amount of money held in these funds is estimated around seven-year highs.

Bloomberg analyst Ranjeetha Pakiam said it's not just virus driven gains. The decision of the US Federal Reserve to lower interest rates and keep them anchored well below the historic average has also boosted the appeal of the precious metal. As a non-yielding asset, gold is an attractive investment when interest rates are low. Although, the Fed has signaled that rates are likely to remain stable during 2020, there are reasons to believe its next move will be to lower them. Futures traders are pricing in at least one rate cut after September this year.

At present, gold is sought after, not just for investment purposes and to make jewellery, but it is also used in the manufacturing of certain electronic and medical devices. It may be worth exploring the factors that are driving price of precious metal higher.

Central bank reserves

Central banks around the world hold paper currencies as well as gold in reserve. As the central banks diversify their monetary reserves and move away from the paper currencies, the next choice is to accumulate gold. Many of the world's nations have reserves that are composed primarily of gold. Reportedly, central banks around the world are buying gold, ever since the US abandoned the gold standard in 1971. Russia has been the biggest buyer, followed by Turkey and Kazakhstan. In all...