Are E- Gold and Gold ETFs Shariah Compliant?

By: Ubaidur Rahman Niyaz Qasmi
There are four forms of Gold Trading:
1. Actual Gold Trading
2. E-Gold
3. Gold ETFs
4. Gold Fund
 
Actual Gold Trading
Banks offering Actual Gold trading means that one buys Gold online, through his bank account. Bank will keep the actual Gold and this Gold is available to him on demand. Bank will act as a keeper.
 
Buying, 'apparently' is without interest. Bank offers spot rates for selling which is slightly higher than its buying price, just like currency. E.g. selling rate today is $963/oz and their buying rate is $962/oz. there is no other fee or anything else involved. He buys at $963. In the evening, the rate may become $970 or $960. It is up to the buyer to sell it back to his bank.
 
Now if he wants to get hold of the actual gold, he has to inform his bank. Bank will ask him to submit a form in which he tells the bank at which branch he needs the actual gold. He'll go there, and get hold of it.
 
E-Gold
E Gold is the demat unit of the physical Gold which is traded in electronic form at National Spot Exchange (NSEL).  Other e-commodities are E-Silver, E-Copper and E-Zinc. Trading in E-Gold has been on since 17th March 2010. E-Gold units can be bought and sold through the exchange (NSEL) just like shares. Here one unit of e-gold is equal to 1 gram of gold. For long term goals like accumulating gold for children’s marriage, retail investors can buy e-gold in small quantities in their Demat account over a period of time. Once their target is achieved, the individual can take physical delivery of gold through the exchange. By buying gold in electronic form (demat), the individual need not worry about the purity of gold, storage costs and the insurance of gold. If the individual has bought e-gold only for investment purpose and does not need to take delivery of physical gold, then he can always sell the e-gold units and encash them.
 
How to Trade in E-Gold
1. Opening a separate Demat and Trading account for trading in NSEL: First of all you will have to open a Demat and Trading account with one of the authorized participants with NSEL. This has to be a separate trading account from the one that you might be using for trading stocks. You can expect to pay an initial charge of about Rs. 350 or so for opening the Demat account and then expect a slightly lower AMC (Annual Maintenance Charge) of about Rs. 250 or so every year on this account.
2. Buying E-Gold, E-Silver or E-Copper through NSEL: Once you have your account set up, you can then carry out transactions. You can buy gold, silver or copper, and one unit of the E-Series is equivalent in the following way:
a. E-Gold: 1 gram
b. E-Silver: 100 grams
c. E-Copper: 1 kilo
The commission to transact is about 0.5% if you take the delivery, and 0.05% for intra - day trading. I use the word about because these might differ from one broker to the other, and I wanted to give you gauge of what you can expect. You can trade the E-Series from 10:00 in the morning to 11:30 in the night on weekdays, and the settlement is done on a T+2 basis.
3. Converting E-Gold, E-Silver or E-Copper in Physical Form: You can hold the E-Series products in Demat form, and you also have the option of converting it into physical form - this is known as dematerialization. Currently delivery of physical gold is available only at Ahmadabad, Mumbai and Delhi. When you rematerialize you will have to pay some dematerialization charges (which will be in the range of Rs. 200 for 10 grams gold), but the VAT might be a bigger amount based on how much electronic quantity you hold.
 
Advantage of E-Gold – Islamic Perspective
The transactions in E-gold are delivery-based; don’t involve speculation as in Futures & Option market, as is known Islam imposes a bar on speculating and selling something that one doesn’t own in the first place.
 
Unlike gold exchanged traded funds (ETFs), money is not parked in debt instruments; whereas Islam prohibits from generating any income by means of Riba (interest). Amongst other disadvantages of parking funds in gold ETF, an investor has to bear cost in the form of AMC charges but in E-gold there is no holding cost.
 
The client can buy and sell the commodities in a transparent manner at a single price across the nation which is accessible to all. For buying and selling E gold, the impact cost is nearly zero. It can be traded throughout the day from 10 am to 11.30 pm. There is no risk pertaining to impurity or weight difference. 
 
Hence, E Gold combines the benefits of holding physical gold, demat records and seamless entry-exit process.
 
E-holding to Jewellery
 
NSEL is in talks with over 100 jewellers across the country to facilitate conversion of e-gold and e-silver in demat directly into jewellery items. This is expected to start by March this year.
 
“A number of jewellers have evinced interest in this facility. The registration process is on, and will be completed with over 100 empanelled jewellers spread across the country, by the end of the current financial year,” said Anjani Sinha, managing director and CEO of NSEL.
 
The exchange is chalking out a formula for conversion of pure gold (in demat form) into jewellery of lower cartage. Preferably, each 10g of demat gold would allow consumers to carry 14g of 22-carat jewellery items, or 16-18g of 18-carat hallmark jewellery.
 
Sinha, however, cautioned that the exchange would not guarantee purity and making charges (the fee for converting a gold item into jewellery), as these fell beyond its purview. Making charges vary depending upon jewellery design and trend. Therefore, that has to be negotiated between clients and jewellers.
 
Some Unanswerable Questions
1. If someone faces an issue with NSEL, or the E-Series products, then who should they address it to? Can they go to SEBI? Is SEBI actively regulating it or does it fall under the purview of some other agency.
2. Gold ETFs hold underlying physical gold equivalent to the number of units of funds they have issued, and they publish the data periodically, but I didn't find information on who holds the physical gold, or if at all it is being held at somewhere at all times.
3. If everyone who holds a E-Series contract requests for gold dematerialization then what will happen.
Shariah Certification for E-Gold, E-Silver and E-Copper
 
National Spot Exchange (NSEL) has received Shariah-Certification for its ‘E-series’ products in gold, silver and copper. This certificate was granted on 11th February, 2011, by TASIS (Taqwaa Advisory and Shariah Investment Solutions (P) Ltd), the premier Shariah Advisory Institution in the field of finance in India. This is for the first time in India that investment products in commodities have received such Certification from a Shariah Advisory Board.
 
TASIS has certified e-gold, e-silver and e-copper products as Shariah compliant Ethical Instruments conforming to Islamic Investment principles, based on a thorough study and scrutiny of NSEL systems and procedures. 
 
Mr. Anjani Sinha, MD & CEO, NSEL said, “TASIS is noted for its thorough scrutiny in respect of Shariah certification. Our products have gone through strict screening for establishing the fact that they are Shariah compliant. E-gold, e-silver and e-copper are pure products conforming to Islamic investment principles. Our basic objective for obtaining this certification was to convince the large Islamic population of our country to use these products for promoting savings and investment, as we have observed that a large proportion of the Muslim population of our country do not open bank accounts, because it leads to earning interest. For such people, Shariah compliant e gold and e silver products will provide a mechanism to save for the future. In this manner, our products will drive financial inclusion.”
 
Mr. MH Khatkhatay, Senior Advisor, TASIS said, “Every Indian citizen, who follows Islamic investment principles should greet this opportunity. These are very good instruments to park small savings, or to plan for Hajj on a future date. You can go for Hajj by selling your units, whenever you have put aside sufficient savings.”
 
Dr. Shariq Nisar, CEO, TASIS commented, “After a thorough study and scrutiny of NSEL’s systems and procedures we found that the ‘E-series’ instruments are ethical and conform to all the standards of Islamic Investment. Hence, we have certified these instruments as Shariah compliant. We recommend to our Shariah conscious investors to make use of these products for preservation of wealth as well as for wealth appreciation. We congratulate NSEL for launching an investor friendly instrument, which will go a long way to reach out to our large Muslim population who have hitherto been bereft of such an opportunity. It is to note that there is no other commodity backed instrument in India, which is certified as Shariah compliant.”
 
Mufti Khalid Saifullah Rahmani, Shariah Scholar, while welcoming the launch exhorted all investors who are committed to Shariah to participate in such an opportunity. He stressed that unlike some other popular investment avenues, such as listed equity stocks, most of which are not fully Shariah compliant but have been permitted for investment by Shariah scholars out of necessity (due to paucity of viable investment options for the common man), demat trading of gold, silver and copper on NSEL can be fully Shariah compliant and does not suffer from similar Shariah reservations.
 
It is also noteworthy that due to huge price appreciation in commodities, e gold has given an annualized return of 26 %, while e silver has given a return of 110 % and e copper around 90 % since their launch.
 
Some Questions
1. As an ordinary investor, I heard that NSEL’s E-Series has been certified by the Shariah scholars as Shariah Compliant. I started trading with NSEL. Who will monitor my transactions whether these are adhering to the criteria mentioned in the Certificate? Viz.:
Do not sell the e-product, if it hasn’t bought earlier.
Do not enter into transaction of purchase, if that the time of purchase he doesn’t have means and intention to pay.
Do not default in payment of storage charges, so as to avoid the payment of interest which is liable to the default or delayed payment. 
 
2. When I purchased e-gold, it has been transfer into my demat account. In other words I got the possession of the gold in electronic form, which I can sell at any point of time with the current market price of actual gold. But the question is that I do not have possession of my actual gold (that I can ask any time from exchange). My actual gold has been sold and resold from one person to another by the exchange. Is it allowed as per Shariah?
GOLD ETFs
 
What is ETF
An exchange-traded fund (ETF) is an investment fund traded on stock exchanges, much like stocks. An ETF holds assets such as stocks, commodities, or bonds, and trades close to its Net Asset Value (NAV) over the course of the trading day.
 
Exchange-traded funds follow a specific benchmark index as closely as possible. Through an index ETF, investors get exposure to a large number of securities in a single transaction. Much like stocks, an investment in ETF should be for the long run. Commodity ETFs especially Gold ETFs have done very well in India. 
Types of ETF
1. Equity ETF's: Equity ETF is a basket of stocks that reflects the composition of an Index, like S&P CNX Nifty or BSE Sensex. The ETFs trading value is based on the net asset value of the underlying stocks that it represents. Think of it as a Mutual Fund that you can buy and sell in real-time at a price those changes throughout the day. Currently there are eleven equity ETF's which can be traded in BSE.
2. Gold ETF's: Gold ETF is a special type of Exchange traded fund that tracks the price of gold. Currently there are six gold ETF's which can be traded in BSE.
3. Liquid ETF's: Liquid ETF's are the money market ETF's, the investment objective of which is to provide money market returns. Liquid BeES launched by benchmark mutual fund is the first money market ETF in the world. Liquid BeES will invest in a basket of call money, short-term government securities and money market instruments of short and medium maturities. 
 
GOLD ETFs
Gold ETFs are exchange traded mutual fund schemes that invest in physical gold. Gold ETF are traded on the stock exchange. It is also known as paper gold. It is basically an instrument where you can trade and make investment based on NAV.  Every unit of gold ETF you buy lets you own 1 gram of physical gold. In Gold ETFs, unlike E-gold one does not have option of taking physical delivery. The market hour is less than 7 hours. There is an annual AMC charge that investors have to bear apart from transaction and demat related charges.
 
Benefits of Investing in Gold ETFs
 
1. They are Virtual: Gold ETFs are virtual and thus easier to store and unlikely to be stolen. They need no lockers, no security guards and no TV cameras. When you buy gold ETFs, though you own a certain amount of gold, you don't actually get delivery of the yellow metal. You can store the units virtually in your demat account and save yourself the trouble of having to protect your gold from prying eyes of greedy relatives, robbers and looters.
2. They are Pure: Gold ETFs only deal in 99.5 per cent purity gold. So by choosing them over physical gold, you spare yourself the consequences of misplaced trust. And so, there's no chance of you being fooled by that smooth-talking jeweller. Unless you're a goldsmith, gauging the purity of physical gold is hard.
3. They are priced right: The problem with precious metals is that there is a lot of scope for price disparities. While one jeweller may offer the same quantity of gold at a certain price, another would have a different tag attached to it. If your bargaining skills are not good enough, gold ETFs are the way to go.
1. They are more tax efficient: The taxation system for gold ETFs is the same as for non-equity mutual funds. If you hold gold ETFs for more than a year, you pay a long-term capital gains tax of 10 per cent without indexation or 20 per cent with indexation, whichever is lower, on the profits made. But in case of physical gold, you have to hold it for at least three years for the long-term capital gains tax to kick in. Gold ETFs held for less than a year attract short-term capital gains tax. Meaning the profits are added to your annual income and taxed according to the bracket your income falls in. 
4. They are easier to sell: Physical gold bought from banks cannot be sold back to them. That bought from jewellers comes with an unfair 'commission' charged when you decide to sell. With gold ETFs, you don't have to go to 10 different jewellers who will fuss over the quality and the price before handing you your spoils. They're more liquid than physical gold and fetch you the market price.
5. They are available in small sizes: If you ask your local jeweller to give you half a gram of gold, chances are he'll snigger. But gold ETFs are available in small denominations and you don't have to have lots of spare cash to invest in gold anymore. One gold ETF unit represents 1 gram of gold. You can even buy half a gram of gold if that's all you can afford this month. And watch your gold pile and investments grow at the rate you choose. This isn't a benefit you will get if you go to buy physical gold -- as coin or biscuit or jewellery.
6. They are wealth tax-free: Physical gold attracts wealth tax if you're holding more than a certain amount i.e. Rs 15 lakh. But there is no such taxation for gold held through gold ETFs. The cash you save on tax you can always invest in more gold ETFs.
 
E-Gold v. Gold ETF
E gold, in comparison to the ETFs, are fairly straightforward. Investors are able to buy or sell gold at their discretion. There are no management fees, taxes are split between short-term and long-term capital gains, there are no third parties making decisions on investors' behalf, and at any time investors can own the underlying gold.  E-gold can be trade 14 hrs a day while Gold ETF is traded 7 hrs a day. Gold ETF cannot be converted into physical gold unlike E-gold that can be converted into physical gold at any point of time.
ETFs as fund houses charge for AMCs; e-Gold is digital gold currency. 
E-Gold can be redeemed for physical gold, unlike Gold ETFs. 
In future, e-Gold can be converted into jewellery; unlike Gold ETFs. 
E-Gold is tradable for longer hours than Gold ETFs. 
E-Gold are spot rates of gold, Gold ETFs intends to mirror gold prices.
 
 
I have invested in Gold ETF can I take physical delivery of gold?
You can redeem the fund and buy in market. This is only (indirect) way to get physical delivery of Gold out of Gold ETF. But in principle you can get money and not physical gold from redemption of Gold ETF.
 
Gold Funds
 
They are gold mutual funds and are separate from the gold ETF and hence the analysis of these schemes also has to be done differently by the investors. These are equity-oriented schemes as they invest in the stock of companies that are listed on the stock exchanges across the world.
 
In terms of investment, the money is invested in companies belonging to gold sector. This covers usually those companies that are involved in the gold mining area and hence the movement or the returns of this fund will depend upon the movement of the companies on the stock exchange. The base for these schemes is different and hence they have to be analysed separately.
 
Unlike gold ETF, which shows a direct relationship with the price of gold, the same might not be witnessed here. The scheme will show some gains when the gold companies record higher profits and gains. 
 
Usually, there is a larger gain coming in for the gold companies when the prices go higher as they are able to post better results. There is, however, some time lag with which these conditions are witnessed