Gold and silver in Islamic finance: spot trading rules
Understand why gold and silver have special exchange rules, what the AAOIFI gold standard requires, and how to check common gold products against these rules.
What you will learn
- Why gold and silver are "ribawi" items with special exchange rules
- The main conditions of the AAOIFI Sharia Standard No. 57 on gold
- How to check physical gold, gold accounts, exchange-traded gold and CFDs against these rules
- How to exchange old jewellery for new jewellery in a compliant way
Explanation
Gold prices, units and costs are covered in the course on gold; here we look only at the Sharia trading rules.
Ribawi items
A well-known hadith names six items (gold, silver, wheat, barley, dates and salt) that must be exchanged "like for like, equal for equal, hand to hand". Items of this kind are called ribawi items, because breaking these rules creates riba (a forbidden excess). Two forms matter here:
- Riba al-fadl: an excess in quantity when exchanging the same item, for example 10 g of gold for 11 g of gold.
- Riba al-nasi'ah: a delay in delivery when exchanging ribawi items, for example gold today for money next month.
Most scholars treat modern currencies like gold and silver here. So when you buy gold with euros, any price is allowed, but both sides must be delivered in the same session. This is called spot or hand-to-hand exchange.
The AAOIFI gold standard
AAOIFI (Accounting and Auditing Organization for Islamic Financial Institutions) published Sharia Standard No. 57 on gold in 2016, developed together with the World Gold Council. Key points:
- Gold for gold is allowed only in equal weight, new or used, delivered in the contracting session.
- Gold for currency is allowed at any agreed price, but neither side may be deferred.
- Possession can be physical or constructive. Constructive possession requires a certificate for a specific, allocated bar (identified for example by serial number), issued on the trade date (T+0, meaning settlement on the same day).
- Forward contracts and contracts that defer both sides are not permitted.
- An ETF holding only gold follows the rules for gold itself.
Allocated gold means you own specific bars; unallocated gold is only a general claim to an amount of gold. Check exactly what a provider offers.
Checking common products
| Product | Key questions |
|---|---|
| Physical bars and coins | Is payment immediate and is the gold handed over or allocated to you at once? Pre-orders with later delivery at today's fixed price are a problem. |
| Gold account or savings plan | Is the gold allocated (specific bars, or a defined share in them) on the trade date? Is there a Sharia review? |
| Exchange-traded gold (ETC or ETF) | Is it fully backed by physical, allocated gold? Is it Sharia-certified? A debt security with only a delivery claim needs separate review. |
| Futures, options, CFDs | No ownership, deferred settlement and, for leveraged positions, financing charges. Widely regarded as non-compliant. |
Some brokers offer swap-free "Islamic" accounts for gold CFDs (contracts for difference). Removing the overnight charge does not create ownership or spot settlement, and leveraged CFDs can lose money quickly.
Worked example
Hypothetical example: Yusuf wants to exchange an old 21-karat chain for a new 18-karat chain at a jeweller. Assumptions: hypothetical price €80 per gram of fine (pure) gold; the jeweller charges a separate making fee; no VAT is considered.
Problem: The jeweller offers "your old chain plus €100 for the new one". This is gold for gold plus cash, with unequal fine-gold weights. Many scholars see this as riba al-fadl.
Compliant alternative: two separate spot contracts.
- Fine gold in the old chain: 20 g × 87.5% (21 karat = 21 ÷ 24) = 17.5 g. Sale value: 17.5 g × €80 = €1,400, paid to Yusuf immediately.
- Fine gold in the new chain: 20 g × 75% (18 karat = 18 ÷ 24) = 15 g. Gold value: 15 g × €80 = €1,200, plus a making fee of €300 = €1,500, paid immediately by Yusuf.
- Net cash Yusuf pays: €1,500 − €1,400 = €100.
The net money is the same, but each contract is a complete gold-for-money exchange settled on the spot, which many scholars accept.
Common mistake
Practice activity
For each case, decide whether it meets the spot rule and give one reason: (a) You pay €2,000 by instant transfer and receive a certificate for an allocated, numbered 20 g bar the same day. (b) You pay a 10% deposit today; the rest and the bar follow in 30 days. (c) You open a 1:20 leveraged gold CFD on a swap-free account. (d) You exchange 50 g of 24-karat gold bars for 50 g of 24-karat gold coins at the same moment.
Show solution
(a) Meets the rule: full payment and constructive possession of an allocated bar at T+0.
(b) Does not: both payment and delivery are deferred, and the price is fixed today.
(c) Does not: there is no ownership of gold, settlement is not spot, and leverage adds the risk of fast losses. Being swap-free does not change this.
(d) Meets the rule as stated: gold for gold of equal weight, exchanged in one session. A making fee for coins would need to be handled separately.
Limitations: this is a simplified classification; product terms vary, and scholars differ on some modern structures.
Key takeaways
- Gold and silver are ribawi items: exchange them hand to hand, and gold for gold only in equal weight.
- Gold for euros may be at any price, but payment and delivery must both happen on the spot.
- Constructive possession needs allocated, identifiable gold on the trade date.
- Futures, options, forwards and CFDs on gold are widely regarded as non-compliant, even on swap-free accounts.
Next step
The next lesson applies the same principles to a newer and more disputed asset class: cryptocurrencies and the range of scholarly views on them.
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