In this post, we run through several methods for investing in gold, silver, platinum and other precious metals — while avoiding the risks of exposing ourselves to non-halal instruments.
When discussing the different asset classes, I mentioned that there are ways to trade commodities (including gold, silver and platinum) in a halal manner.
However, these are the execptions to the rule — the vast majority of commodities are in fact haram to trade (for purely speculative purposes).
Let's start by explaining why that is, and then discuss the halal methods for investing in precious metals.
Why most commodities are not halal
There are different types of commodities, spanning everything from corn 🌽, to beef 🐄, to precious metals. Pretty much any basic good used that is fungible, and can be exchanged with other goods of the same type.
The challenge with trading commodities is that they tend to be too expensive to physically store. To get around this, financial markets often trade derivatives of these commodities, and not the actual commodities themselves.
The primary form this takes is that of a 'Futures Contract' where an investor agrees with another party on a price and a sale date, and either profits or loses based on the future price of the commodity at contract expiry. The investor has no interest in owning the underlying commodity (and indeed, is unable to, as a retail investor). The result is higher risk created in the market — with little corresponding value actually being generated. You can read more about derivates here.
Halal Ways To Invest In Gold & Precious Metals
As we've just seen, the primary issue with trading commodities in general is the fact that they're not physically backed — the investor has no way to lay claim to the actual thing they've invested in.
With gold (and other precious metals like silver and platinum), it's less of an issue. They're valuable enough that it's worth going through the hassle of storing the real thing.
Let's explore the different ways you can invest in gold:
1. Owning physical gold bullion
This is pretty obvious. Buy gold from a jeweller and use that as an investment. If the price of gold increases, you can head back to the jeweller and sell it for a profit.
There are two downsides to this approach:
Fees: Gold isn't free to produce. When you buy a a bar of gold (or coin), the service fee for the production of this piece, as well as the display is baked into the price. This fee can cost upwards of 5%, relative to the actual market price of gold. Selling usually involves several fees in the same range, so you're losing on both sides of the transaction.
Storage: You have to physically store the gold somewhere, and that puts you at risk of getting robbed. Some providers do offer gold insurance, but they have minimum storage safeguards (not to mention that this would eat into your profit from keeping the gold)
This is the most traditional way of investing in gold, but there are much better options.
2. Gold Marketplaces
There are platforms that exist to match buyers and sellers of gold and other precious metals, facilitating an exchange without physically moving the gold.
The way this typically works is that it involves the company storing gold in a secure vault, and allowing buyers and sellers to trade that stored gold through their website or app.
This makes it much easier to get exposure to gold, and you don't necessarily need to physically store it yourself. They also give you the option to take custody of your gold through physical delivery.
I've used a service called BullionVault in the past that does this well, and with lower fees than you'd pay if you were to purchase physical gold from a jeweller.
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3. Physically-backed ETFs (Recommended 🌟)
The third, and preferred, method for getting exposure to precious metals is through physically backed Exchange Traded Funds (I've written more on halal ETFs here). This is similar to marketplaces, but takes the form of a stock ticker symbol that you can buy and sell through your investment broker.
Here are some examples of physically-backed ETFs[^1]:
|Platinum||PPLT||Aberdeen Standard Platinum Shares ETF||0.60%|
|Platinum||PLTM||GraniteShares Platinum Trust||0.50%|
|Silver||SLV||iShares Silver Trust||0.50%|
|Gold||GLD||SPDR Gold Trust||0.40%|
|Silver||SIVR||Aberdeen Standard Physical Silver Shares ETF||0.30%|
|Gold||IAU||iShares Gold Trust||0.25%|
|Gold||BAR||GraniteShares Gold Trust||0.17%|
|Gold||SGOL||Aberdeen Standard Physical Gold Shares ETF||0.17%|
|Gold||GLDM||SPDR Gold MiniShares Trust||0.10%|
The expense ratio is a % that is charged every year from investors in the fund. This is used to cover the storage costs, and administrate costs related to operation of the fund.
As you probably guessed, the lower the expense ratio, the better. The cheapest option on there is
GLDM at just 0.10%/yr in fees. It really doesn't get much better than that.
You're paying just $10/year for every $10,000 invested for all of the costs related storing and insuring it. That's unbelievablely good value!
Physically backed ETFs are the easiest and cheapest way to get exposure to gold in a halal manner (It's not often that the easiest method is also the cheapest, but that's the case here).
I personally buy the GLDM (SPDR Gold MiniShares Trust), as it has the lowest expense ratio, with over $5b of assets under management, so it's very liquid.