RECENTLY, the Al-Meezan Investment Management Ltd announced the launch of an open-ended commodity fund, offering to invest in gold at the Pakistan Mercantile Exchange.

Shariah-compliant funds have restricted investment options, as they can either invest in Shariah-compliant stocks or in Sukuk. The launch of this gold fund provides a healthy diversification for investors. The fund is expected to tap into the unexplored segment in the mutual funds market that has been shying away from futures contracts for religious reasons.

The main feature of the futures contracts traded on the Pakistan Mercantile Exchange (PMEX) that make them unacceptable under Shariah is the pre-fixing of the price for future trade. The deal is structured where all trading will be done in the short-term expiring contract that will fix the price for that day, making it a spot transaction. Furthermore, no short selling is allowed and the fund actually has to take delivery of the gold before selling it.

This collaborative effort between the PMEX and Al-Meezan is encouraging, as this innovative transaction makes use of the existing facility in the country to make it a viable Shariah-compliant scheme. Other countries like India have commodity exchanges that deal in the spot market only to cater to Shariah-complaint Muslim communities. However, in the absence of such a facility, this is a unique structure.

Locally, gold has not lost its lustre, as along with the long-term cultural demand it also provides a hedge against inflation, currency devaluation and diversification

The product is expected to boost trading activity at the PMEX to some extent. Currently, the gold trading volume is approximately 75pc of overall trading at the exchange. Such initiatives in conventional investment houses include the gold funds run by UBL and Atlas Investment Management Ltd, which were launched in 2013 when the metal was at its peak. With its expertise, Al-Meezan hopes to make its venture a success.

Since then, gold prices have depicted a declining trend. For last month, UBL’s and Atlas’ gold funds reported negative returns of 4.6pc and 4.87pc respectively.

The initial investment amount in the Al-Meezan gold fund is Rs5,000. The fund is structured to invest 70pc of its funds in gold contracts (tola, milli tola and mini tola), deliverable within a maximum of three to five days of purchase. The PMEX will act as the custodian of the gold, and on the advice of the client, will also stand ready to sell it in the market. The remaining 30pc of the funds will be invested in near cash options, namely bank deposits. The timing of the launch of the fund — when the commodity cycle globally is at its lowest — seems like an appropriate one for a long-term investor with a 3-5 year horizon.

Oil is trading at $40 and gold at $1,155. With Iran joining the oil bandwagon, coupled with rising property prices in the US (according to the Case-Schiller Home Price Index), commodity prices are predicted to stay stagnant in the near future. The dollar is also trading at its highest against most currencies leading to a greater flow of funds towards the safe haven and depressing gold prices in the short term.

The table shows the gold price trend for the last 10 years.

However, any weakness in the exchange rate and the depreciation of the dollar following an increase in the US interest rate, ‘less compelling’ for the time being, will lead to a rise in commodity prices.

Locally, gold has not lost its lustre, as along with the long-term cultural demand it also provides a hedge against inflation, currency devaluation and diversification. Due to the government’s restriction on the import of gold, the yellow metal is being smuggled into the country.

Recently, according to sources, the government approved gold imports, but it has yet to define the modalities. The move will improve gold exports, which, according to Trade Development Authority of Pakistan statistics, declined from $1.1bn in FY2012-13 to $330m in FY2013-14.

Going forward, although the structure of the fund is commendable, the actual performance would remain uncertain in the near future given the forecast for gold.

The writer is a faculty member at Institute of Business Management and can be reached at sarwat.ahson@iobm.edu.pk

Published in Dawn, Economic & Business, August 31st, 2015

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