The market for the precious metal may be about to open to 1.6 billion new Muslim investors.

From Kim Iskyan, founder, Truewealth Publishing: Owning gold as an investment has been controversial for those who follow Islam, but an upcoming clarification to Sharia law could open the gold market to 1.6 billion new Muslim investors.

The possibility of many potential new investors will make the case for buying gold even more compelling.

The financial and personal lives of Muslims around the world are guided by Sharia law, which is based on the Koran and other sacred texts.

The law has adapted to changing circumstances over the centuries under the guidance of Islamic scholars. This continues today, with scholars even clarifying Sharia law as it relates to financial instruments.

Under Sharia law, earning money from interest and paying interest on loans are prohibited.

Sukuk bonds were developed to comply with this requirement. They are Sharia-compliant bonds that share revenue generated by tangible assets instead of paying interest.

Muslims under Sharia law are allowed to invest in stocks, as long as the company isn’t involved in something deemed unethical such as the alcohol industry, for example.

Investing in gold, though, is less straightforward.

Under Sharia law, gold is one of six Ribawi items, the others being barley, dates, salt, silver, and wheat.

These items can only be traded by weight and measure. The trade must also take place right away, which means that speculating on future values isn’t allowed.

What this means is that Muslims can own gold to use as jewelry, for other personal uses and even as a currency.

But there is no consensus if it can be traded like a commodity. There is also no clear policy on owning companies backed by gold or that hold gold assets, such as a gold exchange-traded fund.

And because trading Ribawi items such as gold must involve an immediate transfer of goods, gold futures contracts aren’t allowed.

But there is a Sharia-compliant gold standard being developed.

The Accounting and Auditing Organisation for Islamic Financial Institutions, which sets Sharia standards for Islamic finance around the world, and the World Gold Council have come together to try and clarify the issue. The two groups want to settle the debate and set the standards for Sharia-compliant gold investing.

The proposal on which the AAOIFI and WGC have been working says that gold investments must be backed by physical gold.

So, gold futures contracts wouldn’t be acceptable investments. But the gold standard draft does approve holding gold in derivative contracts, ETFs, investment accounts, and Islamic bonds.

The draft is rumored to be very close to completion, and there are public hearings scheduled in both Dubai and Morocco later this year.

A definitive decision on investing in gold would mean that Muslim investors could choose from more Sharia-compliant gold investment vehicles. With a market of 1.6 billion people, this could have a big impact on demand for gold.

The WGC estimates that the Sharia gold standard could equal “hundreds of tonnes” of new demand from the Muslim world. To put that in context, the global demand for gold was 1,290 tonnes in the first quarter, which was 180 tonnes more demand compared with the fourth quarter, a 16% increase.

It just so happens that gold prices rose 17% in the first quarter, likely not a coincidence. This was the largest quarterly gain since 1986.

So, hundreds of tonnes of new demand could mean a further spike in gold prices.

If the new Sharia gold standard is implemented this year, which looks like a good possibility, 20% of the world’s population will have new access to gold as an investment. If the expected increase in demand lives up to expectations, we might only be in the opening stages of this gold rally.

Read about other good reasons for owning gold in a free special report that can be downloaded here.