The Role of Gold in the Asean Free Trade Area

Asean’s gold market

Gold has played a very important role in the region and is closely connected with the life and culture of the people in the region. In some Asean countries, gold is seen as more stable than the national currency, explaining its use as a medium of exchange and a unit of measurement. In general, people in this region like to buy gold, and it is not only used as an accessory. Gold is given as gifts in cultural or religious ceremonies such as weddings, festivals and other special occasions, and is also used as a store of wealth. In rural areas, people often convert their harvests into gold and store it for a rainy day. The attitude towards gold amongst Southeast Asian people is that it is as good as money. People can resell the gold to local jewellery shops when they need money or pawn it if they require short-term borrowing.

Besides this demand for gold, global political and macroeconomic uncertainty, as well as weak local currencies (see Table 4), are prompting people to invest in gold and are pushing up the demand for physical gold, such as bars or coins. Additionally, dinar coins are well received in some of countries as a form of savings and are often used as a medium of exchange.

Asean does not only comprise gold importing nations, but also includes nations that export gold collected as scrap or from the by-product of mining, though gold mines are located in only a few countries (see Table 2). According to Metals Focus, in 2016, Asean’s total demand for gold was 295 tonnes and its total supply was 333 tonnes. Besides, some of the frontier countries such as Laos or Myanmar are not on the map yet, but they have healthy gold reserves and have the potential to become producing countries in the future.

Central banks in Asean are also market participants and hold gold in their reserves totalling 603 tonnes (see Table 3).

Shari’ah Standard on Gold

The introduction of the Shari’ah Standard on Gold, which sets out clear guidelines for Islamic investment in gold, is expected to spur the development of new investment asset classes, and Islamic banks and other financial institutions should be able to expand their customer base with new products created under the guidance of the standard. This has the potential to make Malaysia a gateway to Asean for Islamic investments from the Middle East and the rest of the Islamic world. Bank Negara Malaysia, the country’s central bank, has a history of studying gold circulation in the Middle East as the region has a history of accepting gold as money.

Uncertainty of the international monetary system and weak Southeast Asian currencies

According to the International Monetary Fund (IMF), the ratio of US dollars to foreign currency reserves in each country at the end of March 2014 was 60.9% ($3.76 trillion of $6.18 trillion). The figure has experienced a long-term downward trend since its peak of about 73% in June 2001 (see Chart 1). The total reserves among Asean countries currently stands at US$727.5 billion (see Table 1).

A new generation of gold investors

Gold has become more popular among the younger generation who are always connected to the internet, and this is no different in Southeast Asia, where mobile phone penetration is almost 100%. Online gold trading is gaining traction among this group of investors, who see gold as another instrument to generate income and wealth.

Sovereign wealth funds and pension funds

The increasing income of the middle class is prompting the development of social security systems such as pension funds and social insurance. Gold is currently not a part of any asset class among institutional investors in Asean, except for central banks, which buy gold for their reserves. However, the pension fund system in some countries, such as the Central Provident Fund in Singapore, has approved exchange-traded funds (ETF) as an asset class to diversify its portfolio into gold, with a limit of 10% of the total assets held.

Currently, many pension fund assets are managed and invested in their respective local markets. The total asset size of major sovereign wealth funds and pension funds (except GIC) in Asean is US$791 billion (see Table 5).