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Thursday, 25 September 2008

Gold, the "Mother of all Money"? - Conversation about the current financial system and alternatives offered by the Muslims

(ma) What do Muslims think about such topics as finance methods, globalization and alternatives to the expected speculative crisis in the worldwide finance markets? Until now we have primarily heard about so-called 'Islamic-Banking', an attempt to create a capitalism with an Islamic face. This is the hot topic which we discussed with Mohamed Abbas. He is responsible for customer relations with e-dinar FZ LLC, a Dubai based internet-firm operating in gold and silver trading. The following opinions of Mohamed Abbas are his own personal views and not necessarily the expression of the views and opinions of his employer.

ma: Dear Mr. Abbas, the whole world is talking about globalization and phenomenon in connection with that. Do you see a connection there with the recurring interest in gold and silver?

Mohamed Abbas: I see only an indirect connection if any. The global consolidation of the world economy causes the simultaneous employment of large capital amounts in different markets and continents. The enormous liquidity required for that is made available through ever greater indebtedness – see the USA – and through a worldwide acceleration of growth in the money supply. Indebtedness and money supply growth in their turn lead to inflation and loss of purchasing power. This is where gold and silver come in useful – as documented protection against inflation and decline of value. By their inherent value the precious metals remain inflation neutral and protect their owner from depreciation.

ma: These money supplies are so to say the fuel of globalization?

Mohamed Abbas: Let me explain this a bit more exactly: the original 'empowering' of globalization was based on the freely moveable utilization of large capital sums for implementing worldwide co-ordinated consolidation and acquisition strategies. In other words: globalization causes an unnaturally high liquidity and world economic growth which are extended beyond a compatible degree – we see this in the continually accelerating environmental pollution and the climate catastrophes linked with that. This super-capital, which today is in the service of ever fewer, is used as a means for total economic consolidation (call it globalization) and has successfully freed itself from any claim, from the need to satisfy any moral or ethical requirements. In other words, the global use of capital is guaranteed through the 'free market economy' and as such cannot be placed in question. The necessary liquidity is based on increasing indebtedness and a growth of the money supply which have taken on an alarming dimension. While during the continuously growing indebtedness an ever-greater proportion of the domestic gross national product is obligated to servicing the interest on the debt, money is being printed without end, as it were until we run out of trees, and the M3, as the broadest measure of the money supply, with presently 12 to 13 per cent growth annually in the USA and the Eurozone – in the poorer regions the money supply growth is significantly higher. In other words: in order to guarantee the liquidity needed for globalization and to finance the indebtedness in connection with that, the western countries are today creating new money at the rate of up to 13 per cent per annum.

ma: Where does this new money come from?

Mohamed Abbas: The new money doesn't bring any new value along with it since this new money is born in a magical fashion – it's created out of nothing – and isn't backed up by inherent value like gold, rather it 'borrows' this attribute as it were from existing money, with the result that every year the existing money loses a corresponding share of its purchasing power – the M3 money supply growth is clearly closer to the real inflation than the too-low and glossed-over inflation numbers which the central banks use for the official inflation analyses. Interestingly the US Federal Reserve (the Fed) has stopped measuring and publishing the M3 since the end of 2006, most likely in order to keep driving the wondrous reproduction of money higher, undisturbed by any annoying criticism.

This means for the Eurozone, that in seven years twice as many Euros will be in circulation as is the case today. Although this should sound thought-provoking, there is no resistance. While the state thereby finances its bad economic policies, the citizen is left holding the stick with more and more cheap money, in the long-term we as workers and normal salaried employees will be the ones to suffer from such a ruinous money policy.

ma: Is it because of that that the gold question is also more popular than ever?

Mohamed Abbas: As you certainly know e-dinar together with Emirates Gold (the largest gold and silver producer in the Middle East) produces the gold dinar and the silver dirham as the traditional currency of the Muslims in accordance with the exact historical standards. Dinar and dirham were employed for more than 1200 years from China to Europe and Africa as the most important means of payment and are the most significant and longest accepted bi-metallic currency in the history of humankind. The gold dinar and the silver dirham consequently have a strong symbolic character. On a practical level gold and silver are ideal candidates to avoid the previously described inflation trap. Since gold and silver are not created out of nothing, rather have to be wrestled out of the ground, transported and refined, precious metals have a guaranteed inherent value, which is based on a combination of the costs of obtaining and producing, rarity and demand on the market. This inherent value averts a reduction in purchasing power – gold and silver are historically regarded as immune to inflation. With higher inflation gold and silver are correspondingly increasing in value even more rapidly, which was certainly clearly observable in recent years.

ma: Does this mean that we should return to some kind of gold standard?

Mohamed Abbas: As you likely know, the last official gold standard, which was anchored in the Bretton-Woods agreement, was finally dissolved by President Nixon in 1971. That means that what was then the existing partial backing of the US dollar by gold was removed. This was at the same time the formal end of gold as the 'reserve currency'. The outcome of the wondrous paper money reproduction since 1971 has resulted in extreme inflation and usurious interest rates – since 1980 both have grown at well over 10 per cent annually – and one of the biggest gold 'bull-runs' of history, in which the gold ounce price had increased by 2000 per cent in ten years: from $44 US dollars in 1971 to $850 US dollars in 1980. Although in conclusion only a linking of the money growth to gold can reconstruct the necessary fiscal discipline – governments have shown us satisfactorily in recent times that they are incapable of maintaining such discipline themselves – such a measure is no longer implementable in the developing world today. We have already left the 'point of no return' behind us and find ourselves on a financial and world economy collision course. Even if it were achievable to reinstate retroactively a partial gold standard, the deceleration of the economical expansion and money supply growth caused thereby would bring about rather an earlier than a later economic and financial collapse in the West – an exception here, which is discussed later, is presented by the poorest countries in the world. Thus for the rich countries there remains only the unattractive alternative to meet the disaster with open eyes.

Let us consider briefly a couple of characteristic data. While the total gold inventory 'above-ground', including all bullion, jewelry and coins, is around 160,000 tons worldwide (according to current market value just $4 billion US dollars), the worldwide paper value including money, stocks and shares, bonds, derivatives is from $250 up to $400 billion US dollars according to different sources and estimates. As a graphic illustration: all the gold of the world could be easily stored in a medium sized hall.

A new gold standard would mean among other things, that a retrospective backing of the worldwide paper value by gold would cause a 50 to 100-fold increase in the gold price – a factual impossibility.

A new gold standard can only then be implemented after the unavoidable collapse of the worldwide financial system – the question here is not whether, but when. Only then, you see, will gold find its way back to its historical role as the 'mother of all money'.

ma: Can you tell us something about the reality of the gold dinar and the silver dirham in the past and their basis in Islamic law?

Mohamed Abbas: As we have just talked about, with the gold dinar and the silver dirham we are dealing with the traditional currency of the Muslims, which was used as a means of payment and was accepted during more than 1200 years from China to Europe and Africa and which was absolutely the most significant and was the longest accepted bi-metallic currency in man's history. A lesser known fact is that the first European gold and silver currencies of the late middle ages followed the Muslim coins and also copied these. The Muslim coins quickly established themselves in the trading centers of that time, such as Venice and Barcelona and found their way from there to the largest cities and royal houses of northern Europe. The spread of European gold and silver currencies in the late middle ages on the other hand laid the foundation for the European flourishing of science, arts and trade in the Renaissance.

For Muslims the use of gold and silver is more than backwards-directed romanticism. This is demonstrated in the payment of the Zakat (a 2.5 % tax calculated on excess wealth), which had to be paid in gold and silver, and also in normal daily payment transactions.

ma: Why is that?

Mohamed Abbas: The Qur'an specifies that a means of payment must possess an inherent value that corresponds to its purchasing power. All types of promises of payment – our modern paper money is nothing other than that – are forbidden and cannot be used in payment transactions, because they are unavoidably rooted in interest and Muslims may not profit from interest. As soon as new paper money is created for example, it is ‘loaned' at an internal banking interest rate by the central bank to the commercial banks, who in their turn will lend it at higher interest rates to their customers. In the context of the 'partial reserve system' this interest business is extremely profitable. ‘Partial reserve system’ means that a commercial bank is able to loan out the same 1 Euro between 20 to 40 separate times. At 5 per cent interest per year, the bank is earning 100 to 200 per cent profit annually by that through the interest from the customer's money deposits. Any such wondrous increase of wealth is naturally only possible with money created out of nothing and would fail miserably with a physical gold and silver currency. It is on that account that there is the Islamic prohibition on promises of payment as means of payment. The Prophet Muhammad, may the blessings and peace of Allah be upon him, said: "There will certainly come a time upon mankind in which there will remain nothing useful besides a dinar and a dirham."

In the year 695 of the Christian calendar the Caliph ‘Abdalmalik minted the first dirhams and thereby established the official standard from ‘Umar Ibn Al-Khattab. In the following years on the order of the Caliph the dirham was produced in all the regions of Islam with the inscription, "Allah is Unique Allah is Eternal". In addition he ordered that all human and animal figures be removed from the coins and that these be replaced by letters. This order was carried out literally to the letter over the next 1200 years. Typical inscriptions were "La ilaha ill’Allah" and "Alhamdulillah" on one side with the prayer on the Prophet "salla’llahu ‘alaihi wa sallam" and sometimes verses from the Qur’an on the other side. Gold and silver remained the official currency of Islam until the fall of the Caliphate at the beginning of the 20th century.

ma: Are there not however many attempts to 'islamicize' the dominant financial system and to bring the corresponding products into line?

Mohamed Abbas: Yes, there is a downright euphoria raging in 'Islamic Banking'. Interestingly it is above all the giant western banks such as HSBC, Citybank and UBS, which with their 'Islamic Banking' programs are attempting to attract the, until now, largely neglected Muslim customers. From those reasons which we have already discussed we certainly see in 'Islamic Banking' merely an insignificant variation on the western banking model and in no way an acceptable alternative to that from an Islamic perspective. The only thing which changes is the semantics and the calculation model through which the banks siphon their profit from the customer. Since they haven't altered the basics such as the magical reproduction of money, means of payment without inherent value, etc. then 'Islamic Banking' is just as susceptible and sickly as our western model.

ma: Do you see the dinar as an alternative for the people and regions which are particularly affected by globalization? If yes, how would that appear in your opinion?

Mohamed Abbas: Naturally the gold and coin trade in the western world is very strictly regulated – for example through taxation. The Muslims must naturally respect these laws. We see rather a natural market for the dinar in the poorest countries of the world, in which a small stratum of extremely rich are standing opposite to a broad population of the impoverished. These lands have not yet had the opportunity to form a middle class. As soon as a middle class has formed, an ever larger proportion of the population profiteer from the continually expansive and, in the mid-term, ruinous money policy and correspondingly take no interest in an alternative money system which tends towards being more restrictive.

We have been representing our ideas and concepts in Malaysia and Indonesia since the end of the '90s, where in the meantime our work has begun to bear fruit. In Indonesia the interest is enormous. No wonder, with rapid devaluation of the Rupiah by over 30 per cent per year and an average daily income of less than $1 US dollar. If we set these characteristic values against an annual increase in gold value of 20 to 25 per cent, then the advantage of a gold currency for Indonesia is obvious, above all, because they simply have nothing at all to lose.

Indonesia is the most populous Muslim country with some 200 million Muslims. In our work with developing countries we orient ourselves according to the motto: Who has nothing to lose, can only win. We are confident that especially Indonesia in the foreseeable future will make definite steps towards a gold and silver currency.

ma: Can you give us some final comments from practical experience?

Mohamed Abbas: Interestingly the gold dinar and the silver dirham enjoy great popularity with coin collectors and precious metal investors from throughout the world. This certainly has to do with the outstanding quality, the good price-performance relationship and the fact that these coins are only purchasable through us. Consequently a certain exclusivity is guaranteed.

ma: Dear Abbas, thank you very much for the conversation.


Alfalah Consulting - Kuala Lumpur:
Consultant/Speaker/Motivator : 
Islamic Investment Malaysia:

1 comment:

Anonymous said...

It was a thought provoking interview. In todays world is it possible to open a gold-dinar/silver-dirham account anywhere in the word. If somebody could provide an informationon it please.

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