If just 2 percent of current Islamic finance assets are allocated to gold, a huge new source of demandroughly equal to Chinas total purchases in 2015will soon enter the market. And this could push gold prices higher a lot higher.As weve discussed previously, Islamic investors have shied away from gold-related financial products. This is because religious laws have been offering conflicting advice about gold investments. As a result, Islamic financial institutionswhich hold over US$2 trillion in assetsdont have a lot of money invested in precious metals.However, a Sharia Gold Standardwhich will clarify and streamline Islamic gold-investing rulesis on track to be implemented by the end of the year. This means that the approximately 100 million active Muslim investors will soon have gold as an investment option.Once the Sharia Gold Standard is adopted, its very likely asset managers in key Islamic finance countries like Bahrain, Qatar, Indonesia, Saudi Arabia and Malaysia will start aggressively offering gold investment products like ETFswhich are already wildly popular in the rest of the world.If only a small percentage of the US$2 trillion in Islamic finance assets move into gold products in 2017, the gold marketcurrently undergoing a pullback in its ongoing bull marketwill have a huge new source of demand.An October 10 press release by the developers of the gold standardthe Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) and the London-based World Gold Council (WGC)announced the release of the standards exposure draft. After accepting public feedback and suggestions, the organisations will meet in mid-November to finalise the gold standard draft, and set the implementation schedule, expected to be around year-end.Muslim gold buyers have the potential to be a force in the global gold marketFor comparison, in 2015 China was a huge gold buyer. The Chinese government is secretive about exact numbers, but gold imports verified to pass through Hong Kong last year into mainland China amounted to nearly 1000 tonnes.At current prices, if Islamic financial institutions allocate to gold just 2 percent of the assets they manage, it would equal roughly 1000 tonnes of extra demand. So that would be equivalent to another Chinafor starters. This new demand could help push gold prices higher in 2017.And while this initial allocation may be a one-off event, Islamic finance is growing rapidly. It will be an ongoing source of gold demand into the future. Standard and Poors projects the industry could reach US$5 trillion by 2020. Some industry forecasts say that the number will be as much as US$6.5 trillion in four years.Yet despite this rapid expansion, Islamic banking only accounts for a small fraction of the worlds investment assetseven though Muslims account for nearly 1/3 of the worlds population.A big problem has been the lack of standardisation in the products available due to different interpretations of whats acceptable under Sharia law. The new Sharia gold standard, along with other investment standards in the works, should help.Under Sharia law, gold is generally considered a Ribawi item, meaning Muslims cant trade it for future value, or for speculation. They can, however, use gold as a currency and own it as jewelry. Whether Muslims can trade gold as a commodity has been an ongoing source of debate among Islamic scholars. The new standard seeks to solidify agreement among scholars.As Yusuf DeLorenzo, an AAOIFI member, told me in July, The hesitation about investing in gold when credible Sharia standards are unavailable is nearly universal in the Islamic world. On the reverse side of the equation, however, gold has historically been the choice of individual Muslims desirous of preserving wealth and value.Given its long history as a currency and storehouse of wealth among Muslims, expectations are high that the Islamic finance industry, and Muslim investors, will quickly embrace gold investments. This would include gold savings plans, gold certificates, physically-backed gold ETFs, certain gold futures and gold mining equities.Golds pullback to its 200-day moving average offers a good entry pointThe added demand expected from Islamic investors comes as gold has pulled back from a big 2016 rally. It was consolidating around its 200-day moving averagea popular measure of a markets long-term trendlast month. But it has since climbed above the 200-day moving average and is now up 23 percent for the year.The catalysts for gold to climb higher are still there. Central banks zero interest rate policies and bouts of global currency instability are driving investors to golds stable embrace. Also, global political uncertaintylike the Brexit vote and the crazy U.S. electionhas added to golds allure.All indications point to golds 5 percent correction since mid-summer as a pullback in an ongoing, and historic, bull market.The fundamental reasons for golds long-term bull market remain in place. And 100 million Islamic gold investors are waiting in the wings to start buying. So, investors should buy gold at these lower prices while they still have the chance.SEE ALSO:It's time to load up on goldJoin the conversation about this storyNOW WATCH: JACK DANIEL'S MASTER DISTILLER: This is the real difference between scotch, whiskey, and bourbon
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