Introduction

In the face of global economic and geopolitical instability, African nations are increasingly turning to gold as a hedge against financial uncertainty. This trend comes amid rising inflation, currency volatility, and concerns over the reliance on global financial systems. Gold, traditionally viewed as a safe-haven asset, has gained prominence in many African central banks’ portfolios as they seek to protect their economies and diversify their reserves.

As of September 2024, the price of gold has surged to $2,500 per ounce, up from $1,900 in September 2023. Despite this significant increase, demand for gold is expected to rise even further in the coming months, according to the World Gold Council (WGC). This increase in gold reserves is a reflection of the growing concerns over economic stability and the desire to mitigate risk in an increasingly uncertain global environment.

Why African Nations are Investing in Gold

The move towards gold by African central banks is largely driven by the need to shield their local currencies from external shocks. Carlos Lopes, a professor at the Nelson Mandela School of Public Governance in South Africa, highlights how inflationary pressures and the effects of global stimulus packages have pushed returns on traditional financial instruments to historically low levels. In contrast, gold’s value has continued to rise, making it an attractive investment.

“Gold is becoming a go-to investment for African central banks as they look to protect their economies from external shocks. The soaring prices of the metal reflect its growing demand as a safe-haven asset,” Lopes explained.

Gold has also proven to be a strong hedge against inflation, which has been particularly acute in several African economies. As the cost of living increases and currencies lose value, holding gold offers central banks a way to maintain the purchasing power of their reserves. Additionally, by boosting their gold holdings, African nations are reducing their reliance on traditional currencies such as the U.S. dollar or the euro, making them less vulnerable to fluctuations in the global financial system.

African Gold Production on the Rise

Africa is rich in gold resources, and the continent’s gold production has grown substantially in recent years. Since 2010, African gold output has increased by 60%, outpacing the global average growth of 26%, according to the World Gold Council. This rise in production has helped African nations to meet their growing demand for the metal, which in turn has contributed to their ability to shore up foreign reserves.

Ghana, the continent’s largest gold producer, has taken a proactive stance by purchasing gold from artisanal miners to bolster its foreign currency reserves. In 2022, the Ghanaian government announced a bold plan to pay for oil imports using gold instead of U.S. dollars. This strategy is intended to reduce pressure on the local currency, the cedi, which has experienced significant depreciation in recent years, while simultaneously lowering fuel prices.

Uganda has also adopted a similar approach, purchasing gold from small-scale miners to replenish its dwindling foreign currency reserves. This move comes as the country grapples with the negative impacts of fluctuating global markets and seeks to stabilize its economy by increasing its gold holdings.

Zimbabwe, a country plagued by hyperinflation and currency volatility, has taken the concept of using gold one step further. In 2022, Zimbabwe introduced a gold-backed currency to combat inflation and bring more stability to its exchange rates. The country’s gold-backed currency, known as ZiG (Zimbabwe Gold), has been used for transactions, and goods in shops are priced in this currency. The move aims to instill confidence in the local currency and reduce reliance on foreign exchange.

The Role of Gold in Reducing Economic Dependency

In addition to safeguarding their economies, many African nations see gold as a means of reducing their reliance on the global financial system. For countries that are subject to international sanctions or those wary of their dependence on external powers, gold represents a form of financial sovereignty.

Bright Oppong Afum, a senior lecturer at the University of Mines and Technology in Ghana, explains that some African countries are using gold to reduce their exposure to the risks associated with international sanctions. “If sanctions are imposed on you, an African country, the impact can be devastating. By holding gold, these countries can reduce their dependence on external financial systems and avoid the potential fallout from sanctions.”

Afum further emphasizes that while gold holds great value, many Africans, particularly artisanal miners, often sell the metal at undervalued prices to meet their immediate financial needs. This highlights a key challenge for governments seeking to acquire gold domestically without exploiting vulnerable miners.

The Pan-African Payment and Settlement System

One significant development that could reduce the continent’s reliance on gold is the African Continental Free Trade Area’s (AfCFTA) Pan-African Payment and Settlement System (PAPSS). Launched in 2022, this system allows countries within the AfCFTA to trade using their local currencies rather than relying on foreign currencies such as the U.S. dollar or euro.

PAPSS is seen as a potential game-changer in addressing the economic challenges facing African nations. By allowing intra-African trade to be settled in local currencies, it could reduce the need for African countries to hold large reserves of foreign currencies or gold. Experts believe that once fully implemented, PAPSS will ease the economic pressures on African countries and reduce their dependence on gold as a hedge against currency volatility.

Gold as a Long-term Investment

While gold is currently seen as a vital asset for African central banks, some economists argue that it cannot solve all of the continent’s economic problems. Gold’s value may rise in times of crisis, but its performance can be unpredictable in more stable periods.

The World Gold Council advises countries to hold onto gold for its long-term value and its role as a portfolio diversifier. Gold has historically performed well during economic downturns, making it an attractive investment for central banks. However, it should not be relied upon solely to stabilize an economy, especially in countries facing deep-rooted structural issues.

Moreover, the volatility of gold prices means that countries should be cautious about relying too heavily on the metal to solve their economic challenges. Diversification remains key to ensuring economic stability.

Conclusion

African central banks’ decision to bolster their gold reserves reflects their desire to protect their economies from external shocks and diversify their portfolios. As gold prices continue to rise, African nations like Ghana, Uganda, and Zimbabwe are strategically investing in the precious metal to shield themselves from inflation, currency volatility, and geopolitical uncertainty.

While gold provides a hedge against economic risks, its role is not without limitations. As African nations continue to navigate the complexities of the global financial system, a balanced approach that includes not only gold but also broader economic reforms will be essential for long-term stability. Initiatives like the Pan-African Payment and Settlement System offer hope for reducing dependency on gold and creating a more resilient economic future for the continent.

Photo source: Google

By: Montel Kamau

Serrari Financial Analyst

11th September, 2024