Gold as a commodity has been an essential component of nations’ financial reserves for centuries, and its appeal is showing no sign of diminishing, with central banks set to be net purchasers of gold given the economic disruptions across many economies. But what is it about gold that has made it such a key asset for so long?
Ghana’s central bank, the Bank of Ghana (BoG), in June 2021 launched the Gold Purchase Programme to augment the country’s foreign reserves. The Programme will enable BoG to buy domestically produced gold from selected gold aggregators and mining firms, and pay in local currency at the prevailing market price. Through this programme, the BoG expects to double its gold holdings in the next five years. The end game of this policy directive seeks to increase/double Ghana’s foreign exchange reserves portfolio.
The History of Gold Backing Currencies
The history of gold is long connected with money; however, gold somewhat relinquished this role in developed economies after the outbreak of the Second World War. At the war’s end, the Bretton Woods monetary system – a regime of fixed exchange rates – was created. This system broke down in 1971 when the USA unilaterally ended its gold standard, which set the convertibility of gold and the dollar to US$35 per ounce.
References to the Gold Standard often refer to two key periods in history: that of the Classical Gold Standard and the post-Bretton Woods gold-pegged exchange rate system. This Gold Standard was a system under which nearly all countries fixed the value of their currencies in terms of a specified amount of gold or linked their currency to that of a country that did so. Domestic currencies were freely convertible into gold at the fixed price and there was no restriction on the import or export of gold. Gold coins circulated as domestic currency alongside coins of other metals and notes, with the composition varying by country.
As each currency was fixed in terms of gold, exchange rates between participating currencies were also fixed. It became apparent that during the Second World War a new international system would be needed to replace the Gold Standard after the war ended. The design for it was drawn up at the Bretton Woods Conference in the USA during 1944.
USA political and economic dominance necessitated the dollar being at the centre of the system. After the chaos of the inter-war period, there was a desire for stability – with fixed exchange rates seen as essential for trade, but also for more flexibility than the traditional Gold Standard had provided.
The system drawn up fixed the dollar to gold at the existing parity of US$35 per ounce, while all other currencies had fixed, but adjustable, exchange rates to the dollar. Unlike the classical Gold Standard, capital controls were permitted that enabled governments to stimulate their economies without suffering from financial market penalties.
The status of Ghana’s foreign reserves
Available data suggested a steady growth of Bank of Ghana’s foreign reserves over the past fifteen (15) years. However, the reserve position as seen in 2021 June was estimated to be around US$11billion, which subsequently dropped to US$7.6billion as of May 2022. But the portion of gold reserves remained unchanged at about 8.11 tonnes, with the average value of gold reserves held as a percentage of Gross International Reserves (GIR) at 6.14 percent.
A general comparison shows that contrary to Ghana’s static gold holdings in its reserves, the USA and other industrialised countries in the Eurozone continued to hold large gold reserves, post the gold standard era.
According to the International Monetary Fund (IMF) and the World Gold Council, major industrialised countries hold the largest volume of gold reserves followed by major emerging markets with major developing countries lagging the curve.
Globally, the demand by central banks for gold, over the past decade, ranks third behind jewellery, technology and other investment sectors. These trends are significant because Ghana has mined gold for over three centuries, and for the most part exported that gold. In 2019, for instance, Ghana was adjudged the largest producer of gold in Africa and 7th largest in the world. Yet, in that same year other central banks acquired a record level of 670 tonnes of gold to boost their reserves, according to the World Gold Council.
The Gold Acquisition Process under the Programme
According to the BoG, under the Programme, dore gold (unrefined gold) purchased from a gold aggregator will be assayed by the Precious Minerals Marketing Company (PMMC) – the national assayer. Assaying is simply a process of testing a metal with the aim of determining its ingredient and quality. Upon completion of a satisfactory assaying process, PMMC will submit an assay report to BoG on the day of delivery.
Using the agreed pricing sources for gold and the cedi/dollar exchange rate, the value of gold supplied will be determined and paid for within 48 hours to the aggregator. The Bank of Ghana will then aggregate the assayed dore gold purchases at its vaults, and from time to time send the validated dore gold to a London Bullion Market Association (LBMA) – certified refinery to be processed to the required international standard of good gold delivery (fineness of 99.99 percent). Finally, the LBMA-certified gold will then be stored at designated locations as part of the BoG’s reserves.
Benefits of Increasing Gold Reserves
The diversification benefits of this initiative for Ghana’s reserve portfolio are enormous. It will pave the way for the BoG to grow foreign exchange reserves, foster confidence, potentially enhance currency stability, and create a more attractive environment for foreign direct investments and economic growth. This programme is also expected to position the Bank to potentially leverage gold holdings to raise cheap source of funding to provide short-term foreign exchange liquidity.
Ordinarily, one may wonder why efforts were not made to increase the country’s reserve positions all these years – especially during the Gold Standard era when gold as a monetary asset was of a higher value. I am not an economist but an ordinary man trying to understand why such a reserve creation opportunity is only now being exploited, especially for a country like ours which has been mining gold for centuries.
The question I leave with us all with is: A policy initiative a little too late – or just in time?
>>>The writer can be reached on [email protected]
Bank of Ghana -Launch of Domestic Gold Program (https://www.bog.gov.gh/wp-content/uploads/2021/06/Launch-of-BOG-Gold-Purchase-Programme)
The History of Gold – World Gold Council (https://www.gold.org/history-gold)