The dilemma of delay in Africa’s rise (5)

GOLD WILL CONTINUE TO be relevant in the global monetary system irrespective of whatever transformation takes place in the future. Although money has moved into the digital economy, its hard currency versions will still be around for a long while. The issue of convertibility might pose less problem across countries as more and more economic blocs converge, settling for common currencies. Since year 2000, the eurozone member countries have grown to become 20. The eurozone (EZ) or euro area is made up of those Member States of the European Union that have adopted the euro as their currency. More EU countries members are expected to drop their own national currencies and adopt the euro in the future. Although the dollar has held sway as a ‘glocal’ currency for decades, it may soon be rivalled by an alternative if the BRICS’ dream come true. The alliance between Brazil, Russia, India, China and South Africa (BRICS) has been expanded in 2023 to include Egypt, Ethiopia, Iran, Saudi Arabia and the United Arab Emirates which  joined the ranks of the BRICS group on Monday, January 1, 2024. They were to join the group at the 15th BRICS summit in August 2023  in Johannesburg, South Africa.

Apart from the common currencies in any of these alliances, it is unlikely that individual participating countries will abandon their age-long tradition of keeping gold as backup for their countries’ economies. According to the World Gold Council, “gold is an important component of central bank reserves because of its safety, liquidity and return characteristics – the three key investment objectives for central banks.” In World Gold Council’s reckoning, the central banks’ reserves are significant holders of gold, accounting for around 20 percent of all the gold that has been mined throughout history. This is quite revealing, especially considering the countries in custody of these gold reserves and the transformations that their economies have gone through. France and Germany, for instance, have been EU members for over two decades and were the early adopters of the euro currency. However, Germany boasts the second-largest stock of gold holdings in the world, at 3,374 tonnes. France’s gold reserves, as of the end of May 2023, amounted to 78.3 million ounces or 2,436.8 tonnes. Are these two not pointers to the likely continued relevance of gold reserves despite any form of transformation in the world’s monetary economy? The US, world leader in the digital economy, has a large repertoire of gold. It holds the world’s largest stockpile of gold reserves by a considerable margin of over 8,100 metric tonnes, when compared to the next in rank as the U.S. government has almost as many reserves as Germany, Italy, and France — the next three largest gold-holding countries — combined. As of early in 2024, the US Federal Reserve gold vault in New York housed approximately 507,000 gold bars, with a combined weight of 6,331 metric tonnes. 

Central banks typically hold gold bars of the standard weighing in 400-troy-ounce (438.9-ounce; 27.4-pound; 12.4-kilogramme) in their gold reserves and it is widely traded among bullion dealers, each valued at roughly $750,000. The gold reserve of the United Kingdom is the 17th largest central bank reserve in the world with 310.29 tonnes of gold bars. The UK reportedly once abandoned its gold reserves. Switzerland has 1,040.0 metric tonnes of gold reserves, while the European Central Bank’s officially reported gold reserve is 506.5 metric tonnes. China has been steadily building up its own gold reserves in recent years. Its official gold reserves as of April 2024 was 2,262.5 metric tonnes, after an increase by 27 tonnes was recorded in the first quarter of the year. 

Over the past two centuries, the world has been running on the monetary system created and operated by the West. The gold backing by their central banks may not have been their original idea, but it was institutionalised under their contemporary influence. The US strictly backed its currency with gold until it was forced to have a rethink. A change that led to gold-to-dollar decoupling occurred when the US continued to flood the markets with paper dollars to finance its escalating war in Vietnam and the Great Society programmes, the world grew cautious and began to convert dollar reserves into gold. 

US President Nixon at that time — concerned about the extensive run on gold — was compelled to step in and decouple the dollar from the gold standard. That was the beginning of the floating exchange rates that remain in use today. Soon after, the value of gold tripled, and the dollar began its decades-long decline. But the floating of the dollar became a model for adoption by multilateral financial institutions, particularly the World Bank and the International Monetary Fund (IMF) in their neo-liberal ideology, used in their international transactions, particularly when lending or providing advisory services. 

While it could be affirmed that a continued faith in the U.S. Dollar is still appreciable, as it remains the world’s currency reserve, it was the US experience that prompted other countries to accumulate so much gold which is still considered the most stable and liquid form of exchange. It might therefore be argued that the US dollar is highly unlikely to collapse anytime soon. But that is just a statement of optimism. If the euro, introduced in 1999, has become the second most commonly held reserve currency in the world, it may well embark upon a mission to knock the dollar off the pedestal. According to the IMF, central banks hold more than $6.7 trillion in dollar reserves versus 2.2 trillion in euros as of the fourth quarter of 2019. 

Currency convertibility rests in part on gold. The gold standard has thus become a rallying point as a fixed monetary regime under which the government’s currency is fixed and may be freely converted into gold. Under it, a freely competitive monetary system is in operation, in which gold or bank receipts for gold act as the principal medium of exchange. On the standard of international trade, the gold standard is also relevant wherein some or all countries fix their exchange rate based on the relative gold parity values between individual currencies. And so, if prices of gold increase, these can create a trade surplus or help offset a trade deficit. Countries that are predominantly net large importers of gold, specialising in producing products made with gold, but lack their own reserves, have to adjust to global price changes.

It might seem like the gold standard has been abandoned, but gold as a commodity can still be used as a substitute for fiat currencies and be used as an effective hedge against inflation. For long, gold will continue to play an integral role in foreign exchange markets. There are things to learn from recent history on gold. 

In April 2011, investors reacted to the declining values of fiat currency, thus driving the price of gold to a staggering $1,500 an ounce. It is important to emphasise that economists are split over whether gold truly qualifies to be an effective hedge against inflation, but it has been shown to be a much more effective hedge against economic downturns. 

Ordinarily, as net exporters, African countries exporting gold or having access to gold reserves were expected to have been at the commanding heights of the continent’s economy. But this has not even taken into account the meagre revenues of annual receivables from gold exports. The gold ore reserves in African soil could be so extensive and seemingly inexhaustible. The peril, however, is that African countries might keep digging and selling without an increase in the strength of their currencies even when gold prices increase. It also seems no African country that has been exporting gold has any robust strategy for taking advantage of global price increases of the prized commodity or bolstering its own competitiveness in terms of gold reserves. 

African countries — from where most of the gold in the vaults of Western Central Banks were extracted — remain uninspiring in terms of gold reserves. They are also prone to the North-South exploitation in their operations; and there are questions about transparency. For instance, the gold reserves of Mali, a major exporter of gold ore, only  climbed to 881.7 tonnes recently, in 2022, according to a mines ministry official. In the first quarter of 2024, according to the World Gold Council, Mauritania recorded 1.02 tonnes, Tunisia recorded 6.84 tonnes, Morocco 22.12 tonnes, Egypt 126.46 tonnes,  Libya 146.65 tonnes and Algeria 173.56 tonnes. In the whole of Middle East and North Africa (MENA), Saudi Arabia was the highest, with 323.07 tonnes. Gold Reserves in Guinea increased to 2.44 in 2019. 

Guinea’s National Bank or Guinea’s central bank (BCRG) maintains foreign-stored gold reserves. Guinea’s gold reserves are stored abroad with the Belgian rare metals firm Affinor. But there was a supply chain integrity problem. Since March 2021 when Alpha Condé was still in power, the contract Affinor signed on refining and storing part of Guinea’s gold reserves for the BCRG in order to in turn supply the nation with foreign currency in case of need has run into a hitch as there have been problems verifying the origin of the gold, some of which apparently came from Dubai and not from BCRG. According to reports, Affinor got into legal trouble and is refusing to give the gold back to the Guinea’s military junta that requested it. Instead, Affinor has offered to return its cash value, which the junta has not accepted partly because of the volatile global market of precious metals.

Africa is thus an onlooker in a global business involving a commodity that was mostly shipped to the global north from Africa. A point about Africa’s currently poor showing in the world monetary economy is evident in the wide disparity between Africa and the affluent global North. There is more to the disparity than meets the eye. The flexibility, currency convertibility and robustness of economies are clearly not Africa’s areas of strength for now. African political leaders need to introspect over this issue and think hard about how the continent’s economy can take greater advantage of gold reserves. The continent must begin to invest in its own gold and must think of how to safely keep its gold at home rather than abroad.

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