African central banks’ gold rush poses supply and pricing issues, according to a Fitch unit
BMI, a division of Fitch Group, warned on Wednesday that central banks in Sub-Saharan Africa that have recently increased their gold reserves may have price and liquidity crises if the precious metal’s value declines.
According to BMI, this year’s overall market volatility, which has been fueled by U.S. trade tariffs and other geopolitical uncertainties, has increased Ghana, Tanzania, and Nigeria’s domestic gold purchases to strengthen their reserves.
Burkina Faso has stated that it will increase its gold reserves, Zimbabwe has stated that its new ZIG currency is supported by gold deposits, Rwanda and Namibia have taken proactive measures to add the metal to their reserves, while policymakers in Kenya and Uganda are considering a move into gold, according to BMI.
Orson Gard, senior Sub-Saharan Africa analyst at BMI, stated in an investor presentation that “sub-Saharan African markets are increasingly using gold as a strategic store of value.”
However, he pointed to Ghana, where an aggressive gold purchase program has resulted in the metal making up a third of its reserves according to BMI calculations, causing the cedi currency to soar and possibly lowering the competitiveness of the nation’s exports.
The central bank of Ghana did not immediately respond to requests for comment.
According to BMI, the price of gold may have peaked after reaching a record high earlier this year. Any decrease in U.S. interest rates could put downward pressure on the price.
“Any sudden drop in global gold prices would have significant implications for those markets in sub-Saharan Africa which have rapidly increased gold as a share of their total reserves portfolio,” Gard stated.
Countries that began purchasing gold around its most recent top may likewise suffer from a slow price drop over the medium term, he continued.
“This would not only weigh on reserve adequacy but would also undermine the perceived credibility of central bank policy,” he stated.
According to him, Ghana and Tanzania, two countries that similarly depend on the export of gold, would suffer from the “double whammy” of declining reserves and decreased export revenue.
Gard pointed to Argentina and India, which experienced severe balance of payments issues in the 1990s and 2000s, respectively, as examples of how governments may find it difficult to transform their gold reserves into liquid assets like hard currency.
