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Why Ghana wants to barter gold for fuel

Kitco News

(Kitco News) Large mining companies in Ghana will have to sell 20% of their refined gold to the country's central bank starting on January 1, 2023, according to Vice-President Mahamudu Bawumia. This is part of a larger plan by the government to trade gold for fuel.

The message was posted on Bawumia's Facebook page. "The Bank of Ghana and the Precious Minerals Marketing Company (PMMC) will coordinate with the large-scale mining companies to ensure compliance with this directive," the vice-president said.

The price of gold will be set via spot prices, he added. "The gold to be purchased by the Bank of Ghana and the PMMC will be in cedis at spot price with no discounts."

The Bank of Ghana will buy gold from large-scale miners such as Newmont Corp., AngloGold Ashanti Ltd., and Gold Fields Ltd., the post said.

Small-scale miners have also been ordered to sell their gold to the state-owned Precious Minerals Marketing Co, but the amount was not yet specified.

Ghana is Africa's largest gold producer, accounting for 117.6 tons in 2021. And now, its government wants to use this position to create a plan to buy fuel with bullion instead of U.S. dollars. Despite being a producer of crude oil, Ghana has been importing refined oil products since 2017 following an explosion at its only refinery.

The idea of using gold stems from the need to contain inflation and limit the devaluation of the cedi, the national currency, according to the government.

The new policy is planned for the first quarter of next year, and it "fundamentally change[s] our balance of payments and significantly reduce the persistent depreciation of our currency," Bawumia said.

The country's inflation reached 40.2% in October. And since the start of the year, cedi is down more than 53%, according to Ghana's finance minister Kenneth Ofori-Atta. The drop makes the cedi one of the world's worst-performing currencies.

The local currency's depreciation against the U.S. dollar has also swelled Ghana's foreign debt stock by USD$6 billion in 2022, the minister said when presenting a 2023 budget last week.

Ghana has been trying to secure financial aid of up to $3 billion from the International Monetary Fund (IMF). The country is facing high debt service payments and low revenues as it battles the economic fallout from the COVID-19 pandemic and the continued effects of the war in Ukraine.

Last year, Ghana announced its first domestic gold-buying program to double its official gold holdings. The country has been buying gold from miners.

"Other than the diversification benefits of gold for our reserves portfolio, the domestic gold purchase programme will pave the way for [the central bank] to grow its foreign exchange reserves to foster confidence, enhances currency stability, create a more attractive environment for foreign direct investments and economic growth," Ghana's central bank said last year.

In 2021, the country's foreign reserves were nearly $11.00 billion, with gold reserves at 8.77 tons.

News of Ghana buying 20% miners' local gold is another sign that countries are starting to utilize gold in new ways, said MKS' metals strategist Nicky Shiels.

"Ghana is Africa's largest gold producer (overtaking S.A in 2018) with annual mine output of 130 tonnes, up 30% from 10 years ago. Monetizing 1/5th of this, or 26 tonnes next year, would generate $1.5bn at current prices and is meant to supplement their dwindling Gross international reserves at only $6.6bn, change their balance of payments and significantly reduce the pressure on the Cedi," Shiels wrote.

De-dollarization is becoming more prominent this year as non-Western countries look to move away from the dollar to help stabilize their falling currencies.

"The longer the Russia war continues, the more we should see this barter trade where non-western countries happily 'de-dedollarize/re-commoditize' and circumvent US$ especially if it means taking in (sanctioned – Venezuelan, Russian, Iranian etc) commodities at a discount," Shiels noted on Monday.

The potential impact on gold prices is not very clear, as the countries that receive gold as payment could simply sell the precious metal.

"It's bearish in the short-term. An economic crisis can lead gold-holding nations (Russia, Ghana etc) to monetize gold, not increase gold holdings," Shiels warned. "It boils down to the market backdrop. In bear markets, the fundamentals will accelerate the downside. In bull markets, the booster to sentiment [and] thus further investor & retail interest will likely offset actual gold flows. Gold is currently in a rather neutral / slightly bullish market … so the news is something to monitor."

Ghana's move also comes after the World Gold Council reported that gold purchases from central banks reached a record during the last quarter.

A total of nearly 400 tons was bought by central banks in the third quarter, the most on record. Year-to-date, central banks bought 673 tons, more than any other annual total since 1967 — when the U.S. dollar was still backed by gold. 

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