Bullion Bulletin: Gold for oil

Ghana vies with South Africa for the title of Africa’s biggest gold producer. Last year Ghana lost out, as its production declined from 4 million ounces in 2020 to 2.8 million ounces. South Africa dominated global gold production until 2009, when China displaced it from the top slot. Ore grades are in decline in South Africa and about two thirds of gold mining operations there in 2018 were either marginally profitable or loss-making.

Despite last year’s slowdown in its gold production, Ghana now says it is planning to buy crude oil and derivatives with gold rather than US Dollars. It plans to start paying in gold in the first quarter of 2023. Ghana’s Vice –President, Mahamudu Bawumia, said the new policy “represents a major structural change” and “will fundamentally change our balance of payments and significantly reduce the persistent depreciation of our currency”.

Its currency, the Cedi, has so far this year been the world’s worst performing currency, dropping 57% against the Dollar. Ghana has ordered large gold-mining companies to sell 20% of their refined gold – for Cedis – to the country’s central bank.

Small-scale miners have also been instructed to sell their gold, also for Cedis, to the state-owned Precious Minerals Marketing Company. The west African country said in August this year that its central bank, the Bank of Ghana, would start buying domestically produced gold. Inflation in Ghana is currently running at more than 40% a year, four times greater than the central bank’s target; the country is currently negotiating with the International Monetary Fund (IMF) to obtain a $3 billion support loan. At the end of September Ghana’s fiat currency reserves fell to around $6.6 billion, against $9.7 billion at the end of 2021. Ghana’s annual import bill exceeds $10 billion according to the finance minister. His deputy has said the government is considering a ‘haircut’ on the debt – i.e. devaluing it – by “up to 30%”; Ghana’s total public debt is about $54 billion. Even before the Russia-Ukraine war Ghana was already classified by the World Bank as being at high risk of debt distress.

Ghana is an oil producer, and exports crude oil, but its only refinery has been closed following an explosion in 2017. It imports around 80% of its finished petroleum products, such as diesel.

Emerging market countries such as Ghana are increasing their official gold holdings; according to a survey by the World Gold Council (WGC) earlier this year found that of 57 central banks a quarter planned to add more gold.

Several points can be made about Ghana’s decision to pay for its refined oil product imports in gold. The first is that gold companies with mines in Ghana, such as Newmont or Gold Fields, will have mixed feelings about the decision. While they will probably welcome the official endorsement this gives to gold-as-money, they may well dislike being forced to take a sliding currency like the Cedi as payment. It will force them to think more, spend more, about currency hedging.

The second is that Ghana’s action is yet another step in the de-dollarization of the global economy. Whether this is by choice or force of circumstances is a different question. Whether other countries with a flourishing gold production sector, who need to import crude oil, may follow in Ghana’s footsteps is another open question. All that can be said with certainty for now is that this seems another chip away at the US Dollar’s global dominance, and is another fillip for gold as a universal currency.

At Glint, we make every effort to demonstrate a balanced conversation between gold, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.