A growing trend of central banks in sub-Saharan Africa bolstering gold reserves could backfire if the precious metal’s value declines, warns BMI Research, a unit of Fitch Solutions. Countries including Nigeria, Ghana, and Tanzania have ramped up domestic gold purchases in recent years, partly in response to global market instability driven by U.S. trade policies and geopolitical tensions. However, analysts caution that overreliance on gold poses risks of financial strain and currency volatility, particularly if prices retreat from recent highs.
Ghana’s central bank has been among the most proactive, with BMI estimating that gold now comprises one-third of its foreign reserves. While this strategy initially stabilized the cedi, analysts warn the stronger currency could hurt export competitiveness. “Gold is increasingly seen as a strategic store of value in the region, but the risks are mounting,” said Orson Gard, a senior BMI analyst, during a recent investor briefing. He noted that Ghana’s aggressive acquisition program exemplifies both the appeal and vulnerabilities of such policies.
The Bank of Ghana has acknowledged these risks, with Governor Johnson Asiama confirming Wednesday that hedging mechanisms are being rolled out to cushion against potential price swings. “Any sharp drop in gold prices would directly impact reserves,” Asiama told reporters. “Our hedging program aims to mitigate that exposure.”
BMI forecasts that gold prices, which hit record levels earlier in 2024, may have peaked. Analysts cite potential U.S. interest rate cuts as a downward pressure point. A sudden or gradual decline could erode the value of gold-heavy reserves, Gard explained, undermining both financial buffers and public trust in central banks. Countries like Tanzania and Ghana face a compounded risk, he added, as shrinking gold revenues could coincide with weakened export earnings, creating a “double shock” for their economies.
Other nations, including Rwanda, Namibia, and Burkina Faso, are exploring similar moves to expand gold holdings, while Zimbabwe introduced a gold-backed currency in April. However, converting bullion into liquid assets during crises may prove challenging, Gard warned, pointing to past struggles in India and Argentina when gold liquidity dried up during economic emergencies.
The warnings highlight a delicate balancing act for African policymakers: diversifying reserves away from U.S. dollar dependencies while navigating gold’s inherent volatility. As global economic uncertainties persist, the stakes for these strategies remain high.
