Gold Coins: Solution or smoke screen?

By Joshua Worlasi AMLANU

…an alternative investment option available in three different sizes—1 oz, ½ oz, and ¼

ozLast week, Bank of Ghana (BoG) announced the launch of its first-ever gold coin, that has caught the attention of economists, investors, and citizens alike. This alternative investment avenue, set to materialize within the next two weeks, could represent a significant shift in the central bank’s strategy to combat persistent economic challenges, particularly the depreciation of the cedi and the elevated inflation, which in recent times have been on a path of decline, but still remains relatively high with significant upside risks.

The introduction of the Ghana Gold Coin (GGC) indeed appears to be a potent addition to the Bank of Ghana’s monetary policy toolkit.

During a press briefing on September 27, the Governor of the BoG, Dr. Ernest Addison, unveiled the GGC, emphasizing its role in diversifying investment options while highlighting Ghana’s rich gold heritage.

The coin will be available in three different sizes—1 oz, ½ oz, and ¼ oz—and is produced from gold refined to 99.99% purity. Each coin features the Ghana Coat of Arms on one side and the Independence Arch on the other, a nod to the nation’s identity and pride. While some market analysts have expressed skepticism about the coin’s long-term effectiveness in stabilizing the cedi, it marks a novel approach in Ghana’s financial landscape.

A golden opportunity or a gilded distraction?

The GGC initiative is multifaceted in its objectives. Primarily, it aims to offer Ghanaian residents a new avenue for investment, diversifying the financial market beyond traditional options such as dollar-based savings or government securities.

Gold has long served as a reserve asset for central banks, providing a hedge against inflation and currency volatility. The introduction of the Ghana Gold Coin (GGC) democratizes access to gold as an investment vehicle, marking a significant innovation in Ghana’s financial landscape. Notably, this approach diverges from the ill-fated Menzgold Ghana Limited, a fraudulent gold dealership and investment firm that previously offered similar investments, albeit illegally.

The GGC’s legitimacy and regulatory backing differentiate it from past unauthorized schemes, offering investors a secure and transparent pathway to gold investment.

The coins, manufactured from dore gold refined to 99.99% purity, will be available in three sizes: 1 oz, 1/2 oz, and 1/4 oz. Each coin will feature the Ghana Coat of Arms on the front and the Independence Arch on the back, symbolizing both the nation’s heritage and its economic aspirations. The Bank of Ghana’s guarantee backs these coins, adding a layer of credibility and security for potential investors.

However, the introduction of the GGC is more than just a new investment product; it’s a strategic monetary policy tool. Dr. Addison emphasized that the issuance of these coins would enable the BoG to “mop up extra cedi liquidity in the banking sector,” complementing existing instruments like Bank of Ghana Bills and overnight deposits in open market operations. This liquidity management aspect is crucial in understanding the potential impact on inflation and currency stability.

The GGC’s pricing will be determined by the previous day’s London Bullion Marketing Association (LBMA) Auction PM Price, with transactions conducted through commercial banks using the cedi, with a minimum of about GH¢ 10,000.

This move is expected to strengthen the domestic gold market, further integrating gold into the country’s financial system. It is also in line with the Bank’s Responsible Gold Sourcing Framework, ensuring that the gold used for the coins is traceable and responsibly mined from Ghanaian sources.

The BoG has assured the public that Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT) safeguards are in place, ensuring that trading of the GGC will be devoid of criminal financial activities.

The Domestic Gold Purchase Programme sets the stage

The launch of the GGC doesn’t come in isolation but builds upon the success of the Domestic Gold Purchase Programme (DGPP), initiated in June 2021. This program has significantly bolstered Ghana’s gold reserves, which now stand at an impressive 65.4 tonnes, valued at approximately US$5.07 billion. The acquisition of 23 tonnes in just the first half of 2024 underscores the aggressive approach the BoG has taken in strengthening its reserve position.

This accumulation of gold reserves has had a tangible impact on Ghana’s international financial standing. By the end of August 2024, Gross International Reserves (GIR) had increased by US$1.58 billion to US$7.50 billion, providing 3.4 months of import cover.

The higher build-up in Gross International Reserves was largely on account of the strong performance of the domestic gold purchase programme. The Net International Reserves also saw a substantial rise to US$4.92 billion. These figures represent a marked improvement from the end of 2023, when gross international reserves stood at US$3.7 billion, surpassing the IMF’s initial projections.

The DGPP’s success in bolstering reserves offers a promising foundation for the GGC initiative. By leveraging its growing gold reserves, the BoG is positioning itself to offer a gold-backed investment product that could potentially attract both domestic and international interest, further strengthening the country’s financial position.

Currency stabilization: A glittering hope?

While these numbers reflect a positive trend in strengthening Ghana’s reserve position, the cedi’s depreciation has continued to pose challenges. In May and June 2024, the Cedi experienced sharp depreciation despite the BoG’s efforts to shore up its foreign exchange reserves and stabilize the currency. This raises concerns about whether introducing a gold coin, which represents a store of value, can serve as a long-term solution to the structural issues affecting the cedi.

Nonetheless, after coming under pressure in May and June, the exchange rate has generally stabilized in recent times. This was mainly driven by the still tight monetary policy stance and improved forex liquidity support. From the beginning of the year to September 25, 2024, the Ghana cedi depreciated by 24.3 percent against the U.S. dollar. In the second half of the year, the cedi witnessed a slower pace of depreciation of 7.1 percent.

The persistent depreciation of the cedi has been a thorn in the side of Ghana’s economic stability. The BoG’s currency stabilisation efforts have involved a combination of tight monetary policy, forward forex auctions to the bulk oil distribution companies, the introduction of a dynamic Cash Reserve Ratio (CRR) to manage liquidity, and the recent revision of the FX management method.

The introduction of the GGC adds another dimension to these efforts. By providing a gold-backed investment option, the BoG aims to reduce the demand for foreign currencies, particularly the U.S. dollar, as a store of value. If successful, this could ease some of the pressure on the cedi in the forex market.

However, market analysts have expressed skepticism about the GGC’s potential to address the cedi’s structural challenges. While acknowledging possible short-term benefits, many argue that a more comprehensive approach is needed to tackle the fundamental issues affecting the cedi’s value.

Inflation control: A golden solution?

The most pressing question on many observers’ minds is whether the launch of the GGC will effectively address the cedi’s depreciation and inflationary pressures, both of which have been persistent issues in the Ghanaian economy. Although the GGC represents an innovative approach, it is not without its critics.

One of the primary objectives behind the GGC launch is to address Ghana’s persistent inflation challenges. The country has grappled with high inflation rates, which peaked at over 50 percent in 2022 and early 2023.

The BoG’s aggressive liquidity absorption efforts, including the mop-up of GH¢ 52.1 billion in March 2023 alone. The BoG’s liquidity mop-up efforts, totalling GHS 101.1 billion as of August 2024, have been instrumental in reducing inflation from 54.1 percent in December 2022 to 20.4 percent in August 2024.

According to Dr. Addison, “The GGC issuance enables the BoG to mop up extra cedi liquidity in the banking sector and will supplement the use of the Bank of Ghana Bills and overnight deposit facilities in our open market operations.”

The introduction of the GGC is expected to complement these efforts by providing an additional tool for liquidity management. By offering citizens an alternative investment option that effectively takes cedis out of circulation, the BoG hopes to further reduce inflationary pressures. This strategy aligns with traditional monetary policy approaches of controlling money supply to manage inflation.

However, the effectiveness of this approach remains a subject of debate among economists. While the correlation between the BoG’s auction activities and inflation trends is strong, external factors such as global commodity prices and exchange rate fluctuations also play significant roles in driving inflation in Ghana. The Russia-Ukraine war’s impact on global food and fuel prices, for instance, contributed substantially to Ghana’s inflation surge in 2022 and early 2023.

Moreover, while headline inflation has dropped significantly, core inflation remains higher at 22.1 percent as of June 2024. This suggests that inflationary pressures persist in non-food sectors like housing, utilities, and services, areas that may not be as directly influenced by the introduction of gold coins.

Some market analysts argue that while the GGC might have short-term benefits, particularly in mopping up excess liquidity in the economy, it cannot address the underlying causes of the cedi’s instability, such as the country’s trade imbalances and reliance on imported goods.

The broader macroeconomic picture

While the GGC can help manage liquidity and offer Ghanaians a hedge against inflation, it is crucial to recognize that inflation in Ghana is driven by a complex mix of both domestic and external factors.

Ghana’s inflationary trends have been influenced by the global economic environment, particularly rising commodity prices and currency fluctuations. Geopolitical tensions, for instance, had a profound impact on global food and fuel prices, exacerbating inflation in Ghana throughout 2022 and early 2023.

Additionally, non-food inflation—such as that for housing, utilities, and services—remains high. Core inflation, which excludes volatile items like food, transport and energy, stood at 20 percent in June 2024, despite the overall inflation rate showing a downward trend. This suggests that while liquidity absorption efforts have been effective in controlling headline inflation, deeper structural issues within the economy require additional policy interventions.

The GGC marks a significant shift in Ghana’s monetary policy approach, however, several challenges and potential pitfalls must be considered. Gold prices can be volatile in the international market, and fluctuations could impact the value of the GGC, potentially creating uncertainty for investors.

While the Bank of Ghana aims to democratize access to gold investment, the initial requirement to purchase through commercial banks using Cedis, with a minimum amount of about GH¢10,000, may limit accessibility for some segments of the population.

Ensuring that potential investors understand the nature of the investment, including risks and benefits, will be crucial for the program’s success and to prevent potential financial misconduct. Furthermore, if the GGC proves highly attractive, it could potentially divert investments from other sectors of the economy, which might have unintended consequences for overall economic growth.

A step in right direction, but not a panacea

The launch of the Ghana Gold Coin represents a bold and innovative step in the Bank of Ghana’s efforts to deepen financial markets, diversify investment options, and manage inflation. By democratizing access to gold as a financial asset, the GGC offers Ghanaians a valuable hedge against inflation and currency volatility, while also helping the BoG manage liquidity within the economy.

However, the success of this initiative will depend on various factors, including market reception, global economic conditions, and the BoG’s ability to effectively manage the programme alongside its other monetary policy tools. While the GGC offers potential benefits, it should be viewed as part of a broader strategy rather than a panacea for Ghana’s economic woes.

The GGC alone cannot address the structural challenges facing the cedi or fully control inflation. The central bank’s broader monetary policy, including its ongoing liquidity management efforts and the Domestic Gold Purchase Programme, must be complemented by fiscal policies aimed at addressing trade imbalances, reducing reliance on imports, and promoting domestic production.

In the end, while the gold coin initiative is a step in the right direction, it is just one piece of a much larger puzzle in Ghana’s quest for economic stability and growth.

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