Ghana settles oil in gold, what are the consequences?

Ghana, Africa's second largest gold producer, Negotiates with the United Arab Emirates to settle oil in gold from now on. A remarkable decision, because countries normally use dollars, euros or other international currencies to buy oil. Is this an attempt to undermine the dominant position of the petrodollar? Or does this say more about Ghana's poor economic situation? An analysis.

Why does Ghana want to pay for oil in gold?

Ghana's central bank is struggling with a sharp decline in the value of its own currency, the Ghanaian cedi. Since the beginning of this year, the value of this currency against the dollar has more than halved, making the import of goods increasingly expensive.

Ghana's economy is suffering from high inflation due to the weak currency, which has made it much more expensive and difficult for the government to borrow money. This year, the government lost access to the capital market, meaning it had to look for other ways to import essential goods such as oil.

To save foreign exchange reserves, the central bank now wants to use gold to settle oil. This is because she can buy that gold directly and in local currency from domestic gold mines. With that gold, it can then import oil, without this being at the expense of currency reserves such as euros and US dollars.

Buying gold from domestic mines?

Ghana's central bank has recently shut down the domestic mining sector Commissioned to sell 20% of their production directly to the central bank. This affects not only international mining companies such as Newmont Mining, AngloGold Ashanti and Gold Fields, but also many local mines. They are paid the spot price for the precious metal in cedis. This is not a problem for mines that operate locally, but it is less favourable for mines with foreign shareholders. They can only pay part of the expenses in cedi, what they have left over they have to exchange for dollars.

It is more common for central banks of countries with a large gold mining sector to buy up domestic production. This is often cheaper, because the central bank can then pay in local currency. Russia has expanded its gold reserves over the past twenty years, mainly by buying up domestic production. Kazakhstan and Bolivia would do the same. It is conceivable that China's central bank will also structurally buy up part of its domestic gold production, as this country has the largest gold mining production in the world and exports little precious metal.

Gold as an international means of payment?

When countries run out of currency reserves or have lost access to international payments due to sanctions, gold is often the last resort. When the bottom of the treasury in Venezuela came into sight, President Nicolas Maduro began to sell the gold stock, which ended in a dispute with the Bank of England, where some of that gold was stored.

In 2012, Iran sought refuge in gold in order to trade with Turkey. Due to Western sanctions, the country was cut off from the payment system. Traders struck a deal with Turkey to buy Iranian gas Swap for gold. Further in history, there are other examples in which gold is used as a means of payment, for example during the Second World War in Europe. At that time, the gold flows were largely via neutral Switzerland.

What does this mean for the gold market?

Ghana needs almost $5 billion a year to buy oil. If the country can use gold for this, it will save foreign exchange reserves. But whether it will also have an impact on the global gold market remains to be seen. If Ghana sells the precious metal at market price, it will have little effect on the market. Otherwise, the gold would have been sold and at the same price. Nor are the volumes so large that it has an effect on global gold flows.

It only becomes interesting when a major oil exporter decides to ask for gold as a means of payment and delivers more oil when paying in gold. The precious metal will then have a higher market value and other countries will then have more Buy gold to be able to buy oil cheaply. In that case, there is a revaluation of gold via oil. This action by Ghana does not carry much weight, but it does confirm the role of gold as the ultimate reserve 

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On behalf of Holland Gold, Paul Buitink and Joris Beemsterboer interview various economists and experts in the field of macroeconomics. The aim of the podcast is to provide the viewer with a better picture and guidance in an increasingly rapidly changing macroeconomic and monetary landscape. Click here  to subscribe.