Finding sanctuary in gold

Ahmed Abdel-Hafez, Tuesday 10 May 2022

Individuals and governments are turning to gold as a safe haven in the face of fluctuating currencies during times of crisis, reports Ahmed Abdel-Hafez

Finding sanctuary in gold
Gold prices have been on the rise for the past two months

 

On 28 April, the Global Gold Council (GGC) reported that “Egypt was the biggest buyer in the first quarter, reporting a 44 ton (+54 per cent) increase in its gold reserves in February. This took total gold reserves to 125 tons, or 17 per cent of total reserves, which is on the higher end when compared to the country’s regional peers.”

The GGC added that “global central bank gold reserves grew by a net 84 tons in the first quarter, 29 per cent lower than last year,” but double the amount they had collectively bought the quarter before.

Gold shares a historical relationship with trade and is a safe haven for investment because of its ability to maintain, or increase, its value. This is why global central banks have rushed to buy more gold during the current crisis, said Ali Abdel-Raouf, a professor of economics.

Generally, banks resort to buying gold, as well as foreign currencies, as forms of traditional reserve. It was therefore to be expected that they would buy gold during the Russia-Ukraine war since the conflict had caused a retreat in the purchasing power of currencies, Abdel-Raouf explained.

The 2008-09 economic crunch also revealed that the global financial system was unstable, resulting in the emergence of crypto-currencies as a substitute, he added. However, to date, crypto-currencies have failed to replace cash the world over, due to various economic and security challenges.

The GGC stated that global markets have recently resorted to buying gold, also leading to a decrease in foreign-currency reserves at the Central Bank of Egypt (CBE). The CBE’s foreign cash reserves decreased to $37.082 billion at the end of March, down from $40.099 billion at the end of February. On 8 May, the CBE reported that its foreign cash reserves had risen by $41 million to reach $37.123 billion.

“The CBE has not released a statement confirming or denying it has bought 44 tons of gold,” Abdel-Raouf said. “Some people doubt the operation has taken place. Their doubts concern the timing. Why would the CBE buy gold after its price has hiked? In addition, Egypt paid $4 billion in March to pay off debts,” he added.

According to a GGC report this month, the CBE’s gold reserve increased by 55 per cent to reach 125.3 tons at the end of February, making up 19.4 per cent of the total foreign currency reserves. The GGC commended the CBE’s move to buy gold prior to the coronavirus outbreak to support its reserves. It was a good step at the right time because the price of gold had increased due to the spread of the pandemic, it noted.

Omar Al-Maghrabi, a member of the board of the Gold Division of the Egyptian Federation of Chambers of Commerce, also questioned the CBE’s recent purchase of gold, based on the fact that it did not issue a statement.

According to the Ministry of Petroleum and Mineral Resources, Egypt produces some 16 tons of gold annually, the majority of which comes from the Sukkari mine in the Nubian desert to the south. The government has become increasingly interested in buying local gold from the mining company since 2017 to increase its gold reserves.

Al-Maghrabi said central banks the world over are buying gold at present due to the weakness of all currencies, even the US dollar. When the US Federal Reserve announced it was lifting its benchmark interest rate, observers were expecting an appreciation of the dollar and a sharp decrease in the price of gold on a global scale, he continued.

However, gold slightly depreciated against the dollar, because many investors believe the Fed’s move to raise interest rates meant that the US central bank thinks that the dollar needs support, which would mean it is not a stable currency, Al-Maghrabi added.

For this reason, despite the raising of interest rates by the Fed, people had not sold gold to buy dollars, he pointed out.

According to the GGC report in May, Egypt jumped to rank 33rd globally, and fourth in the Arab world after Saudi Arabia, Lebanon, and Algeria, in terms of its gold reserves, after it was ranked 41st globally and sixth in the Arab world in the GGC’s April report.

The CBE had earlier announced that the value of gold included in its foreign-exchange reserves has risen by $2.703 billion in February to post a total of $6.907 billion and up from $4.204 billion at the end of January.

Al-Maghrabi said the rise in the price of gold on a global scale due to the Ukraine war reminded him of the unprecedented hike in prices that occurred after the spread of the coronavirus and the halt of trade movement across the globe.

That was when governments and individuals had resorted to buying gold as a safe haven in the light of the risks of crumbling economies due to long-term lockdowns.

With the announcement of the availability of vaccines against Covid-19 and news of curbing the pandemic, gold prices dropped because governments and individuals sold their gold to buy currencies to resume trade, he pointed out.

On the domestic level, demand for gold on the part of financial institutions and individuals has soared because people find gold a safe haven. The government’s decision to halt gold imports has also put more pressure on local gold, and the news — albeit unconfirmed — that the CBE has bought gold has raised people’s awareness that gold is still a safe haven that the state resorts to.

Rafik Abbas, an advisor to the Gold Industry Division at the Federation of Egyptian Industries, said the Egyptian market had been following the international gold exchange since the 1990s. Annual demand by companies and individuals for gold is set at around 100 tons, 50 per cent of which is exported and the rest is sold in the local market.

If local demand increases, gold is imported to be sold domestically, and if it decreases, the exported amount rises.

However, the recently imposed procedures by the CBE on financing imports have affected the import of some commodities and raw materials, including gold. They have come in tandem with the rise in the local demand for gold, especially bullion and stamped pounds, resulting in a deficit due to the rising demand and restricted supply.

Abbas added that gold jewellery pieces are not seeing the same high demand because individuals and institutions buy gold for the purpose of saving.

On a global scale, he expects gold to witness a further rise in demand in the international bourses, based on forecasts that the Ukraine war will drag on and the fact that the conflict is not taking the form of traditional military operations, but rather is an elongated economic war.

The price of gold is currently fluctuating between $1,900 and $2,100 per ounce. The world saw the price of gold increase to this level at the beginning of the coronavirus crisis and during the Arab Spring of 2011.

It is difficult to anticipate the future price of gold in the light of fast-paced changes and sudden U-turns in the Russia-Ukraine conflict and the US-China trade war, Abbas noted.

*A version of this article appears in print in the 12 May, 2022 edition of Al-Ahram Weekly.

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