Five Reasons Why Ghana is Good For Gold

And One That Makes Ghana Bad.

Five Reasons Why Ghana is Good For Gold

And One That Makes Ghana Bad.

Bloomberg reports that Ghana, Africa’s second-largest gold producer, ordered large mining companies to sell 20% of the metal they refine to the nation’s central bank, as the government embarks on a plan to barter bullion for fuel.- Source

Reuters adds: If implemented as planned for the first quarter of 2023, the new policy "will fundamentally change our balance of payments and significantly reduce the persistent depreciation of our currency," Vice President Bawumia said. "The barter of gold for oil represents a major structural change," he added.

This comes at a time when debt ridden Ghana is struggling to make payments and is in the middle of a renegotiation with the IMF to those ends.

Here are some thoughts on The Ghana Gold announcement. Why it is good for Gold, what some bears are saying, and one risk worth noting.

1- Less Means Less

Less physical to LBMA2 (or wherever) means less physical is controlled by intermediaries. Paper shorts will be forced to accelerate covering as less metal is available for deals; Consistent with Basel 3 behavior. Somewhat like Nickel collateral shortage but infinitely slower. Commodity scarcity is the rule now as nations pull in the reins on natural resource exports. Gold while not a consumed commodity, is the most reliable store of value for these times on earth. More will be needed.

2- Gold Takes Oil-Deal Marketshare from USD

The seller of refined oil, the most used energy resource on earth, is we’d assume as Ghana represents, telling everyone that Gold3 is acceptable as payment. All that matters is the price-haircut if one exists.

3- Global Renegotiation of Dollar Deals at Adverse terms for USD, Better Terms for Alternatives

One definite risk this slightly exacerbates is any country renewing trade deals in dollars may be but more apt to close deals on shorter timelines. Terms for dollar-based deals will shorten from events like this casting future doubt on USD incumbency. If two parties like Ghana and a fuel producing nation are willing, able, and bold enough to publicly accept Gold instead of dollars in defiance of American hegemonic rules, this will encourage more defiance. 

4- Virtuous Self-Reinforcing Cycle

Which leads to the positive Network Effect (IPO effect) of increased currency use. If more people have it, then more people will use it. This is the virtuous self-reinforcing cycle in action.5 A growing float (raised awareness) due to organic use from a previously low float means an increasing price, especially when that asset is in limited supply. Growing circulation creates liquidity. Liquidity begets liquidity which creates intrinsic demand in a mercantilist bifurcated world needing a hedge for growing monetary multipolarity. Gold is increasingly being viewed as a currency (at the dollar’s expense), not just a store of value. Or at worst, it is a cumbersome currency whose (lack of) counterparty traits are being valued much higher now.

5- Bretton Woods 3 : Reemerging Medium of Exchange

One way to see this better is to think of the world post WW2 between 1944 and 1971 under Bretton Woods as 2 monetary systems. The USA remained on a Gold standard (store of value) while the rest of the world went on the dollar standard (medium of exchange). Post 1971  the dollar became the SOV as well as Gold was successfully demonetized for a while.

The world  between 1944- 1971 was pegged to dollars for convenience and on-demand liquidity. The Dollar then was pegged to gold for trust in controlled expansion of the currency supply. In 1971, the US asked the world to trust it wouldn’t debase the USD even without Gold backing. It didn’t. It debased everyone else’s by exporting its own printing. The world is less trustful of the US as a result.

Now, Gold is being viewed as the SOV it always has been, but the USD may be less needed (electronic/blockchain accounting!) or desired (with its confiscation/sanction risk) for convenience or liquidity. The dollar is being slowly disintermediated this way due to increased ease in gold’s (virtual) circulation.

RISKS OF THE ABOVE

Each of the above has risks associated with it. For example in Number 1: If there is less physical for LBMA, then that can be bearish as longs close positions due to lack of deal availability. Call it demand destruction. It is very likely on tactical levels.

But what are you going to substitute for Gold as a freshly minted Tier 1 collateral at the Banking level when the ROW is eschewing sovereign  bonds due to counterparty risk for physical? Nothing.

As to Gold taking market share in Number 2 above, there is a big risk here for early adopters of this Gold-for-Oil play. This is a big deal and no incumbent (USD) would accept an upstart taking its business.

There will be pushback in ways unimagined, and likely unseen. By example: Although Bitcoin is not a good parallel to Gold here (CBs own gold, they don’t all own enough BTC yet for starters) El Salvador’s Bitcoin play is still evolving, and so far, it does not look so good from our perspective.

Regarding Dollar deals having to be renegotiated adversely for the dollar itself in Number 3 above: That is also governed by how the pushback comes, and it will come. The US will do everything in its power to not lose the monetary throne. Short of starting a world war, we do not see the US not trying to undermine any nation’s attempt to use Gold as a substitute while the US itself is carrying its own Bullion at cost (as opposed to MTM) on its balance sheet.

Numbers 4 and 5 are conjecture based on our understanding of network effects, market structure, and handicapping likely paths forward. They reflect our own bias towards the whole event.  People see what they want to see and we are no different. There is potential we are not properly handicapping risks unseen like: politics, geopolitics, and so on in our calculus. Empirical work is necessary to bolster these ideas. Here are the three big pushbacks by Gold bears we’ve heard