IS GOLD THE NEW OIL FOR NIGERIA?

Lukman Otunuga,

Senior Research Analyst at FXTM 

Stratospheric Gold prices and spiritless Oil prices would seem to indicate that the state’s investment in Gold mining is a timely and positive one. Amid the COVID-19 pandemic, Gold remains a market-moving and safe-haven asset after spot prices hit all-time highs above $1981 in July. The precious metal appreciated almost 30 percent for the year-to-date and is roughly $50 away from $2000 at the time of writing.

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Gold draws strength from fundamentals

There are several factors over-and-above the COVID-19 disease that are supporting Gold prices. Safe-haven buying triggered by fears over tense US-China relations has boosted the metal’s spot and futures prices. In recent events, the US closed one of its six consulates in China and a Chinese consulate in Houston was closed, raising questions about whether the second phase of trade talks can make any constructive progress.

In addition, the Dollar’s weakness due to low yields on Treasury bonds and exposure to negative COVID-19 sentiment has prompted investors to favour Gold over the USD. So far this year, the Federal Reserve has followed a dovish approach as fears mount over a second wave of COVID-19 hampering an economic recovery.

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Nigeria’s new Gold reserve

For the first time, Nigeria has refined its own reserve Gold bar and paid N268 million for the 12.5 kg bar to start a central bank stock, shining a bright spot amid all the economic headwinds. Given the previously-mentioned support factors for the precious metal’s prices, Nigeria’s new Gold reserve comes at a promising juncture for the country’s emerging mining industry.

It is also an encouraging development in the diversification of the national economy which the government hopes could lead to a stronger job market. If well harnessed, Gold mining and trading has the ability to potentially generate more revenue than crude Oil for Nigeria.

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Looking at the mathematics

The underlying mathematics in Nigeria’s Gold market show strong potential. Nigeria’s Gold reserve is estimated at 200 million metric tonnes, according to the Nigeria Mining Growth Roadmap. Meanwhile, Trading Economics places Nigeria as the six largest country with Gold deposits in Africa, with an average of 21.46 tonnes from 2000 to 2019, reaching an all-time high of 21.51 tonnes in July 2019. The nation’s current estimated Gold reserves are over 200 million ounces, most of which have not been exploited.

The newly-regulated Gold mining sector is expected to create 250,000 new jobs and provide the Federal Government with additional estimated annual revenue of $150 million in taxes, $25 million in royalties and $500 million in foreign exchange reserves.

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These positive developments in the Gold mining and central bank reserve initiatives may help to improve investor sentiment against the background of COVID-19, low Oil prices and the expectation that Nigeria’s economy could contract by anything from three to six percent this year. We must also factor in another hit to export earnings caused by the deeper cuts imposed by OPEC on Nigeria and Iraq due to overproduction.

In conclusion, a well-managed diversification into precious metals mining and building a national Gold stock can support the central bank’s foreign exchange reserves long term, as well as boost other wider types of Gold trading like derivative investments and mining stocks. However, care must be taken to protect the new sector’s reputation and government regulations would need to be seen as enforceable for long-term credibility.