Historically known as a risk-off asset, meaning its price is decoupled from most financial markets, gold is a safe-haven asset sought by financial institutions and retail traders alike.
While the COVID-19 fallout has sparked widespread losses across global markets, with the price of gold also falling, the precious metal usually weathers financial storms better than most assets. This is in tune with the 2008 financial crisis where there was an initial dash for United States dollars as businesses had to settle debts and margin calls, which precipitated the 2009 to 2012 gold bull run.
Western perception of precious African resources usually tends to focus on the diamond trade. However, amid an ongoing pandemic, gold usually surfaces as both one of the most in-demand and discussed assets in the world.
During crises, gold is in high demand. And for African countries, historically that has presented problems as foreign entities seek to coerce and bully Africa for gold and other precious resources. With a systemic financial crisis looming, Africa may turn to technology to protect its resources.
Huge deposits but small gains, same problems
Most gold reserves around the world are hoarded under the control of major Group of Seven central banks and stored in military-grade secure institutions, such as Fort Knox in Kentucky. The U.S. leads all countries in gold reserves by a significant margin, and South Africa and Algeria are the only African nations to crack the top 30 countries by gold reserves globally.
This comes even though the Witwatersrand mines in South Africa have accounted for more than 40% of the world’s total production of gold. In addition, Ghana and Sudan, which are not even in the top 50 countries by gold reserves, are actually among the top 15 largest producers of gold in the world.
Clearly, something is amiss.
Just like how foreign companies have plundered diamonds at a dire political and social cost to Africa, gold has been sequestered from the coffers of African countries atop some of the largest reserves on Earth.
Vast gold deposits in Africa have been pilfered by foreign countries over many decades.
African history is a wealth of intrigue into the gold market too. Mansa Musa, the 10th emperor of Mali, was a historically renowned figure who consolidated much of western Africa in the 14th century and is widely considered one of the richest rulers in history. Stories of his empire rife with opulence signal one of ancient Africa’s most flourishing periods. The price of gold in Cairo was said to have plummeted after Musa’s visit following generous handouts of the precious metal on his pilgrimage to Mecca.
However, times are much different now. The extended colonization of Africa in the years following Mansa Musa set the stage for the extraction of Africa’s precious minerals by foreign governments and adventurers. Those colonial restraints are now removed, but a more underhanded pilfering of gold by the private sector of foreign countries continues. Local labor and mining equipment is leveraged to extract deposits and usher them covertly through illicit suppliers.
Gold then departs from African shores to serve the deposit needs and bolster the treasuries of major Western countries, leaving Africa with arid reserves that contribute to the necessity for dollar-denominated national currencies. Throw in repeated headlines of billions of dollars in African gold smuggled out of the continent and it becomes evident that the African gold industry is facing a pressing issue: auditability.
For many Africans, this is not a surprising development, but is one that may be stifled with the advent of emerging technology such as blockchain.
And with rumors of a systemic financial breakdown in the West fueling a narrative of bulking up gold reserves, an idea thatRussia has taken to heart, that auditability problem needs fixing. Enter blockchains.
Audibility as preservation of assets
Decentralized blockchains have several critical advantages, but one of the most important is the audibility of cryptographic signatures at scale. Bitcoin works because a global user set can verify and authenticate transactions without revealing each others’ identities or needing permission to join the network.
At a high level, a blockchain is just a digital ledger that builds upon conventional accounting mechanisms with cryptography and no single clearinghouse. The result is varying degrees of transparency on the ledger, supreme audibility of the supply and validity of asset transfers on the network.
This solves a significant problem for the African gold trade.
According to a recent article by Reuters, the black market for gold in Africa largely consists of labor abuses of local villagers by foreign companies and shell companies of foreign governments. These firms extract the gold and move it out of the country, mostly into the United Arab Emirates and other gateway markets to Russia, China, Europe and the U.S.
These businesses have no oversight, do not log mining production numbers and are not taxed. As many of them are operating illegally, companies working as fences for the stolen gold in offshore markets are under no obligation to reveal their trade mechanics.
And while many of the early gold mining operations were “artisanal”, leveraging local villages, Ghana – now the largest gold producer in Africa – has seen the rise of illicit syndicates to mine gold. And Ghana’s government has indicated that its reported gold production is only a fraction of what is actually produced by syndicates and ends up in foreign markets.
To state it bluntly, blockchains are not a panacea solution to African gold exploitation issues.
However, blockchains provide a fundamental change in tools for governments to manage gold production and supply chains. For example, the convoluted nature of African gold mining, which encompasses legitimate industry players, state companies, illegal syndicates and covert exchanges in offshore jurisdictions, makes approaching the task of curating and querying the actual production and flow of assets more than challenging.
But in many instances, countries like Ghana can learn from South Africa, which has been leading the gold trade for decades with its vast reserves.
Paired with government crackdowns on illegal syndicates, and maybe working in conjunction with legitimate industry mining firms, Ghana can reduce the amount of gold smuggled out of the country by laying down stricter enforcements. That’s a tall order, but if successful, blockchains could legitimize the entire effort.
For example, under a new, cleaner and regulated gold mining industry in Ghana, gold extracted by firms could be tagged with near-field communication or radio-frequency identification tags, uploaded to the blockchain and cross-referenced with records of exports out of the country. Many blockchain-based supply chain projects are already using similar mechanisms.
Once on the blockchain, gold movements can be validated, tracked and identified in real time, drastically hindering the ability to smuggle gold mined by legitimate companies out of the country. Whether foreign companies admit that they were doing that or not in the first place is another question entirely, something which Reuters pointed to as murky waters.
The changes in the times of the COVID-19 pandemic
An intriguing caveat of the entire opportunity also rests on the ongoing COVID-19 crisis.
A massive liquidity crunch following outsized market losses and deleveraging by major passive funds, hedge funds, foreign institutions and corporations is driving a global dash for cash – the U.S. dollar. The Federal Reserve responded to surging dollar demand by flooding the economy with trillions in dollars via a federal funds interest rate of zero percent, standing repurchase agreement operations thrusting into the trillions, G-7 central bank swap lines and quantitative easing – a veritable monetary policy “bazooka.”
In its attempt to mitigate a potential deflationary outcome where too few U.S. dollars chase a surplus of goods, the Fed may have induced a long-term cost-push inflation dilemma. The problem is only exacerbated by the notion that G-7 and Fed central banking systems have smaller gold deposits than necessary to cover the liabilities on the Fed’s balance sheet, which only continues to balloon with more monetary injections.
Without a bedrock of hard money such as gold, which has traditionally served as a store of value, the dangerous dance of debt and inflation will reach tenuous levels. The resulting swing surge in gold demand or Bitcoin may strike a chord in many public investors, who will pile into assets not subject to the caprices of central banking monetary policy as the prices of goods rise and dollar demand wanes.
The expansion of gold fever will result, kickstarting new mining operations. Entities ranging from governments to corporations will be looking to jump on the hard money bandwagon. Africa subsequently will become a hub of gold focus, which is precisely why auditability and African entrenchment of the supply chain is an obligation amid global economic uncertainty.
Diamonds get the most attention, but as gold demand rises amid financial and economic uncertainty, Africa can protect one of its most sought after minerals by fusing technology with stronger government regulation in the sector.
Billions in gold bullion won’t stealthily exit the continent, and the assets can help bolster developing African economies rather than relying on U.S. dollar currency pegs and foreign investments for growth. That’s a promising future for the continent as a whole and an opportunity that COVID-19’s fallout may have spotlighted.
