The recent trend towards accumulating gold as a means of reserve diversification in sub-Saharan Africa and emerging markets more broadly is not without risk, with the two primary ones being price and liquidity. 

This was indicated during Fitch Solutions company BMI’s 'Gold Rush: The Potential Macro Risks Of Reserve Diversification In Sub-Saharan Africa' webinar, held on July 30. 

In line with a trend across emerging markets, central banks in sub-Saharan Africa are accumulating gold at a rapid pace, seeking to hedge against perceived US macro instability and rising global geopolitical risks.

In a high gold price environment, this strategy can support reserve adequacy and equip policymakers with the firepower to support their respective currencies.

However, a sharp drop in gold prices could expose external imbalances, especially for those markets that are also dependent on gold export receipts as a source of foreign exchange.

It was highlighted that, while the gold price rally seems to have run its course, no quick collapse is expected. Key drivers expected to shape the commodity’s price trajectory over the coming months include the size and number of the US Fed’s rate cute, the dollar strength, global growth outlook remaining broadly unchanged, and inflation.

BMI has maintained its price outlook for gold for this year at a yearly average of $3 100/oz, and expects a gradual medium-term winding down.

However, a sudden drop in global gold prices would have significant implications for markets in the region, which have rapidly increased gold as a share of total reserves portfolio, and especially for those that have only recently begun this process.

If the company’s core view plays out over the medium term, that of a gradual unwinding of prices, markets in sub-Saharan Africa, which are only just beginning to build up gold reserves, could face losses over the long term.

Central banks are expected to continue gold buying, with those across sub-Saharan Africa increasing their gold holdings.

The approach to gold accumulation differs across the region, for example, South Africa, maintains gold as part of its international reserves to diversify its portfolio and for its perceived value as a special reserve instrument.

Moreover, liquidity risks were highlighted as a key consideration. Gold is relatively illiquid and an increased share of the metal in banks’ reserves portfolio could engender problems in the event of an acute liquidity challenge.

It was noted that gold exporters are highly exposed to price risks, with gold constituting a considerable share of the region’s export receipts.

Another risk, which is often underappreciated, is the storage and security costs of holdings gold reserves, with emerging markets more exposed to this.