November 26, 2020

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Gold and monetary policy

6 min read

monetary policy

By Obadiah Mailafia

TODAY, Monday, November 16, South-South Governors are scheduled to meet over the subject of Zamfara gold. Not too long ago, it was announced that the Government of Zamfara State will be “selling” N2 billion worth of gold to the Central Bank of Nigeria, pursuant upon the Presidential Artisanal Gold Mining Development initiative, PAGMI. The angst of the South-South Governors centres on why Zamfara is free to sell its gold to CBN while they are not free to sell their own oil in the same manner.

Several commentators have raised issues with that policy. Last week, the Federal Ministry of Mines and Steel Development made a release aiming to clear the air. They pointed out that Zamfara State had registered a mining company that was mobilising local artisanal miners as a means of finding just and lasting solutions to the insecurity associated with illegal gold mining. They reemphasised the fact that the 1999 constitution and the Minerals Act 2007 place solid minerals in the Exclusive Legislative List. But the controversy is unlikely to disappear any time soon.

I have advised potential investors on the regulatory nightmare underpinning our mining sector. While solid minerals legally belong to the Federal Government, the land belongs to the local communities under the Land Use Act 1978. Local communities that engage in mining activities are technically engaging in illegal activities. Under our laws, the land is theirs but the gold is not.

But the Federal Government cannot access the gold without negotiating with the communities who are the owners of the land. Few investors would want to go into such a regulatory jungle. This partly explains why the solid minerals sector remains in such a low state of development in our country.

Compared to countries such as South Africa, Russia, Australia and Ghana, our gold endowments are relatively modest. Most of the deposits are located in the North, particularly Zamfara and Birnin Gwari in Kaduna State. There are substantial deposits also in Kogi and Osun states.

Gold has been mined in our country since 1913. It peaked in the 1930s before subsequently dwindling, due perhaps to discovery of tin on the Jos Plateau and later explosion of the petroleum sector. In recent times, however, gold has made a come-back. It has been a murky, dangerous business. We have heard stories of “big men” who have cornered the trade and turned it into a murderous cartel.

Tales of guns, helicopters, dollars, Chinese and Lebanese vultures are rife. Satellite technology from outer space is often used to locate deposits of gold and other precious stones. The foreign hyenas then move in; arming local thugs with sophisticated weaponry; driving hapless peasants off their land. Most of the loot is smuggled out of the country.

It has been a disaster for those communities. There has been a huge ecological impact, in addition to land dispossession and widespread violence and death.

The Emir of Anka, who is also Chairman of Zamfara Council of Chiefs, Alhaji Attahiru Ahmad, in an interview with Punch on May 19, 2019, had this to say: “…. we cannot say that bandits are from a particular tribe, but here in Zamfara, the bandits are predominantly Fulani…I am sure you are aware that some Fulani come from outside the state or even other countries. These our subjects joined the external group because of the monetary gains. They operate freely with little or no challenges from anywhere”.

The South-South governors have a right to ask questions. Their zone produces most of the black gold that has brought us such an embarrassment of riches. But it has brought their people tears and sorrow. Their land and fresh water systems have been destroyed. Their air has been polluted. Poverty has been the lot of their people. The 13 percent derivation formula brought some form of closure. But not quite. The way our country is currently being governed – in the manner of a medieval Sultanate – and the rabid exclusionism, is forcing many people to rethink the foundations of our consociational compact.

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I am constrained to reveal that it was yours sincerely who, at a closed-door seminar, first mooted the idea of a CBN window for the purchase of gold. My proposal was that CBN should open a window whereby those engaged in the illegal mining and smuggling of gold can have a legitimate avenue to sell it. I am glad that the Federal Government bought the idea. But nobody acknowledged that I was the originator of the idea.

In my original conception, I wanted to metaphorically kill two birds with one stone. First, I envisioned the initiative as a means of ending violence and bloodshed. But I also saw it as an instrument for boosting monetary policy. I wanted CBN to develop a comprehensive programme of gold purchases so as to boost our external reserves by way of gold bullions. This will also bolster the exchange rate and enhance the value of our naira. My vision is that our naira becomes an international semi-convertible currency.

Gold as a legal tender currency is as old as the Egypt of the Pharaohs. The International Gold Standard lasted from the 1870s to the 1930s. It was anchored by the Bank of England, which was the world’s banker of last resort. By 1944, the Bretton Woods international conference ushered in the gold-dollar standard, by which the United States dollar was fixed at 35 ounces of gold. It made for a stable system of exchange rates until President Nixon rescinded it in 1971.

Ever since, the international monetary system has been operating with fiat paper within a free-floating exchange rate system. Even then, nations have kept sizeable reserves of gold bullion to bolster confidence and to shore up the value of their currencies.

The coming decades will become ever more turbulent from the viewpoint of international monetary order. As at October 2020, the U.S. national debt has ballooned to an astronomical $27 trillion, while the GDP has stagnated at $22.32 trillion. The American national debt is 121 percent of its current GDP. The concept of Quantitative Easing has recently become part of the lexicon of monetary policy in the advanced industrial economies. It simply refers to printing fiat money to solve economic problems. The investment cognoscenti know that you cannot continue to print money forever. Sooner or later, something will give.

The United States is a declining economic and geostrategic power. China is not an open society. It is in no position to assume the burdens of world leadership or to underwrite the institutions of global governance. In the coming global dis-order, many countries will seek monetary safety in gold. I do not foresee the world returning to the gold standard as Charles de Gaulle of France once demanded. But I see gold playing increasingly the role of a major reserve asset for many central banks.

In August this year, the price of gold rose to an unprecedented peak of $1,900, a more than 600 percent since the year 2000.  As the global economy enters an era of uncertainty, gold will look ever more attractive.

Nigeria’s gold reserves in 2020 total a paltry 21.5 tonnes. This contrasts with the U.S. figure of 8,000 tonnes, by far the highest in the world; followed by Germany with 3,500 tonnes. France maintains 2,436 tonnes; India, 658 tonnes and South Africa 125.3 tonnes. Accumulating more gold bullions will not only strengthen the naira; it will bolster confidence in our economy. At the end, everyone will benefit.

Vanguard News Nigeria

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