Gold-for-crude: Gold usually serves as safe haven for extreme oil prices – Energy Economist

Energy Economist, Dr Gideon Ofosu-Peasah has indicated that gold is normally used in making up for increasing crude oil prices hence, the move  by the government of Ghana to buy crude oil with gold.

Speaking on the Ghana Tonight Show on TV3, Dr Ofosu-Peasah explained that when crude oil prices increase, because refined products are from crude oil, it feeds into the production of gold.

That also serves as price build up to the prices of gold, he told host Alfred Ocansey.

He stressed “when crude oil prices increase, what happens is that refined products are from crude oil, then it feeds into the production of gold. So that also serves as price build up to the prices of gold.

“Studies have showed that gold usually acts as an effective safe haven against extreme oil price movements and it is more reliable. That is probably the reason why the idea is for gold.”

The government of Ghana is seeking to buy crude oil with gold. This is expected to start next year. This is an attempt by the country to move away from the US dollar for international transactions.

In respect of this arrangement, Governor of the Bank of Ghana, Dr Ernest Addison has said the Precious Minerals Marketing Company (PMMC) would play a key role in the move.

The PMMC, he said, would be buying a lot of the gold from licensed gold exporters who he indicated, have significant amount of gold.

“The PMMC will be providing most of the gold to be used for crude oil swap,” he said during the Monetary Policy Committee (MPC) press conference in Accra on Monday, November 28.

He further said that the major mining companies operating in Ghana were consulted on the move.

Dr Addison said that in the meeting where this idea came up, the major mining companies including Newmont and AngloGold were all present.

They all cooperated with this idea, Dr Addison added.

He said “the major mines were consulted, Newmont and the AngloGold were all part of the meeting that we had together with the Vice President when the decision was taken that they will, from 2023, sell at least 20 per cent of their production of gold to the central bank.

“In fact, most of the mining companies who were at that meeting were very cooperative, it was not something which was forced on them, they were ready to contribute their quota to support Ghana during these difficult times.”

The Vice President Dr Mahamudu Bawumia who announced this move stated that some analysts and commentators misinterpreted Ghana’s stated policy of using gold reserves to pay for oil.

Speaking at the 2022 AGI Awards in Accra, Dr Bawumia noted that to the contrary, Ghana’s gold-for-oil programme will give Ghana the space to accumulate more international reserves as the country will save the $3 billion it spends on oil imports.

He further stated that the use of gold was specifically for oil imports in the face of declining foreign exchange reserves.

Unfortunately, some people have misinterpreted this as Ghana being against the use of the US dollar in international transactions,” he stated.

“Far from it. We want to accumulate more US dollar reserves in the future.”

Vice President Bawumia noted that a major source of Cedi depreciation has been the demand for forex to finance imports of oil products and to address this challenge, government is negotiating a new policy regime where sustainably mined gold will be used to buy oil products.

we implement the gold-for-oil policy as it is envisioned, it will fundamentally change our balance of payments and significantly reduce the persistent depreciation of our currency with its associated increases in fuel, electricity, water, transport and food prices.”

This, he noted, is because the exchange rate will no longer directly enter the formula for the determination of fuel or utility prices since all the domestic sellers of fuel will no longer need foreign exchange to import oil products

By Laud Nartey||Ghana