Can Gold Mining Offer Nigeria an Unexpected Lifeline?

By Lukman Otunuga

Can Gold stand toe-to-toe with Black Gold for Nigeria’s economy?

Geopolitical tensions have triggered explosive levels of market volatility and uncertainty. These unfavourable market conditions continue to accelerate the flight to safety with gold by roughly 6% since the start of 2022.

Amid the negative themes bombarding global sentiment, gold remains a bright spot and high upside thanks to its status as an inflation hedge.

The precious metal was trading around $1935 last week and is expected to remain volatile over the next few days amid key economic reports, the Ukraine-Russia conflict, and China lockdowns among other factors.

Gold buoyed by fundamental factors

Several factors are supporting gold prices.

Safe-haven buying triggered by fears over the Ukraine-Russia conflict has boosted the metal’s spot and futures prices. In recent events, Russian and Ukrainian negotiators are set to resume face-to-face talks in Turkey this week.

While signs of both sides finding a middle ground could boost risk sentiment, further delays or disagreements could rattle financial markets. Soaring Covid-19 cases in China have also added to the risk-off mood and overall uncertainty. With commodity prices soaring on supply-side fears, concerns over stagflation and its consequences on the global economy continue to weigh on investor confidence.

On the flipside, expectations over the Federal Reserve adopting an aggressive approach toward interest rates could hit zero yielding gold. An appreciating dollar and rising bond yields may compound the precious metal’s woes, creating obstacles for bulls down the road.

Nigeria’s Gold reserve….

Back in 2020, Nigeria refined its own reserve gold bar and paid N268 million for the 12.5kg bar to start a central bank stock. When considering the previously mentioned factors stimulating the appetite for gold, this move was a welcome development for Nigeria as it diversified away from oil reliance.

Indeed, if cultivated well, gold mining and trading possessed a frightening potential to generate more revenue than crude oil for Nigeria.

Fast forward to today, Nigeria still remains in an ongoing quest to tap the potential of the gold mining sector. Since the massive hype in 2020 which created awareness on access to the markets, it’s been a tale of uncertainty and negativity. Illegal mining activities have become a major plague in the sector, with solid minerals being smuggled out of the country – resulting in a loss of potential government revenues.

The numbers do not lie…

The underlying math’s 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 sixth largest country with Gold deposits in Africa, with an average of 21.37 tonnes from 2000 to 2020, reaching an all-time high of 21.46 tonnes during the first half of 2021. The nation’s current estimated gold reserves are over 200 million ounces, most of which have not been exploited.

Back in 2020, the newly-regulated gold mining sector was expected to create 250,000 new jobs and provide the Federal Government with an additional estimated annual revenue of $150 million in taxes, $25 million in royalties, and $500 million in foreign exchange reserves. It remains to be seen whether these predictions will match reality.

Should the developments in the gold mining sector improve, this could help boost investor sentiment against external risks in the form of geopolitical tensions and oil price volatility among many other factors.

In a perfect world, a well-managed diversification into precious metals mining and building a national gold stock could support the CBN’s foreign exchange reserves in the longer term. But we do not live in a perfect world. Negative news around illegal smuggling and violence around the sector have hit the sector’s reputation. However, there is still hope if government regulations instil long-term trust and credibility -especially when factoring in the sector’s strong potential.

Lukman Otunuga is the Senior Research Analyst at FXTM