Written by: Patrick Mensah, Executive Contributor
Executive Contributors at Brainz Magazine are handpicked and invited to contribute because of their knowledge and valuable insight within their area of expertise.
Gold is the most traded entity in the world. According to the World Gold Council, the global gold market is worth over $10 trillion, and it accounts for more than 15% of the world’s trade in goods and services.
Africa is a key player in the global gold market. The continent boasts some of the world’s largest gold mines, producing a significant share of the global supply. The continent’s gold trade not only benefits its own economies but also affects gold prices worldwide.
To understand how the global demand for gold influences African gold prices, we need to examine various factors – from supply and demand dynamics to geopolitical events. As an investor, I rely on gold as a hedge against inflation and market volatility, and as a market analyst, I monitor gold prices and trends closely. In this article, I will explore these factors and reveal the fascinating world of gold trade.
Influence of global demand on African gold prices
The global demand for gold and its influence on African gold prices is a complex interplay of various factors:
Demand and supply dynamics
The principle of supply and demand is a fundamental concept in economics and it applies to the gold market as well. When the global demand for gold increases while the supply remains constant, the prices tend to rise.
A real-world example of this dynamic can be seen in the aftermath of the 2008 financial crisis. During this period, economic uncertainty led to an increase in the global demand for gold as investors pursued safe-haven assets. This high demand, coupled with a relatively constant supply, led to a significant increase in gold prices.
Similarly, according to some estimates, there was a time when the global demand for gold was 1,000 tonnes more than the supply. With no new mining capacity coming through, most of the gold was being recycled. This shortage in supply along with high demand led to an increase in gold prices.
During times of geopolitical uncertainty or economic instability, investors often turn to gold as a safe investment. This increased demand can drive up gold prices. The growing trade tensions between the United States and China have created uncertainty in the markets, forcing investors to gold, consequently increasing its price.
Similarly, political instability or conflict in a major gold-producing country can disrupt the supply of gold, which can increase demand and drive up prices. If we take a look at our old history books, South Africa experienced a transformation between 1870 and 1902 due to the diamond rush and the South African War. This period of instability likely had significant impacts on the global supply of gold and consequently its price.
Impact of inflation and interest rates
When inflation rates are high, the value of currency decreases, but the value of gold tends to remain stable or even increase. This makes gold an attractive investment during times of high inflation.
The US Federal Reserve has been implementing a series of interest rate hikes to combat inflation. These rate hikes have had a dual effect on gold prices:
One factor that can cause gold’s price to rise is inflation. When the U.S. dollar loses its value due to inflation, gold becomes more attractive as a store of value. This has been the case for the past several months, as inflation has persisted.
Another factor that can affect gold’s price is interest rate changes. Sometimes, higher interest rates can make gold less appealing, as they offer better returns for other safe investments or savings. However, if the US Federal Reserve decides to keep rates steady in the near future, some investors may prefer gold again, increasing its demand and price.
Currency fluctuations can significantly impact gold prices. Since gold is traded globally, the strength of the dollar can impact its price. When the dollar is strong, gold becomes more expensive for investors using other currencies, which can decrease demand and lower prices.
A recent example of this dynamic occurred in 2020 during the COVID-19 pandemic. The pandemic led to significant volatility in global financial markets, causing fluctuations in currency values. The U.S. dollar, in particular, strengthened against many currencies due to its status as a global reserve currency.
This increase in the value of the U.S. dollar made gold more expensive for investors using other currencies. For African countries, whose currencies had weakened against the dollar, the price of gold in their local currency increased. This effectively decreased the demand for gold within these countries, leading to a decrease in local gold prices.
How central banks influence gold prices
Over the years, I’ve observed that central banks significantly influence gold prices through their reserves. They hold gold reserves as a hedge against inflation and currency fluctuations. Changes in these reserves can impact gold prices. For instance, in 2022, central banks globally accumulated gold reserves at a pace not seen since 1967. This increased demand contributed to the rise in gold prices.
However, it’s important to note that these trends can shift quickly. For example, the People’s Bank of China boosted its gold reserves but later slashed purchases due to fears of a post-COVID economic slowdown. These actions underscore the importance of monitoring central banks’ activities when trading in gold.
In my experience, understanding the gold trading industry is not just about comprehending the principles of economics; it’s about recognizing the broader context in which these principles operate. It’s about seeing the connections between a policy change in a central bank halfway across the world and a small-scale gold mine in Africa.
It’s important to remember that these impacts are not always straightforward. Other factors, such as local political stability, infrastructure, and mining laws, can also play a role. As such, any analysis of the African gold market must take into account both global influences and local conditions.
Patrick Mensah, Executive Contributor Brainz Magazine
Meet Patrick, a visionary entrepreneur who has turned his dreams into reality. Growing up in a fishing community in Ghana, Patrick learned the value of hard work at a young age, washing cars for older members of the community. This early experience instilled in him the discipline and work ethic that would become the foundation of his success. With over a decade of experience in building and partnering with successful businesses across the globe, Patrick is now the CEO of Wallstreet Investment, one of the fastest-growing companies in the UAE. His ability to lead, inspire and grow his team has been a key factor in his success.