On September 27, the Bank of Ghana (BoG) Governor, Dr Ernest Addison, announced the launch of the Ghana Gold Coin (GGC), a new investment instrument which they plan to make available to investors through commercial banks. The GGC will be issued in three sizes – 1 once, ½ ounce and ¼ ounce and will come with a wooden storage box, a transparent coin holder and a certificate of ownership. The coin is reported to be of 99.99% purity.

According to the BoG, the GGC will “mop up extra liquidity in the banking sector”, “give savers…an additional avenue to invest”, and enable “residents to diversify their financial portfolios.” A further release from the BoG explained that the price of the GGC will be published daily using the LBMA price of gold converted to the prevailing exchange rate.

The intuitive logic for the GGC appears to be to drive investors away from the US Dollar and to the gold coin as a hedge against the Ghana Cedi which has lost over 60% of its value against the US Dollar since the beginning of 2021. However, there have always been cedi-denominated assets that hedge against currency depreciation such as treasury bills, equities, bonds and notes. It is concerning that after the government has recorded weeks of short-falls in treasury bill subscriptions, the central bank has not sought to boost confidence in these traditional assets but has rather chosen the solution of formalizing speculation in a non-productive asset.

The plight of investment companies that are struggling after their mutual funds have been frozen by exposure to restructured bonds and the whittling down of the Ghana Stock Exchange’s (GSE) market capitalization from about $10 billion at the end of 2021 to $6 billion at the end of September 2024 should have given the BoG second thoughts about introducing an investment instrument which will suck even more money away from those sectors. But the decision has already been made, and rather than mopping up spilt milk I will spend time explaining to potential investors what purchase of the GGC could mean.

Firstly, the GGC is not the only means through which one can get exposure to gold as an investment asset. Many sophisticated investors already have exposure to gold in their trading account through US and domestic brokers. There is also the NewGold ETF on the GSE which tracks the price of gold and is up 86% year-to-date as at the end of September 2024. The difference in the GGC mechanism is that it allows domestic investors to buy the GGC from the commercial bank and keep it at that bank for a fee. Is this fundamentally different from what the ETF offers, maybe not but some investors would like the idea of owning a physical gold coin.

Potential investors in the GGC should understand that the asset will be volatile and so caution should be taken when considering it as part of a long-term investment portfolio. Although gold prices have risen by over 70% the last 5 years, gold is capable of long periods of disappointing returns. For instance, after hitting a high of over $1,700/ounce in October 2012, it did not touch that peak again until May 2020 when concerns about COVID-19 drove gold prices up as a safe haven asset. That is almost 8 years of disappointing gold prices, I wonder how many investors would be able to tolerate such returns.

The need to have regular income-generating assets in your portfolio does not change with the introduction of the GGC. Treasuries and dividend-paying stocks should not be discarded in favour of the GGC because you may have the need for liquidity from time to time. And if all you have is the GGC, you may suffer several trading expenses (such as selling at a bad time) when you have unplanned expenses.

Despite my legitimate misgivings, there is no doubt that the GGC would be a welcome introduction to people who have resorted to safes and mattresses stacked with dollars as a hedge against both the cedi and the financial system. For such a class of investors, it would be much safer to purchase the GGC with the knowledge that you can withdraw your physical gold coin whenever you desire. Also, the GGC broadens the investment options that investors have in their quest to build a portfolio which is protected from the wild swings in the cedi resulting from government’s fiscal challenges and dependence on commodity exports.

In summary, investors should note the following.

1. The GGC is not the only means through which one can invest in gold, but it offers the opportunity to take physical possession of your gold.
2. Gold is capable of generating very long periods of investment losses and so one should be careful when building a long-term portfolio around it.
3. The purchase of the GGC should not rule out the need to build a balanced, diversified portfolio that includes more traditional assets.
4. The GGC can bring skeptical investors into the financial market and give them a safer option than keeping huge sums of money at home.
5. Always talk to a financial adviser before you make significant capital allocations.

I’ll be watching the GGC and keep readers of CediTalk updated on significant developments.