Ghana Wants To Buy Oil With Gold Rather Than Dollars

Gold bugs will rejoice at the news of Ghana looking to pay for its oil imports in gold rather than in dollars. Undoubtedly, they will see it as vindication of their belief in the inevitability of “sound money” backed by the precious metal.

However, a quick look at the performance of the Ghanian cedi against the dollar and against gold suggests that the transition to payments in gold from fiat dollars will not change things all that much.

Ghana's government is working on a new policy regime where gold will be used to buy oil products rather than U.S. dollar reserves, Vice-President Mahamudu Bawumia said on Facebook on Thursday.

The move is meant to tackle dwindling foreign exchange reserves coupled with demand for foreign exchange by oil importers, which is weakening the local cedi and increasing living costs.

The problem Ghana is facing is that, as its currency weakens against the dollar, it is compelled to use more and more of its foreign exchange reserves to import oil and oil products into the country. The Ghanian cedi is not an attractive currency on oil markets, in large part because the cedi has lost more than half its value against the dollar over the past year.

Ghana is in a position to consider the use of gold as an alternative means of payment because it is one of the leading gold producers on the African continent, and has been buying up local production of gold mines.

Ghana said in May it had started a programme to purchase local gold in bulk to raise the gold component of its reserves and strengthen the cedi currency, the Central Bank governor said last month.

Unfortunately for Ghana, the cedi has declined in value against an ounce of gold just as it has against the dollar.

While using gold for payments instead of dollars might be a way to conserve dwindling foreign exchange reserves, it seems unlikely to preserve the value of the cedi against either the dollar or a troy ounce of gold.

What is destroying the value of the cedi on foreign exchange markets is the country’s spiraling inflation rate, which in October reached 40.4%

Merely substituting gold for dollars in making oil purchases is not going to stop the country’s surging inflation. If anything, the constant stream of gold purchases by the government is likely to aggrevate the inflation rate, further driving down the value of the cedi both against gold and against the dollar.

Far from being a triumph of “sound money” over fiat currency, the Ghanian gold policy underscores the preference of governments large and small for fiat currency instead of “sound money.”