BusinessDay

How trading of gold on LCFE can boost Nigerian economy

Gold is a global asset and currency as from time immemorial; it has provided a safe haven for countries and individuals in times of market turbulence. Therefore, a country that is not actively participating in gold trading will be losing many opportunities in terms of job creation, royalties and taxes to government, as well as market depth for portfolio diversification.

While investors could trade shares, bonds and exchange traded funds on the Nigerian bourse, there has never been an official platform for the trading of gold, and it was this lacuna that the management of the Lagos Commodities and Futures Exchange (LCFE) filled on July 28, 2022 when its platform began the trading of gold.

LCFE can draw inspirations from the telecommunications and contributory pensions sub sectors which are two unique areas the private sector has succeeded beyond expectations in Nigeria. From these sectors, it has been established beyond doubt that a country always succeeds whenever the private sector leads. We can see this in the positive developments in the nation’s telecoms and pension sub sectors.

Following the opening up of the nation’s telecommunications sector in 2001, active telephone lines rose from 200,000 in 2001 to 180 million active voice and internet lines in 2022.Not only that, one of the players in the nation’s telecoms sector, MTN Nigeria Plc in 2021 alone paid N138.03 billion as taxes; N48.4 billion as salaries to workers; N21.4 billion in the forms of advertisements, sponsorships and sales promotions; N159.9 billion as finance costs to financial institutions; and N267.1 billion as dividend to shareholders, and all these were injections into the Nigerian economy.

Consequently, the contribution of the nation’s telecommunications sector to GDP rose from about 2 percent in 2001 to 12.61 percent as of the end of the fourth of 2021. In the pension sub sector, the contributory pension assets now worth N13.87 trillion as of March 2022.

That is exactly what is about to happen in the nation’s commodities sub sector. With the launch of gold trading on July 28, LCFE has set in motion a private-sector led process that will unlock about $1 trillion presently not fully optimised within the country’s agriculture, oil and gas, solid minerals, and currency sub sectors.

Prior to the launch, a number of events had already taken place to sensitise the investing public about the opportunities that are about to be unlocked.

“We have sensitised, trained, and educated relevant stakeholders to ensure that the participants of this market are adequately prepared to participate effectively on the Exchange. At this point the Exchange has registered and on-boarded over one hundred stakeholders such as dealing member firms, commodity brokers, issuing houses, solicitors, insurance companies, trustees, custodians, settlement banks and many more,” Akin Akeredolu-Ale, Managing Director/CEO, Lagos Commodities and Futures Exchange, said.

Q: It is a precious metal which has been in use from time immemorial functioning as a monetary instrument for exchange of goods and services, and as a store of value

Why gold?
Gold is regarded as the third most valuable metal after platinum and palladium. It is a precious metal which has been in use from time immemorial functioning as a monetary instrument for exchange of goods and services, and as a store of value. Gold also serves as an ornament, and has some industrial applications in electronics and computing.

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Data from the World Gold Council showed that as of end of first quarter of 2022, jewellery fabrication attracted 517.8 tonnes of gold; 281.9 tonnes for barand coin investments; 268.8 tonnes for exchange traded funds(ETFs) and similar products; 83.8 tonnes as central bank net purchases, and 81.7 tonnes for use in the technology industries.

Regarding the gold reserves of central banks across the world, the United States of America(USA) as of December 2021, held 8,133 tonnes of gold, and with that, led other countries across the world. It was followed by Germany, 3,359 tonnes; Italy, 2,452 tonnes; France, 2,452 tonnes; Russia, 2,299 tonnes; China, 1,948 tonnes, and Switzerland, 1,040 tonnes.

All other countries have less than a thousand tonnes of gold.
Algeria and South Africa are Africa’s leading countries with gold reserves amounting to 174 tonnes and 125 tonnes respectively. Nigeria is the 62nd country in the world with 21.4 tonnes of gold in the reserves of Nigeria’s central bank as of December 2021. It should be noted that in 2021, the Central Bank of Nigeria (CBN) bought 12.5kg gold bar worth N268 million.

Nigeria has an estimated gold reserves of about 200 million tonnes spread across states such as Zamfara, Oyo, Osun, Kogi, Kwara, Kaduna, Bauchi, Abia, Edo, among others. Meanwhile, according to President Muhammadu Buhari, the country lost 97 tonnes of gold valued at about $3 billion through illegal gold smuggling between 2012 and 2018.

Therefore, one of the benefits of the gold trading on LCFE is to provide an official platform for artisan miners and other stakeholders in the gold value chain to sell gold, thus reducing the losses through illegal smuggling.

Apart from that, gold trading has the potential to create many jobs. That was envisioned in the Presidential Artisanal Gold Mining Development Initiative (PAGMI), where gold mining in Nigeria was expected to generate about $150 million in taxes; $25 million in royalties, and $500 million in the forms of accretion to Nigeria’s foreign reserves on an annual basis. The sector was also projected to generate about 250, 000 new jobs.

Investors have long described the Nigerian markets-money and capital markets as shallow, which means there are not many investment instruments for investors to diversify their portfolios and reduce their risks.

The launch of god trading provides alternative investment assets to local and international investors for portfolio diversification and to hedge against risk.
“Gold is acceptable worldwide and is an addition to tradable asset classes in Nigeria. Its introduction should portend great value to the Nigerian economy and financial market as it will deepen the market and provide more opportunities to market players”, Saheed Bashir, CEO Meristem Securities, said.

Gold backed exchange traded funds (ETFs) will receive more patronage in Nigeria. On the Nigerian Exchange Group, only Newgold ETF is currently being traded. It closed at N10,600 per unit as of August 1,2022. With official market for trading gold now available, expectations are high for more of such products to be created, further deepening the market, and serving as another source of investment attraction to the Nigerian market.

Further, Artisanal miners will overcome the challenge of inaccessibility to formal market and they will be able to monitor the price of gold at a local bourse. Until now, the absence of this service in Nigeria through a local platform has been one of the causes of cheating of artisanal miners by dubious gold traders.

The provision of gold price in local currency now comes from LCFE which stated that as of July 29, 2022, in line with the standards set by the London Bullion Market Association (LBMA), a 50gof Eko Gold Coin cost N2,392,656.59.

Gold is now an additional asset class to stocks and bonds offering its unique returns to investors. According to Nick Lioudis who stated on Investopedia that over a 20-year period, that is, from 1990 to 2020, the price of gold rose by 360 percent while that of the Dow Jones Industrial Average(DJIA) gained 991 percent. But over a 15-year period, 2005 to 2020, the price of gold rose by 330 percent compared with 153 percent for DJIA.

Using another time range, Goldprice.org put a 5-year and 20-year returns on gold at 38.93 percent and 479.23 percent respectively. Gold price data provided by Goldprice.org showed that as of August 1, 2022, the spot price for gold traded within the range of $1,758.84/oz and $1,774.38/oz posting a daily return of about 0.25 percent.

Gold trading requires requisite knowledge. LCFE with this development has kept all the stakeholders in the gold value chain on their toes to acquire the technical know-how on how to optimise returns on gold especially with regards to gold derivatives such as options, futures and forwards. In effect, the launch is going to engender the transfer of skills to Nigerian traders and investors through regular trainings and partnerships with the leading gold traders in the world.
LCFE is going to be the melting point for investors in the gold value chain within the Central and West African sub regions.

As Africa’s biggest economy, the step taken by LFCE will surely attract gold traders from these regions to the Nigerian market. We have seen in recent times how banking, telecoms, and insurance sub sectors have attracted foreign investments such as MTN and Airtel in telecoms, Stanbic IBTC in banking, and Samlam, Old Mutual, and AXA SA in the insurance sub sector.

In all of these, regulation must either be ahead of the market activities, by anticipating what is likely to be new developments, or must at least keep pace with the market growth, so that government will not constitute a bottleneck to gold market development in Nigeria.

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