Sub-Saharan Central Banks Build Gold Reserves — Benefits and Risks

Central banks across Sub-Saharan Africa have increasingly added physical gold to their foreign-exchange reserves as a hedge against currency and market volatility. According to BMI, a unit of the Fitch Group, nations such as Ghana, Tanzania and Nigeria have led the recent accumulation. While diversifying into gold can strengthen reserves and provide a store of value, BMI cautions that this “gold rush” carries two principal vulnerabilities: price risk and liquidity risk.

Why central banks are buying gold

Central banks often add gold for several reasons: to diversify away from bank deposits and reserve currencies, to reduce exposure to geopolitical and financial-system risks, and to preserve purchasing power when fiat currencies face depreciation. For many African countries, which may be exposed to commodity price swings, exchange-rate pressure and capital-flow volatility, gold can appear as a relatively stable asset that is not directly tied to any single foreign government or banking system.

In the current cycle, Ghana, Tanzania and Nigeria stand out for the scale and speed of their purchases. Other countries in the region — including Kenya, Uganda, Rwanda, Namibia, Burkina Faso and Zimbabwe — are reported to be at various stages of adding gold to their balance sheets. For some of these economies, particularly gold exporters, higher official holdings of the metal can also play a role in national strategy for managing export receipts.

Two main risks highlighted by BMI

BMI emphasizes that while adding gold brings diversification benefits, it also creates concentrated exposure to the metal itself. The two major risks are:

• Price risk: Gold prices can be volatile over the short and medium term. A sharp fall in global gold prices would reduce the market value of central-bank holdings and—importantly for exporters—could lower export revenues. Countries that depend on gold exports for a meaningful share of foreign exchange would face a double impact: diminished export proceeds and weaker reserve valuations.
• Liquidity risk: Physical gold is not always easy to convert into cash quickly and at predictable prices, especially during systemic crises. In past balance-of-payments squeezes, countries have struggled to monetize gold holdings rapidly without accepting steep discounts. BMI points to historical examples such as liquidity stress in India and Argentina, where selling gold to cover urgent external financing needs proved difficult or costly.

Ghana’s position and hedging response

Ghana has been among the most proactive buyers and now reportedly holds gold that accounts for roughly one-third of its official reserves. That concentration prompted Ghanaian authorities to introduce a new hedging program intended to soften the impact of price swings. While details vary by program, hedging typically aims to reduce the variability of returns by locking in prices or using financial instruments that offset downside movements in the metal’s market value.

Hedging can help stabilize the valuation of gold holdings and predictability of reserves, but it also introduces counterparty and operational risks, as well as potential costs. The effectiveness of any hedging strategy depends on its design, the counterparties involved, and the institutional capacity of the central bank to manage derivatives and related contracts.

Considerations for policymakers

For central bankers contemplating larger gold holdings, a few practical considerations arise:

• Balance between diversification and concentration: Gold can diversify foreign reserves, but excessive allocation to a single asset class raises exposure to metal-specific shocks.
• Liquidity planning: Authorities should assess realistic timelines and market conditions for liquidating gold, including the availability of buyers and the potential price impact of large sales.
• Risk management tools: Hedging and other financial instruments can mitigate price volatility but require expertise, transparent governance and robust legal frameworks.
• Macro-financial context: The role of gold within reserves should align with each country’s external profile, fiscal position and access to international markets.

Outlook

Gold accumulation by Sub-Saharan central banks reflects a broader search for safe, non-sovereign assets in an uncertain global environment. The strategy can provide a cushion against currency and financial shocks, but it is not risk-free. Policymakers must weigh the benefits of diversification against the potential for price and liquidity stress, ensure prudent reserve management, and tailor measures—such as hedging and contingency plans—to their domestic circumstances and institutional capacity.