Chronicle of the Middle East and North Africa

Arab Gold Reserves: A Safeguard Amid Economic crises?

Arab Gold reserves play different roles, but the most crucial aspect is to avoid engaging in risky behavior that jeopardizes public funds.

Arab Gold Reserves
Gold bars displayed at an exhibition. Daniel ROLAND / AFP

Ali Noureddine

This article was translated from Arabic.

As of the end of 2022, the collective gold reserves in Arab countries amounted to 1,514 tons. Out of this figure, approximately 1,039.3 tons of gold, accounting for roughly 69 percent of the total Arab reserves, were concentrated within five Arab nations: Saudi Arabia, Lebanon, Algeria, Iraq and Egypt.

On a global scale, Saudi Arabia and Lebanon stood among the top 20 countries with the highest gold reserves, securing the 16th and 18th positions, respectively.

The impact of the global economic crises

The global economic crises of 2022 had a notable impact, prompting Arab countries to increase their gold reserves. This was evident as three Arab nations, namely Egypt, Iraq, and the United Arab Emirates, collectively purchased an additional 97 tons of gold during that year. This substantial acquisition played a significant role in the overall growth of gold reserves across Arab countries.

Qatar, in particular, achieved a historic milestone in 2022 by elevating its gold holdings to 91.7 tons, marking its highest recorded level to date.

Similarly, Saudi Arabia adopted a strategic approach and purchased approximately 20 tons of gold between April and November 2022. This move aligned with their new investment strategy, focusing on diversifying and strengthening their reserves through the acquisition of gold.

The current trend of Arab countries toward acquiring gold is driven by their efforts to diversify their international reserves and reduce reliance on financial markets and Western banks. The pressures faced by banks in the United States and European countries have increased the risks associated with investing in these institutions, whether through purchasing shares, certificates of deposit, or keeping deposits with them.

Moreover, the continuous rise in interest rates in money markets negatively impacts the value of investments in sovereign bond markets, discouraging Arab central banks from purchasing assets like U.S. Treasury bonds.

Furthermore, the high global inflation rates witnessed in 2022, which approached 8.8 percent according to the International Monetary Fund, have eroded the purchasing power of major international currencies such as the U.S. dollar and the euro.

Consequently, Arab central banks are motivated to maintain gold reserves as an insurance policy of sorts that can preserve its value over the long term.

The wave of gold purchases extended beyond Arab governments and central banks. In fact, according to data from the World Gold Council, gold holdings by central banks worldwide reached their greatest levels in 2022 since 1974, when U.S. President Richard Nixon shocked the world by abandoning the gold standard in 1971.

According to the Council’s statistics, global demand for gold experienced a significant rise of 18 percent in 2022. Notably, net purchases of gold by central banks across the globe surged by an impressive 152 percent during the same year.

The rise in global demand for gold can be attributed to the increase in the average annual price of an ounce of gold from $1,798.89 in 2021 to $1,801.87 in 2022. It’s worth noting that gold prices have continued to climb in 2023 due to ongoing global economic turmoil, with the average price of an ounce reaching approximately $1,923.08 at the beginning of May 2023.

Given this international economic landscape, it is understandable why Arab countries are inclined to increase their gold holdings.

However, it is important to emphasize that most experts advocate holding gold as a strategic reserve for the long term while cautioning against speculating on its short-term price fluctuations. While gold can safeguard the value of reserves against inflation over time, holding it for shorter durations may result in losses due to temporary price fluctuations, particularly during periods of financial instability.

Therefore, the management of gold reserves held by Arab governments and central banks becomes a crucial question. It raises inquiries regarding whether these reserves are intended for preserving their value in the distant future or for short-term investment purposes. Additionally, one may question the objectives behind accumulating these reserves and the decision-making processes associated with them.

Saudi Arabia: Navigating the dollar and the United States

Since 1973, Saudi Arabia has upheld its agreement with the United States, commonly referred to as the petrodollar arrangement, which entails pricing oil in dollars. This agreement has played a significant role in preserving the dominance and prestige of the U.S. currency over the decades.

Additionally, since 1986, Saudi Arabia has maintained a fixed exchange rate, pegging the Saudi riyal to the U.S. dollar. This has strengthened the connection between Saudi monetary policies and U.S. monetary policies. Furthermore, Saudi Arabia has expanded its investments in U.S. Treasury bonds, to the extent that it alone possesses 45 percent of the total value of U.S. Treasury bonds owned by Arab countries.

The current landscape is witnessing a shift in dynamics. In January 2023, Saudi Finance Minister Mohammed Al-Jadaan made a groundbreaking announcement, expressing Saudi Arabia’s willingness to conduct international trade, including oil trade, using currencies other than the U.S. dollar. This came after about two years of frosty relations between Saudi Arabia and the United States. The divergence in political and economic interests between the two nations became apparent throughout 2022.

Notably, the Saudi-Russian collaboration within the OPEC+ group showcased a certain alignment, while Saudi Arabia demonstrated its refusal to comply with American demands concerning increased oil production rates.

At the same time, Saudi Arabia has embarked on deepening its economic relations with China in the east.

Furthermore, it has initiated plans to develop its monetary framework plans to break the peg between the Saudi riyal and the U.S. dollar. In an effort to reduce reliance on the United States, Saudi Arabia has been gradually decreasing its holdings of U.S. Treasury bonds throughout 2023, reaching the lowest level observed in the past seven years.

Within this particular context, Saudi Arabia’s strategy of purchasing and accumulating gold as a strategic reserve serves multiple purposes. Firstly, it reinforces the stability of the Saudi riyal independently of its peg to the U.S. dollar. Secondly, it reduces Saudi Arabia’s exposure to investments and deposits in U.S. markets.

Moreover, by relying on non-dollarized reserves, Saudi Arabia paves the way for realizing shared aspirations with the BRICS countries. This includes conducting international trade in currencies other than the dollar, facilitated by the use of alternative reserves in commercial transactions.

In short, the Saudi inclination toward acquiring gold aligns with the vision of Saudi Crown Prince Mohammed bin Salman, who seeks to collaborate with China and Russia in establishing a new global financial system that reduces the dominance of the United States in international markets. It is noteworthy that Saudi Arabia presently possesses around six gold mines, enabling it to accumulate additional gold reserves at a cost below the prevailing global market price.

Considering the substantial financial surpluses currently enjoyed by Saudi Arabia due to high oil prices, there are no indications suggesting an immediate need for the Kingdom to utilize or sell significant portions of its gold reserves. This indicates that Saudi Arabia intends to strategically hold onto its gold reserves for future purposes, avoiding any potential losses resulting from short-term fluctuations in gold prices.

Lebanon: The untouchable reserves

In contrast to Saudi Arabia, Lebanon’s gold reserves were not accumulated through recent purchases. Instead, all of Lebanon’s gold acquisitions occurred between 1948 and 1971, and since then, no additional purchases have been made. The initial objective of these purchases was to utilize the surpluses in Lebanon’s balance of payments to build reserves capable of providing long-term support to the local currency exchange rate.

During the civil war era, the Lebanese Parliament enacted a law in 1986 that strictly forbids the sale or disposal of the existing gold reserves, except through legislation approved by parliament. This legal measure has effectively safeguarded the reserves throughout the decades, keeping their size unchanged.

Presently, figures from the Central Bank indicate that the value of gold reserves held in Lebanon amounts to approximately $17.57 billion. Around 40 percent of these reserves have been deposited in the United States, with the rest in the Central Bank’s private holdings. Despite the severity of the ongoing financial crisis, the Lebanese government has yet to develop a comprehensive financial plan to address the crisis, leaving uncertainty about the future utilization of these reserves.

In practice, Lebanon demonstrates little concern for short-term fluctuations in international gold prices, treating the quantity of gold in its possession as a safeguarding reserve. This strategy is not easily compromised or utilized.

However, the potential danger surrounding these reserves lies specifically in the possibility of their misappropriation to address the losses resulting from the crisis, particularly if the financial elite attempt to shift some of their losses onto the reserve.

The Egyptian gamble

In the first quarter of 2022, the world was taken aback by the news that the Central Bank of Egypt had purchased approximately 44 tons of gold, at the time making it the largest buyer of gold among central banks worldwide.

However, most experts have expressed concerns regarding the risks associated with Egypt’s move.

From a practical standpoint, Egypt utilized its foreign currency reserves to make this substantial gold purchase. It is important to note that Egypt is currently grappling with a severe financial crisis, struggling to secure the necessary hard currency to repay foreign debts and finance imports.

Therefore, it is anticipated that Egypt may need to sell a portion of its recently acquired gold reserves in the near future to meet its medium-term financing requirements. Such a move would expose Egypt to potential losses resulting from short-term fluctuations in gold prices, especially considering the financial turmoil prevalent in global markets.

Despite the current relatively high prices of gold, it is highly likely that prices will experience occasional declines and fluctuations in the short term, particularly with the continued rise of U.S. interest rates. It is well-known that gold prices often face temporary declines in conjunction with global interest rate hikes.

In fact, during the summer of 2022, gold prices had already witnessed significant declines following decisions to increase U.S. interest rates, which coincided with Egypt’s gold purchases.

Investing in local gold production

Certain Arab countries, such as Algeria, Egypt, and Saudi Arabia, have the advantage of owning local gold-producing mines. This has enabled them, at different times, to acquire gold production from these mines using local currencies or benefit from the state’s share of production activities.

In the cases of Egypt and Algeria, these operations have helped alleviate monetary pressures during times of economic crisis. It is natural for Arab countries in such situations to leverage these reserves, generated by domestic gold production, and wait for opportune moments to sell them in the short term.

Gold reserves in Arab countries play different roles depending on the reasons behind their acquisition.

However, the crucial aspect is to avoid engaging in risky behavior that jeopardizes public funds by purchasing gold reserves solely for short-term speculation instead of utilizing them as long-term savings. It is also essential to establish transparent mechanisms for making decisions regarding the purchase and sale of gold by central banks. These operations involve substantial public funds and can result in significant losses if not managed prudently.

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