Chronicle of the Middle East and North Africa

Gold Surge: Effect on Arab Economies

The gold surge shows its economic value and the broader geopolitical and economic interdependencies shaping the fortunes of nations in today’s global economy.

Gold Surge
A merchant displays a gold bar at his shop in Dubai Gold Souk in the Gulf emirate. GIUSEPPE CACACE / AFP

Ali Noureddine

This article was translated from Arabic to English

The price of gold prices has surged dramatically since the beginning of 2024, reaching an all-time high of $2,350 per ounce in the first week of April.

This record jump represents a 21 per cent increase over the average gold price of approximately $1,943 per ounce observed in 2023. The upward trajectory in the price of gold has persisted since 2019, propelled by a myriad of global economic factors.

The Arab region’s economies have not remained indifferent to this trend. Central banks in several Arab countries have contributed to the surge in global gold prices by bolstering demand for the precious metal as part of their strategic reserves. This trend is observable in countries like Qatar, Iraq and Libya.

Conversely, other nations are poised to feel the impact of this price surge, whether due to their status as gold producers and exporters, the appreciation in the value of their substantial gold reserves, or the ramifications on illicit activities such as smuggling and money laundering.

Such effects are anticipated in Lebanon, the United Arab Emirates, Egypt and Sudan, with each country facing unique vulnerabilities to the fluctuations in gold prices.

Changes at the Global Level

To understand the relationship between gold prices and economic dynamics in the Arab region, it’s important to examine the global factors that have influenced these prices between 2019 and 2024.

During this period, the annual average price of an ounce of gold climbed steadily from $1,393 in 2019 to $1,943 in 2023, before reaching record levels in 2024. This translated to a cumulative increase of 78.57 per cent over the five-year span. Such a trajectory prompts an inquiry into the economic and political shifts propelling gold prices during each stage throughout this period.

In the first quarter of 2020, amid the onset of the COVID-19 pandemic and heightened economic uncertainty, gold prices soared to their highest levels in more than seven years. Investors sought refuge in gold as a secure haven to shelter their savings from the escalating risks associated with financial market instruments.

Simultaneously, a surge in capital flowed into metals due to the dearth of profitable investment opportunities within productive sectors, compounded by restrictions on economic activities.

In 2021, as the pandemic began to recede and markets reopened, major economies experienced a global inflation surge, reaching 4.7 per cent that year and rising to 8.8 per cent in 2022. This inflationary pressure stemmed from heightened demand for goods and services following the lifting of economic restrictions, exacerbating strain on supply chains.

Consequently, demand for gold surged as investors sought to safeguard their wealth against inflationary fallout.

Since 2022, successive security and military upheavals have incurred adverse economic ramifications, bolstering the appeal of gold for investors seeking refuge from financial instability. The onset of the Ukrainian war in February 2022 precipitated significant disruptions to energy supply chains, particularly in Europe.

Subsequently, the start of the Israeli war on the Gaza Strip in October 2023 further exacerbated tensions, impacting shipping routes in the Red Sea.

Throughout 2023, a financial crisis ensued, culminating in the collapse of a group of Western banks, prompting heightened demand for precious metals as alternatives to deposits, stocks and bonds amid escalating risks. Into the first quarter of 2024, Western banks grappled with lingering fears and challenges indicative of potential future crises.

Notably, the global rise in interest rates exacerbated pressures on these banks’ budgets, compromising their solvency and liquidity.

Central banks worldwide rushed to stockpile gold as a strategic reserve, seeking to diminish reliance on liquid reserves denominated in U.S. dollars or euros. Following Western sanctions on Russia and American trade restrictions on Chinese firms, many nations endeavored to diversify their reserves to mitigate the risk of similar future constraints or sanctions.

The Impact of Arab Demand for Gold in 2023

As previously mentioned, several Arab nations contributed significantly to the recent surge in global gold prices by displaying a robust appetite for substantial gold purchases.

In 2023, Libya notably procured 30.01 tons of gold, marking its first such purchase since 1998. This acquisition propelled Libya to the fourth position worldwide in terms of gold purchases for that year. Consequently, the Central Bank of Libya increased its gold reserves to 10 per cent of its total assets, aiming to safeguard these holdings amid the country’s ongoing political turbulence.

Similarly, the Central Bank of Iraq acquired 12.25 tons of gold in 2023, positioning Iraq as the seventh-largest purchaser globally for that period. This move by Iraq was a strategic maneuver to liberate a portion of its reserves from the restrictions imposed by the American administration on deposits and investments held in American banks and markets.

During the same year, the Qatari Central Bank purchased approximately 7.44 tons of gold, securing Qatar the eighth spot globally in gold purchases. Qatar opted to allocate part of its surplus funds, generated from heightened European demand for liquefied gas, into long-term gold reserves. This decision was influenced by Europe’s heavy reliance on Qatari liquefied gas to offset the reduced Russian gas supplies following the start of the conflict in Ukraine.

Collectively, Arab central banks acquired about 54.8 tons of gold in 2023, reflecting a fraction of the surging global demand for gold reserves.

However, it’s worth noting that certain countries, such as Saudi Arabia, Lebanon and Algeria, possess substantial historical gold reserves, despite not featuring prominently among the major buyers in 2023. These nations maintain significant gold reserves within their central banks, indicating a robust foundation for financial stability, even without substantial gold purchases during that particular year.

Repercussions of the Rise in Gold Prices on the Arab Region

It is expected that economic ramifications stemming from recent developments are poised to impact Arab countries on various levels. For instance, the value of gold held by the Central Bank of Lebanon surged from $13.9 billion in 2019 to over $20 billion by late March 2024, despite no new gold acquisitions during this period.

As global gold prices surged, the Lebanese Central Bank saw a boost in the value of its gold reserves, translating into a profitable increase of 44 per cent in these holdings. This uptick inherently enhances the bank’s solvency, providing a welcomed relief amid the enduring banking crisis.

Yet, it’s important to acknowledge that the bank is currently unable to capitalize on this surge in gold value, hampered by legislation mandating parliamentary approval for gold utilization.

On the other hand, Sudan, which is renowned as Africa’s third-largest gold producer, courtesy of its mines dotting the north and the eastern coast, yields approximately 100 tons of gold annually, with only 30 tons contributing to the state treasury. The remaining output is clandestinely siphoned off by local armed militias, benefiting Chinese, Russian and Emirati companies.

As a result, there is concern that the surge in global gold prices may fuel a rise in smuggling operations, consequently boosting illicit earnings for factions like the Rapid Support Forces. Moreover, there’s fear that the uptick in gold prices could prompt heightened foreign and regional meddling in the Sudanese civil conflict, driven by a desire for profits from gold trade and smuggling.

On the flip side, Egypt has recently experienced a surge in gold smuggling from abroad, involving both bullion and manufactured products. The motive behind these activities is to capitalize on the persistent increase in gold prices as Egyptians seek to use the commodity as a hedge against the country’s ongoing monetary crisis. The high demand for gold in the Egyptian market often drives local prices above global benchmarks, incentivizing illicit smuggling operations.

In the Gulf region, the United Arab Emirates stands out as a significant beneficiary of the surging gold prices, largely due to its robust gold market which absorbs a substantial portion of the regional trade.

However, numerous investigative reports have raised concerns about the UAE’s gold market being intertwined with illicit activities, particularly involving gold sourced from African nations like Mali, Sudan and Congo.

These reports suggest that gold from these countries is illicitly smuggled into the UAE, circumventing legitimate government oversight. Furthermore, investigations have unveiled instances of the gold and diamond trade in the UAE being exploited as a facade for money-laundering operations.

The repercussions of the escalating gold prices will impact each Arab country differently. However, paramount to this issue is the imperative for these nations to collaborate in implementing measures to combat the illicit trade of this precious metal, particularly the smuggling of illegally extracted gold.

Such illicit operations deprive the people of developing and impoverished nations of their rightful revenues from natural resources, redirecting them to foreign entities and local criminal factions. Thus, concerted efforts are essential to prevent further exploitation and ensure equitable distribution of resources.

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