Gold prices reached a record high in London trade on Friday, spurred by persistent speculation that the United States Federal Reserve will cut interest rates in the upcoming week.
Additionally, growing demand for safe havens amid the close presidential election also contributed to the rise in the precious metal’s value.
The yellow metal surged sharply, tracking drops in Treasury yields and the dollar as markets continued to bet on an interest rate cut despite recent inflation data.
Spot gold hit a record high of $2,570 (N4.23 million) per ounce (28g) earlier in the session, while gold futures approached a peak of $2,600 (N4.28 million). The NAFEX rate at the end of Thursday’s trading session was N1,646.54/$.
Lawmakers Push for CBN’s Gold Expansion
Nigerian legislators are advocating for a significant expansion of the CBN’s authority to use gold to support the country’s reserves, thereby protecting the economy. A proposed Senate bill aims to make gold at least thirty percent of Nigeria’s foreign reserves and also outlines measures to make the bank the nation’s automatic off-taker for all gold produced in Nigeria. Currently, gold constitutes about 4% of the country’s foreign reserves.
Nigeria is grappling with high inflation, near a 28-year peak, as a result of economic restructuring that partially eliminated fuel subsidies and removed the currency’s peg against the US dollar. Over the last year, the value of the naira has dropped by more than two-thirds against the greenback.
Gold mining in Nigeria is predominantly done clandestinely, with little to no economic benefit. The industry’s legal role, under such measures, would be formally established and aligned with the 2019 central bank gold purchase program.
President Bola Tinubu has been working to modernize Nigeria’s mining sector since assuming office in May 2023. He has specifically targeted investors in the low-grade lithium deposits located in the country’s central region. Nigeria is estimated to have roughly 21 tons of gold reserves.
Nigeria’s foreign exchange earnings are primarily derived from the oil and gas industry; however, production has been hindered by vandalism, theft, and declining investments in the sector.
Nigeria is not the only country seeking to take control of its gold reserves and repatriate them. Numerous nations have voiced concerns regarding the use of dollar and gold reserves by Western nations as a tool for foreign policy. In 2023, a survey by the World Gold Council revealed that a “significant portion” of central banks expressed worries about potential sanctions following the blocking of nearly half of Russia’s $650 billion in gold and foreign exchange reserves by the U.S. and other Western nations after its incursion into Ukraine.
Sixty-eight percent of the banks surveyed by the WGC stated they intended to maintain their gold reserves domestically.
Gold Gains Driven by Interest Rate Cuts
Investors continue to believe that the Fed will lower rates at its meeting next week, which supports the yellow metal. However, markets remain uncertain about the extent of the possible rate cut. Expectations shifted toward a smaller, 25 basis points reduction after strong inflation data earlier this week, but with the release of soft labor market data on Thursday, particularly jobless claims, bets on a 50-basis point reduction were once again active.
According to CME FedSee, traders are pricing in a 58 percent chance of a 25-bps cut and a 42 percent chance of a 50-bps cut. Nonetheless, experts still believe that the Fed will initiate an easing cycle at its meeting next week and that by year’s end, rates will have been lowered by at least 100 basis points.
There are two more Fed meetings scheduled for the year after September. Since lower rates reduce the opportunity cost of investing in non-yielding assets, such cuts are positive for gold and other precious metals.