In today’s dynamic financial landscape, investors and sovereigns are seeking ways to diversify their portfolios, foreign reserves, and investments with minimal risk.
Much as the main reason behind the move shall be clearly communicated by the Bank of Uganda, we believe it is meant to diversify Uganda’s foreign reserves and minimize risks related to holding foreign currencies and foreign treasury instruments on the Central Bank’s balance sheet.
One of the most reliable alternative assets, such as gold offers a safe haven during turmoil in the markets when volatility erodes traditional assets value. Gold acts as safe haven but besides this gold has its merits;
Investing is mostly attractive for its diversification benefits; this is a key strategy in managing risk and gold reserves act as a great diversification tool. Historically when stocks and fixed income instruments underperform especially during times of high inflation and recession, gold often performs better than traditional assets.
Case in point, in 2020 markets dipped across the globe due to the impact of covid-19, for example, Nairobi Stock Market 20 Index plummeted 29%, however, the Absa New Gold Exchange Traded Fund (ETF) recorded gains of about 34% to UGX 61,889 (KES 1,975) from UGX 46,064 (KES 1,470). This means if you invested UGX 10M in 2020, by 2021 you would have made a return of 34.3% which is 13.43M this could not be the case however under different circumstances.
Gold is highly liquid, it can easily be converted to cash, which means one can cash out easily whether in physical bullion or digital form.
Gold provides protection against currency depreciation/ devaluation. In emerging and developing economies, currency depreciation/devaluation is a constant risk factor. Investing in gold provides relative protection against depreciation/ devaluation, since the value of gold is independent of Uganda’s economic situation. Hence, the move by Bank of Uganda to invest in gold is an excellent move as the above benefit would appeal to Ugandans.
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The move by the Bank of Uganda should improve the market landscape, improve market efficiency with transparency among the players, this will attract more investors in the industry/ market.
Lower transaction costs, the absence of intermediaries reduces the overall cost of trading. Making it cost efficient is an added benefit to investors. Created liquidity and an active market give the anticipated Bank of Uganda demand, given her balance sheet size leverage to drive trading activity.
Given the above, I encourage Ugandans to look into gold as an alternative investment in a market growing in efficiency; to diversify and research some more so as not to miss the opportunity, I believe the Bank of Uganda has seen something material so we need to keep an eye on the developments!
Joram Ongura is the Founder of Amioo Capital Limited. He can be reached via: onguraj@amioo.com