Watan-An European economic analysis shed light on the effects of rising gold prices and its impact on the economies of the Arab region, as well as the contribution of some Arab countries to the global increase in gold prices.
According to the analysis by the European institution “Fink,” since the beginning of 2024, gold prices have witnessed rapid and sharp increases, reaching around $2,350 per ounce in the first week of April, marking its highest historical level.
It is noteworthy that these record prices were 21% higher than the average gold prices during the previous year of 2023, which hovered around $1,943 per ounce.
In this manner, gold prices continued the upward trend seen since 2019, driven by a wide range of factors on the global economic level.
Role of Arab Countries in Raising Gold
Prices The economies of the Arab region were not far from this scene. The central banks of some Arab countries contributed to the rise in global gold prices by increasing demand for this metal as part of their strategic reserves. This applies to countries like Qatar, Iraq, and Libya.
Other countries, however, find themselves affected by the price increases, either because they are producers and exporters of gold, or due to the increase in the value of their already large gold reserves, or because of the ramifications of these developments on gold smuggling activities and its use in money laundering.
This applies to Lebanon, the UAE, Egypt, and Sudan, where each of these countries has different reasons for being exposed to the effects of changes in gold prices.
Global Shifts
To understand the relationship between gold prices and economic dynamics in the Arab region, it is important to first look at the factors that influenced these prices globally between 2019 and 2024.
During these years, the average price of an ounce of gold gradually rose from $1,393 in 2019 to $1,943 in 2023, before reaching the current record levels in 2024.
As a result, gold prices recorded a cumulative increase of 78.57% over the five-year period. This raises questions about the economic and political shifts that pushed gold prices in this direction during each stage throughout the five years.
In the first quarter of 2020, with the spread of the COVID-19 pandemic and increasing economic uncertainty, gold prices surged to their highest levels in over seven years. Investors found gold to be a natural and attractive safe haven to preserve their savings, away from financial market instruments, the risks of which increased during that period.
During that time, capital flowed towards purchasing metals due to the lack of profitable investment opportunities in productive sectors, amidst restrictions imposed on economic activities.
In 2021, with the pandemic receding and markets reopening, major economies experienced a global inflation wave reaching around 4.7% that year, before rising to 8.8% in 2022.
The inflation rates resulted from increased demand for goods and services after lifting restrictions on economic activity, leading to added pressure on supply chains.
Once again, due to high inflation rates, demand for gold surged during that period, as investors sought to protect the value of their wealth from inflationary effects.
Since 2022, there have been security and military developments with negative economic consequences, attracting investors fleeing financial markets and their effects to gold.
In February 2022, the Ukrainian war began, resulting in severe repercussions on energy supply chains, especially in Europe.
Gaza War and Maritime Shipping Routes
This was followed by the start of the Israeli war on Gaza in October 2023, widening its impact to affect maritime shipping routes in the Red Sea.
During 2023, the financial crisis hit, leading to the collapse of several Western banks, further increasing demand for precious metals as alternatives to deposits, stocks, and bonds with increased risks.
Until the first quarter of 2024, Western banks remained plagued by concerns and issues threatening similar crises.
It’s known that the rise in global interest rates contributed to increased pressure on the budgets of these banks, affecting their liquidity and solvency.
Finally, central banks worldwide rushed to accumulate gold as a strategic reserve, reducing their reliance on liquid reserves in US dollars or euros.
After Western sanctions imposed on Russia and US trade restrictions on Chinese companies, many countries sought to diversify their reserves, fearing similar restrictions or penalties in the future.
Impact of Arab Demand on Gold in 2023
Arab demand impact on gold in 2023 As previously mentioned, several Arab countries contributed to the increase in global gold prices in the past period by actively purchasing substantial quantities of gold.
In 2023, Libya alone purchased 30.01 tons of gold, marking its first such Libyan purchase since 1998.
Thus, Libya ranked fourth globally in the list of countries buying gold in 2023. In this way, the Libyan Central Bank increased its gold reserve ratio to 10% of its total assets, to protect and save these assets amid the political turmoil in the country.
Similarly, the Central Bank of Iraq bought 12.25 tons of gold in 2023, ranking Iraq seventh globally in the list of countries buying gold during that year.
It’s evident that Iraq aimed to diversify part of its strategic reserves from the restrictions imposed by the US administration on deposits and investments of the Iraqi Central Bank in American banks and markets.
As for the Qatar Central Bank, it purchased around 7.44 tons of gold in 2023, placing Qatar eighth globally in the list of countries buying gold during that year.
Thus, Qatar saved part of the cash surpluses resulting from the growing European demand for liquefied gas by investing in gold reserves for the long term.
It’s worth noting that Europe heavily relied on Qatari liquefied gas to compensate for the shortage of Russian gas supplies since the start of the war in Ukraine.
Overall, Arab central banks collectively purchased about 54.8 tons of gold during 2023, representing a portion of, the growing global demand for gold reserves.
However, it is important to note that some countries that did not appear on the list of major buyers during 2023, essentially possess huge historical reserves of gold, such as Saudi Arabia, Lebanon, and Algeria.
These three countries rank highest in the Arab region in terms of the volume of gold reserves held by their central banks, despite these countries not significantly buying gold in 2023.
Ramifications of Rising Gold Prices on the Arab Region
Implications of rising gold prices on the Arab region These developments are expected to have significant economic implications on Arab countries, albeit in different forms.
For example, the value of gold owned by the Central Bank of Lebanon increased from $13.9 billion in 2019 to over $20 billion by late March 2024, even though the bank did not make any gold purchases during this period.
Due to the increase in global gold prices, the Central Bank of Lebanon achieved an increase in the value of its existing gold reserves, resulting in a profit of 44% from these reserves.
Naturally, these developments are expected to reflect in a relative improvement in the Central Bank’s liquidity, which has been suffering from the ongoing banking crisis.
However, it is important to note that the bank currently does not have the capacity to benefit from this improvement in gold value due to legislation that prohibits the use of gold without parliamentary approval.
Theft of Sudanese Gold
Sudan’s gold theft On the other hand, Sudan is known as the third-largest producer of gold in Africa, thanks to its mines scattered across the desert cities and the eastern coast.
At present, the country’s annual gold production is estimated at about 100 tons, of which only 30 tons go to the state treasury, while the rest of the production is extracted and smuggled by local armed militias for the benefit of Chinese, Russian, and Emirati companies.
For this reason, many fear that the increase in global gold prices will lead to a rise in its smuggling activities and the increase in illicit revenues earned by factions such as the Rapid Support Forces.
It is also feared that the rise in gold prices will lead to increased foreign and regional interventions in the Sudanese civil war, driven by the desire for profits from gold trafficking and smuggling.
Conversely, Egypt has witnessed an increase in gold smuggling from abroad into the country, whether in the form of gold bars or manufactured products.
The aim of these operations is to take advantage of the continuous rise in gold prices, using it as a means of saving by Egyptians amid the financial crisis facing the country.
It is well-known that strong demand for gold within the Egyptian market raises its price locally, to levels higher than prevailing global prices, thereby encouraging illegal smuggling activities.
At the Gulf states level, the UAE stands out as the main beneficiary of the rising gold prices, given that the Emirati market absorbs a significant portion of regional gold trade.
It is worth noting that many investigative reports have linked the gold market in the UAE to illegal gold trafficking operations from some African countries, such as Mali, Sudan, and Congo, where gold from these countries is smuggled to the UAE away from the control of legitimate governments.
Other investigations have also pointed to the use of gold and diamond trade in the UAE as a cover for money laundering operations.
As a result, the repercussions that will affect each Arab country due to the continuous rise in gold prices are numerous.
However, the most important aspect is the necessity for cooperation among these countries to take effective measures against illegal trafficking operations of this precious metal, especially those based on smuggling gold extracted through unlawful means.
Because of such operations, the peoples of developing and poor countries are deprived of the returns of their natural resources, as these returns go to foreign companies and local militias operating outside the law.