Nigeria is currently suffering from hyperinflation and the World Bank has recently stated that the current economic realities have pushed 7 million Nigerians below the poverty line. Inflation is a major catalyst to this current economic reality. Nairametrics reported on Nigeria’s inflation rate dropping further for the second consecutive month to stand at 17.93% in May 2021. Food inflation, which is a major component of the inflation rate, drop to 22.28% in the same period. Be that as it may, a 17.93% inflation rate and a 22.28% food inflation rate is still pretty much high and there are no significant indications that the rate will continue to decline. In fact, many factors are indicating that another increase may be coming soon.
Many investors in Nigeria are looking at ways to store value and hedge against inflation and currency devaluation.
Why Gold is the best hedge against inflation
Gold is a hedge asset. A hedge asset aims to protect your finances from risky situations such as hyperinflation. The higher the risk of loss, the greater the importance of protection against it. Currently, naira earners are at risk of losing 17.93% value of money because of inflation.
Although Gold is regarded as a hedge investment against inflation, it does not completely eliminate your potential loss. Gold prices go up when the interest rate goes down; which is directly proportional to the strength of the economy. So, in a broad sense, Gold is a hedge against an unstable economy. People see gold as a way to pass on and preserve their wealth from one generation to the next. When an official currency loses its purchasing power to inflation, which is the current situation we are witnessing in Nigeria, Gold tends to be priced in the base currency (mostly US dollar) and, thus, tends to rise in local currency terms. Gold is therefore seen as a better store of value than a local currency.
This article will be covering ways Nigerians can invest in Gold to hedge against the current economic realities. There are several ways to invest in Gold:
Buying physical gold (bars and coins)
Luckily, compared to other commodities, Gold is more accessible to the average investor, because an individual can easily purchase Gold from a precious metals dealer or, in some cases, from a bank or brokerage. Small bars and coins accounted for approximately two-thirds of annual Gold investment demand and around one-quarter of Gold’s global demand over the past decade.
Major cities like Lagos, Abuja and Kano have a large number of gold traders but mostly in jewellery form. However, take caution in where and who you purchase from because there are many fake dealers and products around.
Buying gold-backed Exchange Traded Funds (ETFs)
Another way to invest in Gold is by buying shares of ETFs that have exposure to gold. Physically-backed gold ETFs account for approximately one-third of Gold’s investment demand. These funds were first launched in 2003 and as of March 2016, they collectively hold 2,300 tonnes of physical gold on behalf of investors around the world. A major Gold ETF in Nigeria is the NEWGOLD ETF that is traded on the Nigerian stock exchange. It was created by an asset management company called NewGold Managers Limited and the fund is sponsored by Vetiva Capital Management Limited. It is currently trading ₦8,900, down 6.28% at the close of the market.
Buying gold derivatives: futures, forwards and options
This option is for experienced investors who don’t want to risk a lot of capital and also for individuals who understand how the futures, options or forwards markets work. These contracts represent the right, but not the obligation to buy or sell an asset (gold in this case) at a specific price for a certain amount of time. Options can be used whether you think the price of gold is going up or going down. If you guess wrong, the maximum risk associated with buying options is the premium you paid to enter the contract which means, you can lose all your money if proper risk management is not adopted. Because investing in derivatives requires more knowledge of financial securities than other forms of investing, it may not be suitable for all investors.
Buying gold mining stocks
Another way to invest in Gold is by buying Gold mining stocks. Gold mining company stocks may correlate with the price of gold. However, the growth and return in the stock depend on the expected future earnings of the company, not just on the value of Gold. A notable Gold mining company trading on the Nigerian stock exchange will be Japaul Gold. The company changed its name from Japaul Oil to Japaul Gold which represented their transition into the mining industry, specifically Gold mining. The stock is currently trading at ₦0.51, currently down 1.96% as of the close of the market yesterday.