By Francis

Copyright thebftonline

By Dr Richmond Akwasi ATUAHENE

The writer is a Corporate Governance/Banking Consultant

1.0 Background/Introduction

The objectives of central banks reserve management are formulated in the IMF’s Guidelines for Foreign Exchange Reserve Management (2001): “Reserve management should seek to ensure that (1) adequate foreign exchange reserves are available for meeting a defined range of objectives; (2) liquidity, market, and credit risks are controlled in a prudent manner; and (3) subject to liquidity and other risk constraints, reasonable earnings are generated over the medium to long term on the funds invested.

Reserves and the reserve management function are directly linked to the core tasks of a central bank, namely ensuring price and financial stability. 4) Adequate reserve levels can reassure markets that a country can meet its foreign currency obligations, thereby reducing the probability of a crisis, and weather the impact of a crisis, should one occur.

Foreign exchange reserves are assets held by a central bank in foreign currency. They often consist of bonds, deposits, banknotes, and government securities, but can also include commodities like gold and silver.

Almost five decades after the collapse of the Bretton Woods system, gold continues to form an important share of global foreign exchange reserves. This may be because gold has traditionally offered reserve managers many benefits, such as the absence of default risk.

Over the past year, global gold prices have surged to record highs, with bullion climbing from around US$2,100 per ounce in early 2024 to between US$3,500 and US$3,534 in middle of 2025.

The increase—amounting to more than 39 percent year-on-year—marks one of the steepest rallies in recent history. According to a recent survey by the World Gold Council, the top five reasons why central banks hold gold are:

(1) its historical position (i.e. legacy holdings),

(2) its status as a long-term store of value,

(3) its performance during times of crisis,

(4) its lack of default risk and

(5) its effectiveness as a portfolio diversifier (World Gold Council (2020).

Gold allocations in foreign exchange (FX) reserve portfolios are an issue of great relevance for both reserve managers – the main audience for this paper – and the broader investor community.

According to the World Gold Council (WGC), the official sector holds about 17% of all the gold that has ever been mined, a percentage that can be assumed to be managed mostly vis-à-vis bond benchmarks of limited interest rate risk (or “duration”, as labelled in the fixed income space).

The answer starts with the definition of foreign exchange reserve assets. According to the International Monetary Fund (IMF)’s Balance of Payments Manual (BoPM), (foreign exchange) reserve assets are those external assets that are readily available to, and controlled by, monetary authorities for meeting balance of payments financing needs, for intervention in exchange markets to affect the currency exchange rate, and for other related purposes.

Nowadays, the term foreign exchange reserve asset is routinely associated with cash deposits in foreign currencies and highly liquid tradable instruments, such as bills, notes and bonds issued by the US Treasury or other highly rated government entities.

Somewhat peculiarly, however, at least by today’s standards, the listing of foreign exchange reserve assets in the BoPM indeed names monetary gold as the first component of reserves. Money market and fixed income instruments fall into the last category: other reserve assets, listed after Special Drawing Right (SDR) holdings and IMF reserve positions.

According to data from the International Monetary Fund, the metal constitutes 14.6% of total world foreign exchange reserves. Even though this percentage has remained broadly stable at least since the late 1990s, it masks important differences in the behavior of central banks in emerging countries versus those in advanced economies.

For example, by the end of the third quarter of 2020, advanced economies altogether held around 20% of gold as a percentage of their official assets, while the share in emerging and developing countries’ portfolios was only 7.4% BIS (2020Working Papers No 906).

A survey of almost 60 central banks conducted by the World Gold Council between February and April 2024 identified the following three key drivers of central banks’ gold holdings: (i) a long-term store of value and an inflation hedge, (ii) (good) performance during times of crisis, and (iii) an effective portfolio diversifier.

Gold is valued by reserve managers primarily as a portfolio diversifier to hedge against economic risks, including inflation, cyclical downturns and defaults, and secondly as a hedge against geopolitical risk. Also, WGC (2024) gold reserves holding hedges against default risks, geopolitical diversification and political risk as factors influencing their holdings.

As Africa’s largest gold producer, Ghana’s economic fortunes remain inextricably linked to its mining sector. The center piece of the policy response was the Domestic Gold Purchase Program (DGPP), launched in June 2021 to double the central bank’s gold reserves within five years from a starting point of 8.74 tones.

The program was aimed to diversify the foreign exchange reserve portfolio, use gold holdings to secure cheaper collateralized financing, and strengthen market confidence through more robust reserve buffers. Before the DGPP, Ghana exported nearly all its gold output despite being Africa’s top producer in 2019 and the world’s seventh largest.

Gold accounted for more than half of export earnings but featured little in reserve assets, with the country relying heavily on cocoa syndicated loans and Eurobond proceeds. In 2025 the government set up Ghana Gold Board, is a government agency established by the Ghana Gold Board Act, 2025 (ACT 1140) to centralize, regulate, and oversee all gold buying, selling, weighing, grading, assaying, and exporting in Ghana, with an initial focus on the artisanal and small-scale mining sector. By June 2025, the central bank had purchased 145.95 tonnes of gold under the programme, sold 86.77 tonnes for foreign currency to bolster reserves, and increased physical holdings to 32.99 tonnes.

Gold production currently serves as the backbone of the country’s economy, providing critical support across multiple economic dimensions. Gold is a financial asset and important component of Bank of Ghana’s reserves because of its safety, liquidity and return characteristics – the three key investment objectives for central banks. From the perspective of safety, it bears neither credit nor default risk. Moreover, gold can be deployed to protect portfolio value because of its negative or lack of price correlation to the US dollar, commodities, and many financial assets.

In physical form, gold enjoys deep and liquid markets as indicated by its daily turnover. And central banks can use gold swaps for short term liquidity requirements. Finally, gold has exhibited positive real returns over periods of both economic crisis and growth due to its dual demand structure: investors demand gold as a hedge against tail risks and price inflation and end-users demand gold for both jewelry and industrial uses. Gold exports represent the primary channel through which Ghana accumulates foreign currency reserves.

In 2025, this has proven especially valuable as record-high gold prices reached historic highs, accelerating reserve accumulation. Ghana’s central bank is implementing a forward-thinking gold price hedging program to safeguard its growing foreign reserves against future market volatility. This strategic initiative comes at a time when the country’s gross international reserves have reached $11.1 billion, providing coverage for 4.8 months of imports—a significant improvement in Ghana’s economic buffer.

The hedging program aims to lock in current high gold prices analysis through strategic derivative contracts, securing minimum revenue thresholds even if global gold prices experience a downturn. The substantial reserves built through gold exports provide Ghana with a crucial buffer against external economic shocks. This protection has become increasingly valuable in an era of global economic uncertainty and supply chain disruptions. Bank of Ghana has one distinct option for adding gold to international reserves through buying local production The rationale behind Bank of Ghana shift is not purely tactical but strategic.

As explored in OMFIF’s 2024 report Gold and the new world disorder, gold is once again being treated as a strategic asset, not because it offers yield or efficiency, but because of what it represents. It serves as a symbol of political neutrality and security in times of fragmentation and independence from the liabilities of any one issuer. That argument – once seen as a theoretical hedge – is increasingly propelling real changes in allocation. Political developments have added urgency to these shifts. With US President Donald Trump returning to the White House in 2025, concerns over trade tensions, fiscal profligacy and the reliability of global partnerships have resurfaced. The dollar’s politicization is also a growing concern even among traditional allies of the US. In this environment, gold has emerged as the only strategic fallback. Since in 2023 under the domestic gold purchase program, Bank of Ghana has chosen to hold gold to diversify their reserves beyond just foreign currencies and other financial instruments, which helps to reduce overall portfolio risk. A Central bank, like the Bank of Ghana, has the responsibility to ensure financial stability for a nation. One of the most important aspects of this role is to maintain exchange rate stability. The central banks, therefore, build foreign currency reserves, which involve buying foreign currency and investing it in various international securities or just maintaining foreign currency accounts. These reserves allow them to provide liquidity in domestic forex markets, as and when required. Gold has been a critical component of Bank of Ghana’s reserves because it serves as a long-term store of value, a hedge against inflation and economic instability, and a means to diversify assets beyond traditional currencies. Unlike fiat currencies, gold has no default risk, cannot be devalued by a central bank’s policy decisions, and offers protection against geopolitical risks and foreign sanctions. This makes it a foundational asset for maintaining financial stability and economic security, especially in times of global uncertainty. Gold has a historical reputation as a stable asset that retains its value over the long term and can protect wealth during periods of high inflation and market volatility. Bank of Ghana has chosen to hold gold to diversify their reserves beyond just foreign currencies and other financial instruments, which helps to reduce overall portfolio risk. Gold is a physical asset with no counterparty risk or inherent default risk, unlike bonds or bank deposits. Its value is not dependent on the policies of any single government. In the current environment of increased geopolitical risks in Middle East and Russia/ Ukraine and potential sanctions, gold has offered a form of jurisdictional security.

Unlike financial assets, physical gold is not subject to asset freezes imposed by foreign government. Purchases of local gold production in Ghana have a distinct advantage in that, because the gold is purchased for the local currency (Ghana Cedi), the procedure can help Bank of Ghana build up foreign reserves. The Ghana Gold Board (GoldBod) has announced record-breaking small-scale gold exports worth approximately $6 billion between January and August 2025. This represents 66.7 tonnes of exports, surpassing the entire 2024 output of 63 tonnes valued at $4.6 billion. Gold reserves at the Bank of Ghana have increased to 36.02 tonnes at the end of August 2025. This was a jump from the 34.40 tons recorded in July 2025. In the same period in 2024, the reserves stood The Bank of Ghana’s gold reserves increased by 4.70% in July 2025 to 36.02 tons in August 2025. According to data from the Central Bank, the gold reserves have risen by 17.6% since the beginning of 2025. The gold reserves stood at 30.53 tons at the beginning of January 2025 and increased to 30.62 tons on January 31, 2025. It has since been rising month-on-month to 25.97 tonnes, representing the rapid accumulation within a year. From a little 8.78 tons in May 2023, the Central Bank reserves have been rising, contributing significantly to the stability of the cedi in 2025. This year, the cedi has appreciated by 20.35% to the US dollar despite the recent weakness of the local currency. The accumulation of the gold reserves had been mainly driven by the Domestic Gold Purchase Programs and Gold Board, a policy initiative designed to strengthen foreign exchange reserves, boost investor confidence, enhance currency stability, and create a more conducive environment for foreign direct investment and economic growth. Bank of Ghana said in an earlier communique that “The gold accumulation programs had been essential tool in our efforts to diversify reserve assets, reduce exposure to global financial volatility, and provide the economy with more robust buffers against external shocks”. Gold is an excellent protective asset. It is pertinent to consider rise in gold value as market reaction to the emergence of new financial assets (or major change in the status of old ones), which causes a temporary condition of uncertainty. Three main factors may explain recent increase in gold purchases by central banks like Bank of Ghana First, gold is viewed as a haven and desirable asset during times of economic, financial, and geopolitical uncertainty as well as a portfolio diversifier. Second, gold is seen as a safe asset when countries are subject to financial sanctions and asset freezes. Third, the Government of Ghana has set the Gold BoD to purchase gold from artisanal mining companies in Ghana. In the same period in 2024, the reserves stood The Bank of Ghana’s gold reserves increased by 4.70% in July 2025 to 36.02 tons in August 2025.

The gold purchase program has helped the Gold Bod obtain around 4.70% of non-monetary gold over the past two months. This enabled the central bank to add around 8.78 tonnes of internationally certified gold bars to its international reserves since 2023, boosting its coffers. Ghana’s economic renaissance in 2025 has been nothing short of remarkable, fueled primarily by extraordinary performance in the gold sector. Gold exports surged by an impressive 76% year-over-year to reach $5.2 billion in just the first four months of 2025, creating a powerful economic catalyst. This export boom has transformed Ghana’s trade balance, widening the trade surplus to $4.1 billion—a dramatic improvement from the $759 million recorded during the same period last year. The strengthened trade position has become a cornerstone of Ghana’s economic stability. The Ghanaian cedi has emerged as a star performer in global currency markets, rallying more than 40% against the US dollar in 2025. This makes it the second-best performing currency worldwide, trailing only the Russian ruble. Such currency strength has significantly improved Ghana’s purchasing power on international markets. The Bank of Ghana attributes this economic turnaround to “increased production and higher prices” that have helped Africa’s top gold miner boost its reserves. Gold exports represent the primary channel through which Ghana accumulates foreign currency reserves. In 2025, this proved especially valuable as record-high gold prices reached historic highs, accelerating reserve accumulation. substantially. Additionally, the government’s commitment to fiscal consolidation has reinforced investor confidence, creating a virtuous economic cycle. The substantial reserves built through gold exports provide Ghana with a crucial buffer against external economic shocks. This protection has become increasingly valuable in an era of global economic uncertainty and supply chain disruptions.

With the Bank of Ghana’s gold reserves holding and the intended hedging policies there are the urgent need to address the strategic issues and challenges that could impact negatively on country’s long-term reserves as well as balance of payment position. Failure to proper address the (unsustainable mining) chronic galamsey issues, Dutch diseases, high opportunity costs due to gold’s non-yielding nature, physical storage, insurance and transport expenses, suitable accounting framework, lessons learned from the Ashanti Crash from gold hedging in 1999 and high up-front premiums, weak incentives; low credit standing after 2022 country’s default on both domestic and sovereign debts and limited expertise in derivatives the Bank of Ghana’s gold reserves and it’s hedging could proof to disastrous for the entire Ghanaian economy in the longer-term

2.0 Overview of the Ten Developed Countries with large Gold Reserves as at end of June 2025

The central banks of many developed markets, such as the US, Germany, Italy, and France, already hold a high percentage of gold in their total reserves. The Netherlands is also around 60 percent. These countries will therefore be less inclined to rapidly build up their reserves. Federal Reserve rate cut this month following a weak US jobs report. The US economy added fewer jobs than expected in August, while unemployment rose to its highest level since 2021, signaling a softening labor market. Traders now assign a 90% chance of a 25bps cut at the upcoming Fed meeting. Attention now turns to the US PPI and CPI data due later this week, which could offer more clues on the Fed’s interest rate path. Elsewhere, the People’s Bank of China increased its gold holdings for a 10th straight month in August as it continues to diversify its reserves away from the US dollar. Gold has surged 37% so far this year, buoyed by a weaker dollar, monetary policy easing, sustained central bank buying, and heightened geopolitical and economic uncertainty.

Top 10 Central Banks with largest Gold Holding as Reserves

Sources: Central Banks, Federal Reserve Bank of St. Louis, International Monetary Fund, World Bank, World Gold Council June 2025

Gold is an important component of central bank reserves because of its safety, liquidity and return characteristics – the three key investment objectives for central banks. As such, they are significant holders of gold, accounting for around a fifth of all the gold that has been mined throughout history. To help understand this sector of the gold market, we publish gold reserve data – compiled using IMF IFS statistics – which tracks central banks’ (and other official institutions, where appropriate) reported purchases and sales along with gold as a percentage of their international reserves. Gold is universally accepted and therefore serves as valuable collateral during times of crisis. Gold also tends to increase in price during financial crises, adding to its appeal as a liquidity management tool. Gold standards are formed at the major global trading centers, where most institutional investors trade. The London OTC market, the COMEX US Futures market, and the Shanghai Gold Exchange (SGE) account for more than 90 percent of gold’s wholesale trading volumes. Gold is mostly traded on the OTC London market, the US futures market (COMEX) and the Shanghai Gold Exchange (SGE). The standard future contract is 100 troy ounces. Gold is an attractive investment during periods of political and economic uncertainty. Half of the gold consumption in the world is in jewelry, 40% in investments, and 10% in industry.

The biggest producers of gold are China, Australia, United States, South Africa, Russia, Peru and Indonesia. The biggest consumers of gold jewelry are India, China, United States, Turkey, Saudi Arabia, Russia and UAE. The gold prices displayed in Trading Economics are based on over the counter (OTC) and contract for different (CFD) financial instruments. Our gold prices are intended to provide you with a reference only, rather than as a basis for making trading decisions.

3.0 Ten African Central Banks with large Gold Reserves Holdings as at June 2025

The emerging market central banks often view gold accumulation as both an economic and political strategy, reducing vulnerability to external financial pressures while strengthening domestic monetary authority. The shift toward gold represents an implicit move away from traditional reserve currencies, particularly the US dollar. This gradual de-dollarization could eventually impact currency valuations and international trade settlement practices if it continues at the current pace. In line with a growing trend across emerging markets, central banks in sub-Saharan Africa are accelerating gold accumulation efforts, as a hedge against perceived United States’ macro instability and rising global geopolitical risks. While South Africa has historically maintained gold in its reserves, some sub-Saharan African countries are currently establishing domestic gold purchasing programs, capitalizing on abundant local gold deposits Leading the trend is Ghana, which has launched its domestic gold purchasing program. The West African country has witnessed a surge in both the volume and the value of its gold reserves, according to BMI, a unit of Fitch Group. Between the second quarter of 2022 and the first quarter this year, Ghana’s total gold holdings rose by 255 percent from 8.7 metric tons to over 31 tons. Earlier in 2025, Ghana reached an agreement with nine mining companies to directly purchase 20 percent of their gold output at a 1 percent discount to the London Bullion Market Association price. In 2024, Nigeria launched its own national gold purchase program, and legislative action has since been taken to strengthen the Central Bank of Nigeria’s ability to acquire domestically produced gold, BMI figures show. In 2025, several other markets have taken similar steps with Namibia and Rwanda, making concrete moves to diversify reserves through gold, while central bank governors in Kenya and Uganda have publicly floated similar ideas. In Burkina Faso, the government has, alongside the nationalization of mines, established a National Gold Reserve to stockpile at least 5 percent of its domestic production. Zimbabwe recently relaunched a gold-backed currency, the Zimbabwe Gold, in a bid to stabilize its financial system. As of June 2025, Algeria had the largest gold reserves in Africa, with 173.56 tonnes, followed by Libya (146.65 tonnes) and Egypt (126.82 tonnes). The complete top ten includes South Africa, Morocco, Nigeria, Mauritius, Ghana, Tunisia, and Mozambique.

Here are the top ten African countries by gold reserves as of June 2025:

Sources: Central Banks, Federal Reserve Bank of St. Louis, International Monetary Fund, World Bank, World Gold Council (2025)

5.0 Operational Aspect of Global Gold Trading (Buying Gold through local production).

Purchases of local gold have a distinct advantage in that, because the gold is purchased for the local currency, the procedure can help build foreign reserves. Central banks can set up local gold buying programs in several ways. The most common procedure is to give the country’s central bank a “priority right” or “right of first refusal” to purchase local production. (Some countries like Ethiopia, Ghana, Kazakhstan, the Kyrgyz Republic, Türkiye, and Uzbekistan use this approach.) An alternative method is for the central bank to set up a special gold buying program or form direct agreements to purchase the metal from local artisanal and small-scale miners (e.g., the ASGM program) or commercial banks (as in Bolivia, Ecuador, Mongolia, the Philippines, the Russian Federation, and Zambia). The central banks publish the official gold purchase prices and usually include a discount for logistics costs, trading (bid-ask spread), and quality, if the metal is not of LGD standard. Since most locally produced gold comes in non-standardized form, the central banks engage in quality swap programs to upgrade their holdings to LGD standard. This is accomplished with the help of LGD refiners, with both the Bank for International Settlements (BIS) and bullion banks providing intermediary services. The Central Bank of Philippines is uniquely positioned, as it has run its own LGD refiner since 1974, allowing the bank to upgrade the gold it purchases from local small-scale miners to international standards. A decision to set up the LBMA-accredited refiner must be considered carefully, as the association imposes strict requirements related to gold quality and production levels on potential candidates. Notably, the absence of LBMA compliance does not mean that the gold owned by a central bank will be untradable in international markets, since some bullion banks can purchase gold of certain minimum fineness, albeit on discount. The LBMA accreditation merely ensures the liquidity of the gold holdings by deeming them acceptable for settlement in world’s biggest trading venues, such as the London Bullion Market, COMEX, and SGE

6.0. Operational Aspect of Gold Trading in Ghana (Buying Gold through local production – A case of Domestic Gold Purchase and Gold BoD Programs.

A growing number of emerging market central banks have been increasing their gold reserves through domestic gold production, often purchased from artisanal small-scale gold mining (ASGM) operations. This allows a central bank to purchase gold using local currency instead of international currency. Central banks operating a domestic purchase program can choose whether to retain their gold or sell it for hard currency in the international market. Previous government through Bank of Ghana launched domestic gold purchasing program in 2021 to augment our foreign reserves with a view to doubling gold holdings in our foreign exchange reserves portfolio, while the current Government of Ghana has set-up the Gold Bod in 2025 to purchase gold from artisanal mining companies in Ghana. This program buys unrefined gold directly from small-scale miners and guarantees the prevailing international gold price for transactions, converted into local currency. Ghana has been no exception of local gold purchase program.

Ghana Gold BOD, the Ghana Gold Board, is a government agency established by the Ghana Gold Board Act, 2025 (ACT 1140) to centralize, regulate, and oversee all gold buying, selling, weighing, grading, assaying, and exporting in Ghana, with an initial focus on the artisanal and small-scale mining sector. Its main goals are to maximize state revenue, combat illegal gold trading, improve foreign exchange accumulation, support the local economy by promoting gold as a store of value, and ensure the full repatriation of export earnings. Gold Bod implements a mandatory licensing regime and has exclusive rights for gold export from the small-scale sector, working to streamline the fragmented gold trading system. Bank of Ghana has increasingly turned their attention to local gold mines, a strategic pivot driven by a confluence of economic uncertainty, geopolitical tensions, and the enduring appeal of gold as a safe-haven asset. Gold Bod were primary driven by a desire to rebalance towards more preferred strategic level of holdings, domestic gold production, reduction of the smuggling of local produced gold, and financial market concerns including higher crisis risks and global rising inflation. In the same period in 2024, the reserves stood The Bank of Ghana’s gold reserves increased by 4.70% in July 2025 to 36.02 tons in August 2025. The Ghana Gold Board (Gold Bod) has announced record-breaking small-scale gold exports worth approximately $6 billion between January and August 2025. This represents 66.7 tonnes of exports, surpassing the entire 2024 output of 63 tons valued at $4.6 billion. The gold purchase program has helped the Gold BoD obtain around 4.70% of non-monetary gold over the past two months. This enabled the central bank to add around 8.78 tonnes of internationally certified gold bars to its international reserves since 2023, boosting its coffers. In addition to the exclusive rights for gold export from the small-scale sector, Gold BoD has also started the local purchase of 20% of gold output of the seven large scale mining companies in the country to beef up Banof Ghana’s gold reserve holdings. The Ghana Gold Board (GoldBod) has announced record-breaking small-scale gold exports worth approximately $6 billion between January and August 2025.

This represents 66.7 tonnes of exports, surpassing the entire 2024 output of 63 tonnes valued at $4.6 billion The Bank of Ghana in the report also acknowledged that steady accumulation underscored the central bank’s commitment to strengthening its balance sheet and enhancing economic stability. The purchase of gold by the Gold BoD has boosted up the Bank of Ghana holding gold reserves as part of foreign exchange reserves are viewed as a haven and desirable asset during times of economic, financial, and geopolitical uncertainty as well as a portfolio diversifier. In considering the composition of central bank reserves not only the nominal rates of return, but also the safety of the reserves must be taken into account, and this by taking a national perspective. Foreign exchange reserves are nothing but claims against foreign governments or other foreign institutions denominated in foreign currency, usually in the form of money market instruments

Key factors are converging to drive this increasing appetite for domestically sourced gold among central banks; inflation hedge, geopolitical uncertainty ie (trade war between USA and global trading partners; Russia/Ukraine war); de- USA dollarization trends; reserve diversification and supply chain security. i)With inflation rates remaining stubbornly high in many economies, central banks are actively seeking assets that can preserve purchasing power. Gold has historically proven its mettle as an effective inflation hedge, outperforming many other asset classes during periods of rising prices. This makes acquiring physical gold a logical strategy for monetary authorities aiming to safeguard their reserves. ii). The current global landscape is fraught with geopolitical risks, from regional conflicts to trade disputes. These uncertainties create volatility in financial markets and increase the appeal of tangible, universally recognized assets like gold. Central banks, responsible for maintaining national economic stability, are therefore bolstering their gold holdings as a bulwark against unforeseen international shocks. iii.) While the US dollar remains the world’s primary reserve currency, there’s a growing global movement towards diversification away from it. Some nations are actively seeking to reduce their reliance on the dollar, and acquiring gold is a tangible way to achieve this.

This trend, often referred to as “de-dollarization,” indirectly boosts demand for gold as an alternative store of value. iv). Bank of Ghana has been routinely reviewing and adjust their reserve management strategies to optimize risk and return. In the current economic climate, a greater allocation to gold offers a way to diversify reserves beyond traditional foreign exchange holdings like government bonds. This strategic diversification can enhance the overall resilience of a nation’s financial system. v) Sourcing gold directly from local agency like Gold BoD offers central banks greater control over their supply chain. This can mitigate risks associated with international transportation, sanctions, and the potential for disruptions in global trade. It also fosters stronger domestic economic ties and supports national mining industries

7.0 Literature Review on Gold as international reserves for Central Banks

The importance of central banks’ gold reserves has been widely discussed during the last decades. After the fall of the Bretton-Woods system, many economists started to argue that gold cannot be considered as a haven, as it is not stable enough to be used as a hedge against inflation and it does not yield any returns. Many central banks around the world have significantly decreased their gold reserves since the end of the 20th century and, despite this, they do not experience high inflation. Nevertheless, most central banks still hold large parts of their reserves in gold, as they believe that gold does not lose value when there is high inflation. Another important reason why many central banks prefer to hold gold in their reserves are that there is a traditional and historical belief in the reliability of gold among the population of the world. Many economists believe that gold reserves can enable central banks to control the inflation expectations of people. Indeed, people tend to consider central banks to be stronger financially if they have enough reserves in gold. Foreign exchange reserves are assets held by a central bank in foreign currency. They often consist of bonds, deposits, banknotes, and government securities, but can also include commodities like gold and silver.

The role of gold as a part of reserves has been decreasing during last decades after the fall of Bretton-Woods system. Nevertheless, gold is still one of the largest parts of Central Banks’ reserves in many countries. Baur (2016) claims that many Central Banks around the world consider gold as a stable asset and therefore are interested

in the movements of its prices. Furthermore, they directly and indirectly affect the price of gold. Though, there were signed four Central Bank Gold Agreements during the period of 1999-2012 to diminish their influence on gold prices. Nugee (2000) suggests four main reasons for storing gold as reserves. Firstly, gold is considered as a very stable asset that does not lose value and even appreciates sometimes in times of uncertainty. Secondly, gold is able to keep its value against inflation and serves as a unit of exchange between different countries. Thirdly, credit risk is absent, as there is no counterparty that can default. Finally, there is a traditional and historical view that gold can be considered as a stable back up for domestic currency due to its role before and during Bretton-Woods system. However, Nugee (2000) also describes many disadvantages of gold. The weakness of gold prices during last forty years reduces the demand for it. Also, gold is expensive to store and safeguard. Moreover, Lucey and Li (2015) in their study of whether gold

can be considered as haven asset that during economic instability gold does not behave as a safe-haven asset, while silver, platinum and palladium do. Many global central banks choose to hold reserves in foreign exchange to support confidence in their monetary and exchange rate policies, including the capacity to intervene in support of the local currency. As the International Monetary Fund (IMF) discusses, foreign exchange reserves can also absorb pressure on currencies during times of crisis or when access to international borrowing is curtailed, giving markets greater confidence that a country can meet its external obligations. Central banks are significant players in the gold market, holding large reserves of gold as a store of value and a hedge against currency risk.

In addition to buying and selling gold, central banks also influence the market through their monetary policies, which can affect interest rates and inflation, both of which can impact the price of gold. Gold is an important component of central bank reserves because of its safety, liquidity and return characteristics – the three key investment objectives for central banks. As such, they are significant holders of gold, accounting for around a fifth of all the gold that has been mined throughout history. To help understand this sector of the gold market, we publish gold reserve data – compiled using IMF IFS statistics – which tracks central banks’ (and other official institutions, where appropriate) reported purchases and sales along with gold as a percentage of their international reserves. Geopolitical concerns, sanctions risk and worries about the status of the US dollar have driven global central banks to make record purchases of bullion. Gold recently overtook the euro to become the world’s second-largest reserve asset, behind the US dollar. Another good reason for holding a large position in gold is as protection against high inflation since gold tends to keep its value over time.

Moreover, unlike foreign currencies, gold cannot depreciate or be devalued because of a loss of confidence. Gold has been widely acknowledged as a preferred asset for hedging against inflation. Ghosh (2016) contends that the allocation of gold in reserve holdings is positively associated with volatility in exchange rates and inflation. Arslanalp, Eichengreen, and Simpson-Bell (2023) similarly establish that the level of inflation is the most significant determining factor influencing the share of gold in reserves of emerging and developing economies. Over the past two decades central banks have broadened the range of assets in their foreign exchange reserves portfolio. These reserves are mostly financed by domestic currency liabilities. Interest rates on such liabilities tend to be higher than those earned on the central bank’s foreign currency assets. Consequently, central banks often incur a running loss from carrying low-yielding foreign exchange reserves on their balance sheets (Ramaswamy, 2008, Kaurnagaran, 2013). A long history Gold is enjoying something of a renaissance among central banks. Central banks are accumulating gold at a pace not seen since the last years of the Bretton Woods system in the late 1960s. We take a look at the drivers of this surge in demand, and whether it could continue.

Bretton Woods was an international agreement designed to keep the US dollar pegged to gold, and other currencies pegged to the US dollar. The system worked until there was a run on US gold reserves in the late 1960s, with massive amounts of gold moving from the US to European central banks as the US ran up persistent current account deficits. This effectively ended the system by 1971. More than five decades after the collapse of the Bretton Woods system, gold continues to play a useful role in the international financial system and forms a notable share of global foreign exchange reserves. Purchases of gold by the official sector are an important (if sometimes little-discussed) component of gold demand. Collectively, central banks are the world’s largest holders of bullion, and their sales and purchasing decisions can have a significant impact on prices. Every independent central bank in the world holds at least some amount of bullion. One measure of central bank influence on gold is to make rough comparisons with other components of gold demand. Central bank purchases often outpace exchange-traded fund, coin, technological and, occasionally, bar demand.

This makes official sector demand an important driver of bullion prices. Gold is considered a haven by investors. As a result, they tend to flock to gold during economic, financial, or geopolitical crises. This demand raises the price of gold, protecting investors from losses in other assets Indeed, central bank purchases played a pivotal role in supporting gold in 2022, notably in the second half of the year. According to the World Gold Council (WGC) and based partly on International Financial Statistics (IFS) data, total official sector purchases hit nearly 1,136t in 2022, more than doubling the 450t of central bank demand registered in 2021. A large chunk of this estimated demand is as of yet unreported officially but which the WGC has estimated based on market activity and other indicators. This is not unusual, as not all official sector buyers publicly report their gold holdings or may do so only with a considerable lag. Central banks have increased their gold purchases notably since the 2008-2009 global financial crisis, and this trend appears to have accelerated recently. According to World Gold Council data, global central banks purchased over 1,100 tons of gold in 2022, more than double the purchase amounts of the previous year—and maintained a similar purchase level in 2023.

Market participants have attributed this increased demand to three factors: (1) gold’s perceived value as an inflation hedge amid growing concerns around central bank credibility and independence, (2) gold’s use as a risk hedge, given elevated economic and financial uncertainty, and (3) gold’s use as a sanctions hedge as it has no issuing government. Gold’s seeming safety from sanctions has been widely viewed as a particularly salient factor behind official gold purchases since Russia’s invasion of Ukraine in 2022 and the G7 countries’ subsequent decision to freeze the foreign exchange reserves of Russia’s central bank and forbid their banks from doing most business with Russian counterparts. (Arslanalp, Eichengreen, and Simpson-Bell (2023) provide evidence of the application of multilateral sanctions as a driver for emerging market and developing countries. Central banks themselves have noted sanctions concerns as a driver of gold purchases and of increased vaulting of gold domestically in recent. Central banks amass liquid assets such as foreign currencies and gold as a hedge against inflation and to diversify their holdings.

Gold is acknowledged as an inflation hedge. Whenever currency devalues through inflation, the price of gold increases, preserving purchasing power. Gold’s value is intrinsic; it is not tied to any single sovereign entity. As a result, it is increasingly seen by central banks as a hedge against volatility and geopolitical risk. Given that these risks remain elevated, gold is likely to become a more significant part of central banks’ portfolios to preserve value and, if necessary, a means of exchange. The distribution of gold holdings may also become more disbursed, away from the traditional, western financial centers’ to increasingly reflect the changing geopolitical landscape. In effect, gold has become a growing part of a longer-term strategy for diversifying foreign exchange reserves. It also allows them to sell these reserves to support their own currency in times of stress. Given the strong rise in gold prices, the momentum in gold buying could slow. But on a long-term basis, the uncertain geopolitical backdrop and desire for diversification will support the accumulation of gold as reserves. First, gold is seen as a haven and attractive reserve asset in periods of economic, financial and geopolitical uncertainty, and when returns on reserve currencies are low, two conditions that have been prevalent in recent years. Gold is popularly viewed as an inflation hedge and a portfolio diversifier (portfolio diversification having special value in a volatile environment).

It is favored by customs and traditions central banks and governments having long held gold reserves. One might imagine central bank reserve managers investing in a variety of physical commodities. But investing in gold is regarded, for reasons rooted in history, as more respectable and confidence-inspiring. Second, gold is perceived as a safe and desirable reserve asset when countries are subject to financial sanctions and financial investments are potentially subject to asset freezes and seizure. Thus, the Bank of Russia accelerated its gold purchases following Russia’s annexation of Crimea in 2014. In 2021, it confirmed that its gold was now fully vaulted at home. While the Russian sanctions imposed by G7 countries—which bar their banks from doing most business with Russian counterparts and deny the Bank of Russia, that country’s central bank, access to its reserves at foreign central and commercial banks—are a recent case in point, earlier sanctions had already interrupted, or threatened to interrupt, such access for the central banks and governments of other countries. Gold has traditionally been used to measure the value of goods and was a means of payment in almost every ancient civilization, partly because it is extremely rare in nature and therefore scarce. According to the latest figures, some 183,600 tonnes of gold have been mined to date (source: World Gold Council), roughly equivalent to a cube measuring 21 metres on each side. The US Geological Survey estimates that about 50,000 tonnes still remain in the ground and the number of new mines is dwindling. Some of the value of gold stems from its properties (it is ductile and malleable), as well as its resistance to oxidization and chemical reagents, meaning that it does not deteriorate and can be stored for long periods of time. Gold is an excellent hedge against adversity. Its price tends to rise when operators perceive the level of risk to be high, for instance during military escalation or, more often, financial crisis, when financial instruments, especially high- risk ones like shares, plummet in value but gold tends to rise in price. Incorporating gold into a financial portfolio is a way of hedging against high-risk scenarios, however unlikely. This function has been very much to the fore in recent years: in the face of widespread fears about the resilience of the financial system in 2008-09 and the stability of the euro area in 2011-12, gold performed particularly well, adding considerably to the equity revaluation account in which the Bank records increase in the value of its gold reserves.

Another good reason for holding a large position in gold is as protection against high inflation since gold tends to keep its value over time. Moreover, unlike foreign currencies, gold cannot depreciate or be devalued as a result of a loss of confidence. So, when a foreign exchange crisis erupts, central banks can use gold in the same way as their official foreign exchange reserves, to shore up confidence in the national currency; they do so by using gold as collateral for loans or, as a last resort, selling it to buy national currency and uphold the latter’s value. A large stock of gold gives a central bank plenty of room for maneuver to preserve confidence in the national financial system. Of course, gold’s unique properties entail financial costs: the cost of storage and security. Also, it does not offer a return and so owning a large stock means forgoing the interest that would mature on debt securities. Those securities, however, have a fiduciary value that could evaporate in the event of a systemic crisis of confidence, undermining their role in investment diversification. Gold, on the other hand, is not an asset ‘issued’ by a government or a central bank and so does not depend on the issuer’s solvency.

Despite the advantages of gold as a reserve asset, it also has disadvantages, the main of which is higher volatility compared to traditional assets for a conservative portfolio and the problem of its profitability. This deficiency has also been noted in a number of studies. World Gold Council (2010) notes this risk and that central banks are typically far less risk-tolerant, Liste & Manuel (2019) claim that most countries display negative sovereign gold reserves financial performance. Bernholz (2002) draws attention to the fact that the return on gold reserves is usually lower than that on foreign exchange reserves.

The problem of the impact of asset revaluation on the financial performance of central banks was studied by Dalton & Dziobek (2005), Stella & Lönnberg (2008), Sweidan (2011), Benchimol & Fourçans (2019). Skeptics, however, point to drawbacks in reliance on gold, including its cost to transport, warehouse, and security and its lack of interest. It is advantageous for a country like Ghana to hold part of its central bank reserves in gold, even given a discretionary monetary regime with managed float exchange rates. Although the return on gold reserves is usually lower than that on foreign exchange reserves. Reasons are first, the greater security of gold reserves kept at home. For foreign exchange reserves there are claims against foreign banks and authorities, which can be blocked any time for political reasons. Second, short and especially long-term movements of exchange rates are often more important than that of the gold price.

Finally, the selling of gold reserves in favor of political authorities or purposes implies political struggle for the distribution of the proceeds as witnessed by recent events in Ghana. Finally, in comparing the return on gold and foreign exchange reserves not only the respective nominal returns, but also the long-term development of the prices of gold and the respective foreign currencies have to be considered. Despite these disadvantages, gold remains a popular asset for central banks due to its historical track record and the well-regulated markets for trading. The available empirical evidence suggests that some reserve managers respond to relative costs and returns by increasing the share of gold in their reserves when the expected return on financial assets such as US Treasury securities is low, while viewing gold as a hedge against economic and geopolitical risks. Notably, the proportion of gold held in reserves by both advanced economies and emerging markets tends to increase with measures of economic uncertainty, with advanced economies showing an additional increase in response to measures of geopolitical risk (Arslanalp, Eichengreen, and Simpson-Bell 2023).

8.0 Global Gold Hedging Strategies

Gold hedging means employing gold or gold derivatives to shield from the value depreciation of other securities; foreign currencies or assets. It is a hedging technique by which an individual acquires gold to protect them from a possible shake-up in different underlying assets. Gold is among the oldest well-known elements utilized as cash and a valuable possession. It served as currency and a symbol of wealth. In the current financial systems, gold has been widely used as a hedging tool, Gold is an excellent protective asset. It is pertinent to consider rise in gold value as market reaction to the emergence of new financial assets (or major change in the status of old ones), which causes a temporary condition of uncertainty, especially during economic instabilities and inflation. Hedging’ is a popular tool in risk management and it can be used as insurance to reduce risk, or transfer risk from one party to another. Hedging can be defined as “a coincident purchase and sale in two markets which are expected to behave in such a way that any loss realized in one will be offset by an equivalent gain in the other” (Hardy &Lyon, 1923).

The gold positions can be hedged with the use of derivative instruments such as forwards, futures, and options. Forwards and futures, agreements to buy or sell gold at a predetermined price on a specified date in the future, are the least expensive way to hedge future gold price fluctuations. Practically free hedging strategies, these instruments do not allow flexibility, and counterparties are obliged to make good on sell/buy agreements on the predetermined price and date. Some investors like to hold positions unhedged or hedge their entire portfolio separately outside of individual product decisions. Other investors are attracted to a gold hedge built into the product. Gold in US dollar terms appreciates when US dollar depreciates. But as Cedi or Sterling or Euro-based investor, holding a gold position unhedged, one can miss out on some of gold’s gains when the US dollar is depreciating.

8i. Types of Global Gold Hedging

Classical (pure hedging)-When a transaction with real delivery in the commodity market is made, parallel opposite positions in forward markets open (in options market or futures market

Proactive: – A market contract replaces a real delivery contract during the period, which divides contracting in the forward market and trading with real delivery in the commodity market

Full or partial full hedging excludes both probability of losses and probability of extra profit from the change in insurable asset prices. Both risk of insuring losses and probability of earning an additional profit from a transaction uninsured part remain with partial hedging.

Cross hedging-: As an insurance tool the underlying asset is applied, which is close to the really traded one but not coinciding with it. For instance, an export-import transaction involving physical gold can be hedged by a gold futures contract, while an actual stock purchase can be hedged with the help of a stock index future.

Selective: – This type is the riskiest and sometimes considered equivalent to exchange speculation: based on the analysts’ predictions about presumable price movement, only a part of transaction amount (part of currencies, gold or goods) is insured. Besides, contracting and trading time in the commodity and forward markets may not coincide.

9.0 Bank of Ghana’s Gold Hedging Program

Ghana’s move toward systematic gold price hedging represents a distinctive approach among major gold-producing nations, positioning the country at the forefront of proactive resource management strategies in Africa. Bank of Ghana intend, to engage in gold hedging programs to manage price volatility and lock in prices for a portion of their gold reserves. Unlike South Africa with larger gold reserves holding with South African Reserve Bank generally maintains an unhedged exposure to gold prices, but Ghana is adopting a more conservative risk management approach. While hedging protects against probable losses, on the other hand, it reduces probability of receiving unplanned profit at favorable movements in the asset value. This contrasts with the strategies of other major producers who often accept full price exposure to maximize potential upside. Ghana’s hedging initiative reflects a focus on stability and predictability in foreign reserve accumulation—a priority that differs from countries like Russia and China, which have focused on physical gold accumulation as a strategic diversification from dollar reserves. Despite the current windfall from gold exports, Ghana’s heavy reliance on gold exports creates significant vulnerabilities that necessitate careful risk management. The Bank of Ghana (BoG) views a gold hedging program as a crucial strategy to protect its growing gold reserves and the country’s economy from price volatility and external shocks. The central bank aims to implement the program on a portion of its reserves to secure prices for future sales, mitigate potential losses from a price crash, and preserve the build-up of its foreign exchange reserves, which are a vital tool for stabilizing the cedi and restoring investor confidence. The primary goal is to manage the risk of potential future drops in gold prices, which could negatively impact the value of Ghana’s increased gold reserves. By hedging, the BoG intends to lock in current prices, protecting the significant gains made through its domestic gold purchase program and securing foreign exchange inflow. Gold serves as a tool to stabilize the cedi, rebuild investor confidence, and insulate the economy from external shocks by hedging against sovereign risk. The program will only target a portion of the bank’s total reserves to allow the BoG to participate in any potential upside if gold prices increase. The move is considered timely given projections from market analysts and firms suggesting a potential decline in gold prices. In essence, the Bank of Ghana sees gold hedging as a proactive measure to safeguard its economic stability and leverage its growing gold assets effectively in a volatile global market. The Bank of Ghana’s hedging initiative acknowledges several key risks inherent in a gold-centric economic strategy. Bank of Ghana’s gold positions can be hedged using derivatives like forwards, futures, and options to mitigate potential losses from price fluctuations and lock in a future gold price. These instruments allow businesses and investors to manage price risk by taking an opposite position in the derivative contract, effectively stabilizing their financial exposure without selling the actual gold.

9i. Bank of Ghana’s Hedging Strategies- (i) Over the counter (ii) Options; (iii) Forwards iv. Swaps

The most widespread hedging tool is a futures contract; futures options or forward contracts are used less often. Selecting this or that instrument for conducting a hedging operation is defined by the type of hedging chosen, considering specific terms of transaction. Thus, a gold futures contract can help an investor to avoid losses under a volatile political, financial and economic situation. Hedging gold can provide ‘purer exposure’ to price performance – however it can come at the cost of gold’s crisis hedging and diversification benefits. Ghana could adopt the South Africa unhedged gold reserves posture as Gold is seen as a politically neutral reserve over which no central bank has control. Moreover, gold is a hedge against default because you are not dependent on a counterparty. Gold is seen as a politically neutral reserve over which no central bank has control. Bank of Ghana must increase its gold reserves may therefore be attractive, especially considering low overall reserves compared to countries like Algeria, Libya, Egypt and South Africa rather than adopting any of the derivative hedging strategy.

However, Bank of Ghana could adopt any the following types of derivatives used (i) forwards is an over-the-counter agreement between two parties to buy or sell a specific amount of gold at a predetermined price on a future date; (ii) futures is an exchange-traded contracts to buy or sell a standardized amount of gold at a specific price on a future date; (iii) options is a contracts that give the holder the right, but not the obligation, to buy (call option) or sell (put option) gold at a certain price within a specific time frame. (iv) Gold swaps are forms of repurchase agreements commonly undertaken between central banks or between a central bank and other types of financial institutions.

Gold has become a popular investment asset due to its perceived ability to serve as a hedge against economic and geopolitical uncertainties. The gold market is characterized by a large-scale, liquid, and diverse source of demand, which makes it less volatile compared to some other major asset classes. Bank of Ghana aims to leverage these assets to secure more affordable financing options, thus improving short-term foreign exchange liquidity without heavily dependent on external debt markets. Gold hedging means employing gold or gold derivatives to shield from the value depreciation of other securities; foreign currencies or assets.

It is a hedging technique by which an individual/business entity acquires gold to protect them from a possible shake-up in different underlying assets. Gold is among the oldest well-known elements utilized as cash and a valuable possession. It served as currency and a symbol of wealth. In the current financial systems, gold has been widely used as a hedging tool, Gold is an excellent protective asset. It is pertinent to consider rise in gold value as market reaction to the emergence of new financial assets (or major change in the status of old ones), which causes a temporary condition of uncertainty, especially during economic instabilities and inflation. Hedging gold with futures carries risks like leveraged losses that exceed initial deposits, volatile and unpredictable price movements, the possibility of losing more than the money invested, counterparty risk (though minimized by exchanges), regulatory changes increasing costs, and a limited ability to participate in significant price rallies, potentially missing out on gains. Historically, gold plays a special role as an instrument for hedging financial risks. Many investors hold the view of gold as a universal protective asset and often connect rise in its value with temporary instability of the world markets. Gold prices are inherently volatile and can fluctuate dramatically over short periods, making it difficult to predict their movement and potentially leading to significant losses. Futures trading uses leverage, meaning only a portion of the contract’s value is required to trade. This amplifies both potential profits and losses, and it’s possible to lose more than the initial deposit. Futures markets can have experience periods of instability or even sudden crashes, further increasing the risk of substantial losses.

In the gold market, there are many derivatives available for investors including Bank of Ghana who want to hedge or speculate. They may use gold futures which are quoted on exchanges. In the over-the-counter market, gold options, gold forwards and swaps are traded instead
Over the Counter (OTC)

In the over-the-counter (OTC) market, gold hedging involves using customizable financial instruments like spot gold OTC contracts, options, or swaps to manage gold price risk for a specific future date, protecting against volatility. This market connects parties directly, allowing for tailor-made hedging solutions, such as a gold bullion dealer hedging physical inventory or a miner securing a minimum selling price with options. Businesses, jewellers, and central banks utilize these OTC derivatives to gain price certainty, lock in prices, and provide stability during volatile conditions. Agreements to buy or sell physical gold at a specific future price, directly between two parties Unlike exchange-traded instruments, OTC contracts are negotiated directly between two parties, such as a company and a bank or two companies

Gold option. A gold option is a derivative contract that gives the holder the right to buy or sell a certain amount of gold at a set price, called a strike price, between two parties for a predetermined duration. Unlike just buying gold, having a gold option involves paying a premium for the right to sell or buy at the agreed price. This, therefore, makes such a financial tool very alluring to investors who seek to leverage the price movements in gold without having to deploy large capital upfront. Derivatives that give the holder the right, but not the obligation, to buy or sell gold at a set price before a certain date. Gold options are derivative financial contracts that give the holder the right, but not the obligation, to buy or sell a specific amount of gold at a predetermined price (strike price) before a certain expiration date. They are used by investors to speculate on gold price movements, hedge against risk, or gain leverage in the gold market without directly owning the physical metal. There are two types: call options, which are for anticipated price increases, and put options, for expected price decline. Unlike futures contracts, options don’t create an obligation to buy or sell, offering greater flexibilityOptions allow traders to control a significant amount of gold for a relatively small upfront payment (the premium), increasing potential profits but also risks.

Gold Forwards

Gold forwards (gold forward contracts) work essentially like futures – the main difference is that they are not traded in organized markets. It means that forwards have credit risk, as there is no clearing house, no mark-to-market mechanism. In exchange, forwards are not standardized, but customized to meet the investors’ special needs. Therefore, a gold forward contract is a transaction in which two parties bilaterally agree on the purchase and sale of gold at a future date. These contracts often contain terms that are party specific, that are difficult to transfer readily to other third parties – it makes them less transparent and liquid than futures traded in an open market. However, investors usually pay larger premiums for the privilege of customization. The majority of gold forwards are traded in the London gold market.

Gold Swaps

Gold swaps are contracts that exchange financial instruments (such as assets, liabilities, currencies, securities or commodities). They are non-standardized contracts that are traded over the counter. Most swaps involve cash flows based on a notional principal amount. Swaps are also used in the gold market. Usually, swaps in the precious metals markets are forward swaps and refer to purchasing bullion spot and selling the metal forward (from the borrower’s perspective), or selling the metal spot and buying bullion forward (from the lender’s perspective). It means that gold is borrowed (lent) against a currency. The gold swap rate for a gold-to-U.S. dollar exchange is the gold forward offered rate. Agreements to exchange future cash flows based on gold prices

9ii. Key Principles of Bank of Ghana’s Gold Hedging.

Bank of Ghana’s gold hedging works as a hedge against currency devaluations and wil