October 14th, 2009 Print Print Email Email

The drama in the marketplace

Throughout history, gold has been the unrivalled source of value, although for decades the dollar has been its formidable challenger. In a reversal of fortune, however, today the dollar is fighting to hold onto its own especially on the cross currencies fronts (the so-called dollar index) against the euro, sterling, yen, the loony, Swedish krona and Swiss franc. In contrast, the weighty and glittering metal has arisen to majestic prominence as the singular safe haven in today’s world of uncertainties.

To the chagrin of those who have squandered their gold, or passed it to others for chicken fee because of corruption or beguilement, the precious metal’s meteoric rise is calling for serious thinking and soul searching. Gold has usurped the dollar’s role as the safest portfolio of wealth, if not, at least, as the medium of international exchange, both for reserve purposes and as the most sought-after store of value. It has now become the most reliable hedge (insurance) against losses due to possible deflation, inflation and in the extreme against new major bubble of sorts that may lead to market collapse.

Therefore, on October 8 the international gold market witnessed gold breaking the unexpected price barrier of $1,062.70 per ounce. Later that day, it retreated to $1,052, still the highest ever recorded in the history of the precious metal. After a week of yo-yoing between the low and higher sides of the $1,050s range ever since, on 13 October it hit a new high of $1,069.70. In the opposite direction, the dollar has fallen against all currencies to its lowest level. Ironically, stocks in New York could not reach the psychological threshold of 10,000 pts, despite the rise in prices of gold, oil, metals and some other commodities. This makes an additional statement about the global economy’s overall health.

For the time being, neither the euro, nor a currencies-soup is likely to replace the dollar as an international reserve currency. Economist Carmen Reinhart of the University of Maryland, who co-authored This Time is Different: Eight Centuries of Financial Folly with former IMF chief economist Kenneth Rogoff in 2009 emphasized to Bloomberg, “The euro hasn’t been fulfilling that role. The yen? Forget it. And the yuan is not convertible. This is not something that’s around the corner here.” In the circumstances, analysts of different stripes are convinced that gold prices would continue to rise in the twilight months of 2009 and possibly far, far beyond until economic recovery is assured.

In recognizing that, American and European investors are fleeing from the dullness of the epicentres of financial and economic crises, in essence abandoning the dollar. They have opened up the tap of their capital flows into Asian markets abandoning the dollar en masse, although the consequence of their actions for now is a matter of conjecture. The ironic twist is that these investors are making money by taking advantage of the low interest rates in the US borrowing dollar cheaply, converting it into Asian currencies to do businesses in Asia mostly, not in Europe or in the United States where taxpayers spent billions in stimulus funds to revive the economy.

Although this inflow of capital is contributing to appreciation of Asian currencies, for now investors are emboldened by the spread advantage the weak dollar has created through investments in a mix of Asian currencies, with over 95 percent of their wealth hedged against losses in some form. The not yet learnt lesson is that investors’ overconfidence seems oblivious to the building bubble in Asian markets, the evolving tide of inflation blowing quietly into the world market. Like the dollar, not all currencies are seen favourably now. Not all commodities are considered safe refuge either. That fate has fallen to coffee, grains, cotton, cereals, etc.
Gold is a strategic resource for its owners, so long as it is taken out of the ground by honest and accountable governments for national betterment. It would remain shiny for a long, long time to come. And gold owning countries, both governments (depending on their deals) and investors (companies), have continued to benefit immensely. If any reader wonders what Ethiopia has done with its gold, that question is not out of the ordinary. At the same time, we talk about Asia becoming source of inflation. Recall in this connection that, while Europe is Ethiopia’s largest export destination, Asia that is feeling the tremors of inflation now is its primary imports sources. The question here is will Ethiopia import goods or also inflation from Asia, before it has overcome its own double-digit disaster.

What is gold trying to tell the world?

Global investor sentiment could be clustered into three categories of worries about the future: DEFLATION, INFLATION & ECONOMIC COLLAPSE. The following are their readings of the situation.

■ First, deflation warriors see the weak economy is not showing meaningful recovery, despite the massive infusion of capital into the market (banks and some industries). The jobs market has continued on its steady path of contraction (9.8% unemployment). Even as we head into the holiday season, retails data lend credence to that fear, confirming that consumer spending is still at its lowest. New investments continue to be scarce because of inaccessibility of credit and fear of the future. The housing industry, that less than three years ago spewed its destructive forces, is still not in a reliable recovery mode, as both the state of construction and sell of homes and commercial properties is in a slump. Manufacturing industries are still better off laying employees and shutting production, even to fill inventory. Deflation worriers fear central banks may withdraw the stimulus package prematurely, thereby crushing the so-called ‘green shoots’—the few signs of economic recovery and make deflation a reality.

■ Second, there are those who are concerned about inflation. They see its makings in the massive stimulus funds governments and central banks have pumped into the market. That fear is based mostly on doubts that central bankers may not withdraw the stimulus funds in time, thereby contributing to inflationary pressures. The concern is that central bankers might be under political pressure not to withdraw the stimulus funds in a timely manner, because of the high numbers of unemployed people in almost all countries. Asia has so far pulled off, with the rise of international investments. While such transfer of investments has denied the stimulus funds of any ability to have meaningful impacts in Europe and America, Asian markets are awash with cash, strengthening currencies and yes, the elements of inflation. China, which has its currency pegged to the weak dollar is benefiting from the situation, while contributing immensely to the build up of bubble in other Asian markets. Aware of this, Asian central bankers do not seem poised to hit the break hard any time soon. The consequences of that, at a time when other economies are still weak, is anyone’s guess.

■ Third, there are those who fear total collapse of economies under the weight of huge US debts, trade imbalances, budget deficits, exacerbated by the economic crisis and two wars. So far, the economy has remained less responsive than anticipated to the billions of dollars of stimulus spending. Battered by such adverse economic factors and the seemingly permanent low interest rates, the weak dollar has been discouraging foreign investment in the US. Where continuation of this situation would lead is anyone’s guess.

If the fear of deflation becomes reality, there is no quick and effective solution. Japan has been in it for over a decade now that, among other things, has resulted in little known unemployment hereto before becoming its new reality, with devastating effect on both Toyota and Sony, among others. If instead, the global problem is inflation, interest rates could rise. Nevertheless, how could growth become restorative or transformative in that restrictive environment? In that scenario, high unemployment would continue deepening recession. This not only would severely curtail international trade further, but also would be the primary link between countries.

Most problematic would be, if the fear by the third group, above, is realized, the policy measures to confront the problem may not be that easy or as potent, as already seen in the current crises. Central bankers in the major economies since the end of 2007 have been all over, including with their ‘quantitative easing’—the disregard of monetary policy in favour of bombarding the market with unrestrained cash flows. Instead, it has generated fear and disappointment—not to speak of the hostility it has engendered in the United States towards the Obama administration. The stimulus package has neither proved as strong to pull the economy out of its decline, nor garnered confidence and support among a significant number of citizens.

What for Ethiopia and other developing countries?

As far as Ethiopia, or any other ill-prepared developing country is concerned, there would be the danger of not benefiting from international trade for a long time to come or finding alternatives to expanding the economy or feeding as many of its people, while the number of those constantly threatened by joblessness, drought and famine continuously rising. All along, drought has been the author of Ethiopia’s inflation. The September 2009 data on inflation is not out even in mid-October, but the picture is not expected to be that comforting. Of course, the current inflation is caused largely by misguided policy that in the wake of that fateful 2005 election hit the gas hard on domestic spending and high imports without support by domestic production.

In the current reality, the weak dollar has forced commodity prices to shoot up. However, oil prices are dancing between a high of $73 per barrel and low of $66 in nearly ten days. While its trip northwards is somewhat unlikely to continue due to slow economic activity, this price is still very high for many developing countries. Coffee, cocoa, oilseeds, cotton, etc., have not enjoyed significant price increases, as much as other commodities, mentioned above, to support additional costs.

For instance, in this time of commodity price boom, the average price of mild coffees for the entire month of August 2009, according to the International Coffee Organization, stands at 149.76 cents per pound, far lower than the average price for the entire year of 2004. Since then coffee prices have been characterized mostly by declines. Moreover, in spite of production estimate increase by the US was in the negative, grains and oilseeds in the December future markets for corn closed at only in an increase of $3.62 ¼ per bushel, according to Bloomberg. While the market has been unfair for developing countries, Ethiopian production has been erratic even in good times, requiring newer approach and policies.

Mineral explorations in Ethiopia

The Ethiopian Ministry of Mines and Energy boasts of Ethiopia being endowed with huge deposits of: (a) Precious metals (gold, platinum and silver and associated with the low-grade meta volcano-sedimentary rocks. Lega-Dembi, Megado Serdo, Sakaro, Dul, Oda, Kurmuk gold and Yubdo platinum are located along thin belts and occur as primary and placer deposits); (b) gemstones (opal, topaz, olivine, ruby and sapphire, quartz, and garnet; (c) Base metals such as zinc, copper, lead, tin, etc. and have highly promising potential; (d) rare metals (tantalum in operation now); chromite and nickel; (e) iron; (f) industrial minerals (silica sand, feldspar, dolomite, uartz, feldspar, kaoline, limestone, clay, gypsum, phosphate, potash, soda ash, marble, limestone, basalt, brick clay, ignimbrite etc. bentonite, dolomite, graphite, soda ash, etc).

It is encouraging that limited explorations of gold are now being carried out in Ethiopia in the south, west and northern parts of the country, although most astonishing is the frequency of international companies changing hands. Dwyka Resources Limited that had taken over from Minerva Resources plc for its Tulu Kapi gold project and Yubdo platinum project in western Ethiopia has passed over its concession to Nyota Minerals Limited. Nyota is seized with the exploration and potential development of one million ounces of gold project. The company is also currently evaluating its interests in platinum (ProActiveinvestors.Austrailia).

Nyota’s chief executive recently said, “These exploration results are outstanding…they provide us with exciting new targets for drilling and the potential to expand the currently known mineralisation at Tulu Kapi into new areas of the licences” ( On 5 October, the share of Nyota Minerals rose by 12 percent. The only industrial scale gold mine in Ethiopia is Legadembi operated by MIDROC Ethiopia (‘MIDROC’). This is located 500 km south of the capital, Addis Ababa, and in another block basement separated from the north by the East African Rift Valley. MIDROC acquired the mine from the Ethiopia government in 1997 for $172 million. While MIDROC has spent millions to enhance capacity, the mine has produced on average 113,000 oz gold per year in the period 2000 to 2005, according to St. Brides Media & Finance and Mining Africa Review 2006. MIDROC releases no costs for production.

Similarly, Stratex International has signed a binding letter of intent with Sheba Exploration (UK) PLC to earn-in an initial 60 percent of the prospective Shehagne (50 km from Adwa), according to They have also agreed a joint venture on a respective 70:30 basis to explore new prospective targets and license areas in that part of Ethiopia. The company believes that potential license areas, which currently are under review, have excellent potential for gold and/or copper and massive sulphide occurrences. The company would pay 35 percent tax and government would have the option of taking two percent holdings in equity. This may raise eyebrows.

Stratex says, “We believe that Ethiopia offers similar exciting opportunities for rapid low cost discovery and is not subject to many of the economic and political constraints that neighbouring countries are exposed to, such as product sharing agreements and security issues. Ethiopia is both logistically and financially an easy and cost effective place to explore,” We hear about what our country is up to only through foreign sources, because companies announce them to attract more investors and boost the price of their shares in the marketplace. Government does not communicate with its citizens.

When and how would Ethiopia benefit from its natural endowments?

This writer has no reason or adequate information to prejudge the nature of these contracts. However, the fact is that companies working in this sector have common interests much greater than their clienteles’ do; that by itself is a serious disadvantage that hinders developing countries from negotiating concessions that are more rewarding. Nevertheless, this writer would like to emphasize that Ethiopia should see clearly its interests going forward, especially not to repeat past mistakes many African and Latin American countries have done and are now in a state of surrender or are embroiled in turmoil in an attempt to regain a fair share of their own. Therefore, it is important that the country aims at putting its natural resources to the use of its people in the most judicious manner.

It is reported that Ethiopia loses to smugglers 3,000 tonnes of gold and other precious metals every year. This figure comes from the Ministry of Mines and Energy; but it appears to this writer highly exaggerated, unless a domestic source in power of position of power is in collaboration. However, the National Bank of Ethiopia (NBE) until recently has been in an annual receipt of 500-800 kg of gold. More worrisome is how trusting should citizens be when even national institutions, such as the national bank itself, have not shown enough credibility and trustworthiness. The reference here is to NBE that has been not adequately safeguarded the precious metal surrendered to its custody, as the siphoning of gold worth $150 million (?) has shown.

Similarly, of interest in this connection is that there have been many controversies in recent months surrounding the twenty-year contract of the gold mines passed in concession onto Sheik Al Amoudi. If the contract was given in under the table dealings, as alleged by The Reporter, government owes it to the Ethiopian people to investigate it and inform the country of its findings. If the country has unfairly lost what rightfully belongs to it, it should be indemnified appropriately and the culprits held accountable. The fact that government has kept mum is troubling, although some people have been imprisoned.

Why have we become a nation of suspicious citizens?

Gold stolen from the national bank, or gold mines passed on to investor under shady deals do not give comfort to any citizens. Recently, this writer had also raised concerns about the lack of transparency in government in its dealings with foreign companies in virgin agricultural lands of the country in secrecy since 2004. Why government is so secretive, if all its deals with foreign companies are valid and meant in the national interest? Why can it not communicate with the nation?

The whole problem boils down to the form of governance prevailing in the country, which government in its folly presumes secrecy could be empowering, especially in internet age where the market does not care for potatoes or information, so long as the price is right. In fact, in the eyes of citizens, the very secrecy and the approach that government has espoused in denial and scapegoating others has become its source of powerlessness and cause for citizens to loathe its behaviour. In brief, its secrecy is seen as the hallmark of its arrogance of power and its desire to evade accountable governance.

While the following is not an endorsement of the Chinese system of governance, in recent years the further opening up by China has provided ample lesson for many developing countries. This could be illustrated by looking at it from two different angles—officials and citizens. Firstly, in an October 2008 interview, Prime Minister Wen Jiabo candidly told Fareed Zakaria, about Chinese democracy in the future where he saw progress in three areas:

No. 1: we need to gradually improve the democratic election system so that state power will truly belong to the people and state power will be used to serve the people. No. 2: we need to improve the legal system, run the country according to law, and [have] an independent and just judicial system. No. 3: government should be subject to oversight by the people. That will [require] us to increase transparency in government affairs. It is also necessary for government to accept oversight by the news media and other parties (Newsweek, ‘China’s democracy will continue to grow”).

Secondly, on the eve of the country’s celebration of its 60th anniversary some days back, experts of Chinese origin saw the country’s evolution and their concerns about the future with equal candour. This was captured by NPR radio, which joined the country in its celebrations. Prof. Wang Zhengxu, a senior research fellow at England’s University of Nottingham, saw the advantage of having a strong government in the early stages of economic takeoff to mobilize resources, and determine national priorities and the sectors that are important for the economy. He stressed, at that stage, “it is the policies that matter more than the type of government.”

Tsinghua University historian Qin Hui argues that authoritarian systems are also good at concentrating economic gains in the hands of a powerful few. This forces average citizens to save more and consume less. He adds, “Given equal GDP growth, I believe that under a democratic system, more people will get a bigger share of that growth…This is because democratic systems encourage higher levels of consumer spending. In the case of the United States this has led to unsustainable levels of borrowing, mostly from China, because of which the different political systems of the U.S. and China have contributed to the current imbalance in the world economy.”

NPR quotes Prof. Minixin Pei saying authoritarian regimes are experts at dazzling foreign visitors with their giant spectacles — such as the parade on China’s 60th anniversary or last year’s Olympics in Beijing — and with their massive infrastructure projects. “China can build the world’s largest airport terminal, but China cannot really make sure it delivers milk that is safe to drink,” Pei says. “And while authoritarian regimes tout their successes…They tend to squelch any discussion about the human and environmental costs of their blunders.”

The above discussions have object lessons to Ethiopia, which government has now elevated to a status of Open Society, which Ato Seyoum Mesfin claimed before the UN Assembly last September and that I mentioned in my last article. In contrast, China is very clear about its objective along time scales. Their assessment is honest about the strengths and weaknesses of the system they pursue, though rife with efforts to buy time. More importantly, they do not hide behind blind denials, or embellishments or constant search for scapegoats when their expectations are not realized. Chinese leaders have a vision for their country, quite different from the goal of personal aggrandizement and enrichment.

Ethiopia needs to take heed of the lesson provided here. The country is badly in need of a new bold vision. What Prof. Minxin Pei says about China is equally applicable to Ethiopia. The country needs to adopt openness, citizen participation and an attitude of respect and humility to listen to different views. All experts mentioned here, above, agree that before China adopted its current policies, its political and economic path was erratic. For Pei, however, the trouble remain, “A centralized political system, especially one that is not accountable to its own people, can make horrendous mistakes.” If Ethiopian recall in this connection the causes of the double-digit inflation, that is a sign of their maturity.

The way forward

Ethiopia, Africa, has many prospects, into which it has so far failed to put its minds and efforts. Thus, it should not come as a surprise that Africa has now become one of the less well-known sources of investments. Peer into the Africa bonds major European and US banks offer for investors in mines, manufacturing inputs or industrial processing. Even at this time of poor economic performance world wide, funds and bonds linked to investments in Africa in the last two years have fetched as much as 18 to 25 percent earnings growth. This should encourage African governments and African investors to work out a policy framework that is free from stale ideology, the habit of throwing good money after bad only to cater to narrower interests.

Improved political, institutional and economic performance is the last hope of Ethiopia and Africa. The media should be used as instrument to aid governments, if government itself is honest and fighting corruption and malfeasance. Civil societies assist the unreachable sectors of society. Hostility towards them is influenced by macho culture and apathy to power sharing that CSOs aim at fostering by helping the empowerment of illiterate citizens. It is time the state in Africa is tamed and abandons its sense of being not subject to scrutiny. The state should stop boasting about ensuring the physical safety and mental sanity of its citizens from war and the danger of diseases, before citizens’ deliverance from the prevalent sense of insecurity caused by fear and state violence itself. In contrast, a sense of security aided by a sense of freedom, it empowers citizens to try their skills and gifts to benefit themselves and the broader society.

Therefore, the current global crisis should not be used as an excuse for poor performance or the search for alternatives, or to drum up the echo of terrorism to beat opponents or to reverse reforms that in the first place have opened up some possibilities.

The way out of our present predicament is through a bold new vision. That does not come like a thunderbolt. It starts with a good foresight and in steps, sector-by-sector, but closely synchronized—with the consistency of a clock and the persistence of a camel. Rest assured that empowering an inefficient state, elitist or ethnic capitalism is not an innovation or a new vision. It is the womb of all corruption and backwardness.

Thus, the starting point is through respect for the human person, fundamental human rights, improved education and endeavouring to improve life conditions of the millions of our people whose life conditions have been continually deteriorating while government has been tapping itself on the shoulder about its success in double-digit economic growth.

Comments are closed.