A Small Gold Fund is Becoming a Conduit To Export Capital From Nigeria

It is a nearly certain money-loser as a trade but activity in the gold ETF has been steadily rising with investors concluding it is worth paying up to obtain assets out of Nigeria and into other markets of higher liquidity.”

Exchange-Traded Funds (ETF) have been praised for democratising investment and stimulating market liquidity. Foreigners are now leveraging a gold ETF to convey cash out of Nigeria in the face of dollar scarcity in the country.

Portfolio managers are purchasing the Newgold Issuer Limited ETF in Lagos using naira. Thereafter, they transfer holdings to the funds’ primary listing in South Africa and sell for rands.

New Gold Inc. is a Canadian-focused intermediate gold mining company engaged in the operation, development, and exploration of mineral properties. 

Meanwhile, the fund was launched on the Johannesburg Stock Exchange (JSE) in November 2004 by ABSA Capital and has secondary listings on stock exchanges in Botswana, Mauritius, Namibia, Ghana, and Nigeria, where it debuted in December 2011.

It tracks the price of gold and offers institutional and retail investors the opportunity to invest in a listed instrument fully backed by gold bullion – each Newgold security is equivalent to approximately 1/100 ounces of real gold bullion held in a secured stockpile of gold bullion.

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On Monday, the fund closed at 262.56 rand ($17.42) in Johannesburg and N7,656 ($19.83) in Lagos, implying that investors pay roughly 14% extra to purchase the shares in Nigeria.

It is a nearly certain money-loser as a trade but activity in the ETF has been steadily rising with investors concluding it is worth paying up to obtain assets out of the country and into other markets of higher liquidity.

“The ETF has been listed on the NSE for a few years and frankly, nobody cared to look at it until June. The market discovered that there is fungibility play here to get money out of Nigeria to the Johannesburg stock exchange,” said Akinbamidele Akintola, equity analyst at Stanbic IBTC Stockbrokers in a note last week.

Nigeria has been facing a dearth of dollars following the weight of the coronavirus and an oil crash on the economy.

Dollars are generally procured in Nigeria’s spot market called the Investors & Exporters (I&E) forex window, but the Central Bank of Nigeria (CBN) halted dollar sales in March and only restarted limited sales three months back. Volume now comes at an average of $150 million compared to about $300 million to $400 million at the beginning of the year.

The Newgold instrument is providing a way out as it is cross-listed and can be traded on several bourses across the continent. In Nigeria, around N50 billion ($128 million) shares in the fund have traded so far this year, relative to below N60 million for the whole of last year. Assets have ballooned to N17 billion, 2000% bigger than their January level, going by the latest statistics from the Nigerian Security Exchange Commission’s website.

Also Read: Dollar Shortage Poses Major Risks to Nigerian Banks – Fitch

Sometimes, the premium on the fund has climbed to as high as 30%, said Jolomi Odongharo, research head at Cordros Capital, but the uncertainty induced by devaluation and the opportunity cost of keeping money in Nigeria suggests investors are willing to take the loss. “There are other markets with greater potential and stronger macro fundamentals,” he said.

ETFs are a type of security traded on an exchange like a stock and give investors a way to buy and sell a basket of assets without having to buy all the components individually. 

The fund provider owns the underlying assets, designs a fund to track their performance, and then sells shares that track the value of the fund, via broker-dealers. Typically, ETFs combine the flexibility of stocks with the diversification of mutual funds.

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