Saudi Arabia has recently taken initiatives aimed at diversifying its economy and reducing its reliance on oil. The nation, abundant in oil resources, is seeking to expand its economic activities to other potential sources of revenue. The gold market in Saudi Arabia exhibits significant potential for growth as the country seeks to enhance its gold mining sector, establish a sustainable source of revenue, and increase its reserve. Similar to petroleum and oil, Saudi Arabia possesses substantial reserves of gold. The gold reserves in Saudi Arabia exhibited no change, maintaining a consistent quantity of 323.07 tons during the initial quarter of 2023. This is the highest level of gold reserves in Saudi Arabia’s history, as it ranks 16th in the world in terms of gold holdings.
Since the Russia-Ukraine war and the increased downturn in the global economy, the surge in worldwide gold demand has escalated, rising from $1,798.89 in 2021 to $1,801.87 in 2022. It is noteworthy that the prices of gold demonstrated a persistent upward trend in the year 2023, primarily attributed to the prevailing global economic instability. As of the initial month of May 2023, the average cost of one ounce of gold has reached a value of 1,923.08 dollars. Considering the prevailing global economic conditions, it is reasonable for Saudi Arabia to comprehend the rationale behind increasing gold reserves. The present inclination of Arab nations, particularly Saudi Arabia, towards the acquisition of gold can be attributed to diversifying their international reserves and diminishing their dependence on financial markets and Western banks. The heightened pressures encountered by banks in the United States and European nations have amplified the inherent risks associated with investing in these financial institutions.
Following the downfall of the global economy, The Kingdom of Saudi Arabia has established a target of investing 15 billion riyals in its burgeoning gold industry by the year 2030. At present, the gold mining industry accounts for approximately 18% of Saudi Arabia’s total mineral wealth. Furthermore, it is anticipated that the gold mining industry in Saudi Arabia will generate a substantial number of employment opportunities, reaching thousands by the year 2030. Nevertheless, Saudi Arabia is actively pursuing the expansion of its mineral mining sector and endeavoring to establish six additional mines. It is anticipated that the investment allocated towards the establishment of new mines will surpass a sum of 4 billion riyals during the current fiscal year. In the previous fiscal year, the mining sector of Saudi Arabia generated a total of 83 billion riyals in profits. The Kingdom aims to achieve a projected profit of 240 billion riyals by 2030 through the effective capitalization of assets in the mining sector. It is anticipated that the gold industry in Saudi Arabia will experience both direct and indirect investment advantages as a result of this development.
Currently, there exists a significant reserve of mineral resources, valued at approximately $1.3 trillion, within the mines of Saudi Arabia. These resources encompass various minerals, including gold, that have not yet been fully exploited. The estimated value of gold reserves in Saudi Arabia is approximately $229 billion, representing a substantial portion of the nation’s extensive mineral resources. But gold has the potential to protect the value of reserves from inflation over extended periods. However, holding gold for shorter durations may lead to losses as a result of temporary price fluctuations, especially during times of financial instability. Hence, the effective administration of gold reserves maintained by Saudi Arabia and central banks emerges as a pivotal inquiry. This raises questions regarding the intended purpose of these reserves, specifically whether they are meant for long-term preservation of value or short-term investment objectives.
The implementation of Saudi Arabia’s Vision 2030 is expected to facilitate investment and increase the reserve of gold within the country through the utilization of exchange-traded funds (ETFs). It would contribute to the expansion of employment opportunities and foster growth in the nation’s financial sector. The price of gold is currently approximately $1,960 dollars. This is due to the dollar’s limited ability to take advantage of its slight gains made in the last two days. Additionally, the dollar is facing new selling pressure as a result of expectations that the Federal Reserve will soon pause its year-long cycle of tightening monetary policy. It is anticipated that the price of gold will reach $2100 by the end of 2023 as central banks persist in extending their gold reserves due to the influence of dollar sanctions. This initiative has prompted a reevaluation of long-term approaches concerning currency reserves. Following this situation, Saudi Arabia has decided to increase the reserve so that the riyal does not depreciate against the US dollar.
The present geo-political environment is experiencing a transformation with the ongoing global dynamics related to wars and conflict. In January 2023, the Finance Minister of Saudi Arabia, Mohammed Al-Jadaan, announced significant decisions related to the country’s economy. The announcement conveyed Saudi Arabia’s intention to engage in international trade, specifically in the domain of oil trade, by using currencies other than the US dollar. This occurred following two years of strained diplomatic ties between Saudi Arabia and the United States. The manifestation of divergent political and economic interests between the two nations became evident in 2022. Moreover, the Saudi administration has undertaken initiatives to formulate its monetary framework strategies to sever the fixed exchange rate between the Saudi riyal and the U.S. dollar. Saudi Arabia has been implementing a strategy aimed at reducing its dependence on the United States by gradually reducing its ownership of U.S. Treasury bonds throughout 2023. This approach has resulted in the lowest level of Saudi Arabia’s U.S. Treasury bond holdings observed in the past seven years.
From a geopolitical perspective, Saudi Arabia’s inclination for gold acquisition is congruent with the objectives of Saudi Crown Prince Mohammed bin Salman. Saudi Arabia wants to diversify its foreign exchange reserves and reduce its dependence on the US dollar, especially amid the ongoing tensions with Iran and the uncertainty of the global oil market. Also, he aims to foster cooperation with China and Russia in the establishment of an alternative global financial framework that diminishes the hegemony of the United States in international markets. This suggests that Saudi Arabia has a strategic intention to retain its gold reserves for future purposes to mitigate potential losses that may arise from short-term fluctuations in gold prices. In the given context, the strategic approach adopted by Saudi Arabia to acquire and amass gold as a reserve serves various objectives. Firstly, it serves to strengthen the stability of the Saudi riyal, regardless of its fixed exchange rate with the U.S. dollar. Additionally, it mitigates Saudi Arabia’s vulnerability to investments and deposits in the United States financial markets. Furthermore, Saudi Arabia’s reliance on non-dollarized reserves catalyzes the achievement of common goals and aspirations with the BRICS countries. The use of alternative reserves in financial transactions makes it possible to conduct international trade in currencies other than the US dollar.
In concluding remarks, it can be added that the potential of the gold market in Saudi Arabia is substantial, as are the potential revenues associated with it. As the nation steadily advances in alignment with contemporary global economic trends, it has adopted a strategy of diversification through investment and an increased reserve in gold. Saudi Arabia may want to increase its liquidity and flexibility by having more gold at its disposal due to the ongoing geopolitical tensions in the region. It can contribute to the development of a resilient and sustainable economy amid the global economic crisis while simultaneously enhancing the country’s sources of revenue.
[Photo by Steve Bidmead, via Wikimedia Commons]
The views and opinions expressed in this article are those of the author.
Aishwarya Sanjukta Roy Proma is a Research Associate at BRAC Institute of Governance and Development (BIGD).