To what extent can the Lagos Commodities and Futures Exchange (LCFE) help drive investment?
OWOLABI: Under Basel III banking regulations gold, similar to cash, is deemed a zero-risk-weighted asset, enabling financial institutions to hold part of their investment in gold. Facilitating this requires a structured and regulated platform on which gold and other investment precious metals (IPMs) can be traded efficiently. The LCFE constitutes such a platform, as it is regulated and licensed by Nigeria’s Securities and Exchange Commission and abides by strict anti-money laundering laws. Moreover, every party to a transaction is thoroughly vetted in line with its robust risk management procedures.
The LCFE utilises advanced technologies to undergird trade activities, which lowers transaction costs and saves time, while increasing convenience and efficiency. The LCFE also affords fungibility and ease of exit from investment executed on the exchange, which is critical to mobilising capital in the commodity space. Furthermore, by enabling efficient price discovery and transparency, the LCFE engenders investor confidence and trust in a market that has long operated without structure by, for example, offering diverse price points at which investors can enter the marketplace.
Why are IPMs a viable asset class for pension fund administrators and asset managers?
OWOLABI: IPMs, especially gold, have been a ubiquitous investable asset for over a century. In Nige-ria, however, the investability of IPMs has yet to be embraced, but this is changing due to increasing public awareness of its benefits and risks. For example, gold possesses a compelling value proposition for pension fund administrators and other asset managers because it is a store of value and has a negative correlation to inflation. This is critical in Nigeria given the currency risks and volatile exchange rates. As gold is tied to the value of the US dollar, investors who choose to buy the commodity are shielded from inflationary pressures, freeing up capital to invest in other profitable opportunities.
Moreover, investment in gold helps to reduce overall portfolio volatility. Risk diversification is imperative to prudential asset management and holding gold mitigates investment risk. This is underscored by the consistent performance of gold prices over the past 20 years compared to other core asset classes. The value of the investment for institutional investors is accentuated when the three-year rolling return on pension funds is compared to the returns yielded from gold. For example, Pension Fund II and Pension Fund IV yielded 12.8% and 14.6% in 2017 and 2019, respectively, while gold generated returns of about 19.3%.
What steps are being taken to overcome the challenges faced by artisanal miners?
OWOLABI: Enhancing support to small-scale miners, especially in the precious metals segment, is critical to growth. Two of the main hurdles are the absence of formal entities representing artisanal miners and the porous implementation and monitoring of mining regulations. The landmass encompassing the mining operation should be identified to monitor mining sites frequented by artisanal miners. The need for finance is also a major challenge. Moreover, artisanal miners lack the technical skill to make a meaningful contribution to the local supply chain.
The government continues to extend support to miners by promulgating policies such as the Presidential Artisanal Gold Mining Development initiative. The development programme seeks to formalise artisanal mining activities under cooperatives. Furthermore, the government has authorised the Solid Mineral Mining Development Agency, under the Ministry of Mines and Steel Development, to administer the initiative. With additional policies on the horizon, the artisanal space should gain more traction in the near future.
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