Egypt launched its first gold investment fund on Sunday.
The Financial Regulatory Authority launch follows approval by the cabinet on Wednesday for a new import scheme allowing incoming travellers to bring with them unlimited gold over the next six months, while only paying a value-added tax on it upon arrival.
Though the fund will operate under the oversight of the FRA, it will be managed by private companies Azimut Egypt Asset Management and Evolve Investments.
The fund, which will operate with a minimum of 5 million Egyptian pounds, will buy and sell gold through bodies registered under the authority and will offer investment certificates backed by gold starting from 10 pounds, with a minimum requirement of certificates amounting to 1,000 Egyptian pounds ($32).
The fund will work with private commodity traders as well as bodies that store and preserve gold, the authority said.
All private companies it deals with must be at least two years old and must be listed on the Egyptian stock and commodities exchanges.
The authority added that the fund would promote financial and investment inclusion by diversifying the investment options open to Egyptians and that the framework for the fund's launch would be used to start more precious metal funds in the future that are “compatible with the investment habits of various societal segments”.
“The fund was supposed to be launched earlier this year but it took time to be finalised due to technical and regulatory issues until it was released yesterday,” Mohamed Ragab, a financial analyst, told The National.
“It reflects the government trials to ease the pressure on the gold market and provide various types of investment.”
An import scheme to increase supply
The aim of the import scheme is to increase gold supplies in the local market in a bid to bring down prices, which have been on a sharp rise since March last year, said Supply Ministry gold adviser Nagy Farag.
Travellers to Egypt were banned from bringing in gold bullion. But for the next six months, Egyptians and non-Egyptians alike will be able to do so. Apart from the value-added tax of up to 15 per cent, they will be required to show an invoice for the bullion they are carrying.
The sharp surge in bullion rates was caused by Egyptians looking for more secure means of saving money as the value of the local currency has dropped by more than 50 per cent against the dollar over the past year.
Local gold prices per gram were 1,000 pounds higher than international prices earlier this month, when the prices were around $64.
The increase was first triggered by a shortage of US dollars in Egyptian markets, which seriously limited the country’s ability to import components needed for essential industries, Mr Farag told The National on Sunday.
The import crunch resulted in a drop in gold supplies at a time when investment in the metal increased by around 83 per cent in Egypt, according to World Gold Council data, as Egyptians looked for a safe haven for their depreciating life savings held in the local currency.
The drop in the value of the Egyptian pound also made many hoard gold rather than sell it, which further decreased supplies in the market and drove up prices.
Hoarders of gold expected to sell
However, the drop in the price of gold which is expected to happen once travellers start bringing in gold and bolstering the market's supply, will most likely make hoarders sell at least some of their stock, according to Hany Milad, head of the gold division of the Cairo Chamber of Commerce.
The launch of the fund at the same time that holders of gold are expected to sell could suggest that the government hopes to transfer citizens' gold holdings into cash investments made to the fund.
“When people are investing their money in gold, they just keep it in their homes, which makes them feel secure that they at least have something to cover them on a rainy day,” said a jeweller in Cairo's Al Sagha district.
“But the government doesn’t like this. I think it prefers that they invest them in bank certificates so the money can be used for national projects or at least be circulated in the economy,”
Since the first of three rounds of devaluations of the Egyptian pound in March last year, the price of gold has increased by 130 per cent, according to Mr Farag, who said the ratio of gold demand to supply in Egypt is around three to one at the moment.
While there seems to be a consensus that the scheme will bring down local prices, at least in the short term, whether it will be beneficial to local craftsmen and jewellers remains to be seen.
“Our projections are that prices will decrease steadily over the next few months until they match international prices. The benefits of this scheme, which has been in discussion at the ministry for months now, are many and we expect it to also benefit local craftsmen,” he said.
Egyptian gold industry craftsmen were perhaps the hardest hit by last year’s supply crunch, as most customers opted to only buy gold bars, severely reducing demand for decorative and ornamental items.
Cairo's new gold import policy will also benefit the job market, especially in the jewellery industry, Mr Farag said.
“More supply will mean that prices will drop. This could also encourage more customers to buy more [ornamental and finished] gold items made by local craftsmen,” Mr Farag said.
“Importing worked gold items from abroad will also create competition in our local industry, which could very well increase sales.”
However, Mr Milad was less optimistic about who will be able to benefit from the import scheme.
Who will benefit?
“This scheme will most likely benefit people who are living outside Egypt who want to transfer gold holdings here. But sellers, many of whom were benefiting from the high prices of gold in Egypt, will most likely lose money as local gold prices decrease to match international gold prices,” Mr Milad told talk show host Amr Adib on Friday.
The jeweller said the scheme would probably reduce jewellers' revenue and is unlikely to increase sales of the more expensive wearable gold.
If the underlying economic conditions that drove prices higher to begin with are not addressed, the scheme will prove to be a temporary fix to the problem and prices will inch up again after the scheme’s six-month duration ends, he said.
“Of course the drop in supplies increased demand. But mostly, the recent rise in demand was because people are looking for more secure investments than the Egyptian pound and that hasn’t changed. As long as the pound continues to perform badly, people will continue investing their money in gold,” he said.
The Egyptian government has, over the past year, allowed imports of several goods including poultry to cool off prices that had shot up because of rising global inflation and the depreciation of the pound.
Imports of frozen poultry, whose prices tripled over 2022 was allowed ahead of the holy month of Ramadan this year.
However, the scheme brought chicken prices down only marginally but resulted in the closure of many poultry farms in Egypt amid an outcry from the local industry, which campaigned the government to subsidise chicken feed instead.
Earlier, the government also responded to a sharp rise in the price of cars by launching a four-month car import scheme, which generated $713 million in revenue, far below the projected $5 billion, according to a Finance Ministry statement released on Thursday.