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Will gold coins appease inflation?

Patience Mandeya
THE Zimbabwean monetary system has evolved with mixed economic fortunes. Like most developing countries, currency management has had a huge bearing on the overall economic trajectory.

The key distinct phases in Zimbabwe include, the pre-independence era of the pound, the Zimbabwean dollar era between 1980-1990 (post-independence era) and 1990-1998 (reform era), 1998-2008 (lost decade characterised by galloping inflation, persistent shortages, externalisation of foreign currency and a mushrooming parallel market for foreign currency); the multiple currency era from February 2009 to August 2016; followed by  the Bond Notes era, which is now ushering in the Gold Coin Era.

This is a remarkable gesture by policymakers stretching their wits far and beyond, to over 2 000 years ago to the 6th century BC when gold coins were first used in an iron-age kingdom, Lydia (now Turkey).

By the 17th century, bankers would give people a type of receipt (running cash note) when they deposited their gold.

The note was essentially a promise to pay the depositor their gold on demand and was an indication of the eventual move toward using paper money in Europe, leading eventually to the gold standard in 1800.

The gold standard was later abandoned due to its susceptibility to instability, as well as the restraints it imposed on governments, as retaining a fixed exchange rate, hamstrung governments in engaging in expansionary policies to, such as, reduce unemployment during economic recessions

A gold coin is a coin that is made partly or completely of pure gold ranging between 90 and 92% (22 carats).

Gold coins have traditionally been used as currency in many countries before the introduction of paper money.

Internationally, gold coins are used in countries, like China, South Africa and Australia due to their favourable features, such as a low risk investment, better security, stress-free investment, tangible asset and has always commanded a good market value for ages.

They have been used largely as a hedge against inflation and as an investment opportunity, but rarely used as a currency as  envisaged by Zimbabwe’s central bank.

The Zimbabwean gold coins known as Mosi-oa-Tunya (the Smoke that Thunders), each weigh one troy ounce with a purity of 22 carats. The price of the coins will be determined by the international market rate for an ounce of gold, plus 5% for the cost of producing the coin. At the time of the launch on July 25, 2022, the Mosi-oa-Tunya gold coin traded at US$1 824.

The government hopes it will dampen the demand for US dollars, as excess money supply is channelled towards the Mosi-oa-Tunya coins.

This is expected to ease the excess money (bond notes) that has led to the rapid depreciation of the local currency. The central bank also desires its use as security for loans and credit facilities.

How feasible is this intervention?
Theories on demand for money have shown that over time money has been used as a medium of exchange, a store of value and a unit of account. We will concentrate on the first two purposes of money.

The most important function is as a medium of exchange to facilitate transactions. The transactional model of money demand emphasises the role of money as a medium of exchange.

It stresses that people hold money to make purchases (Mankiw 2010). The recent pressures on the demand for money have been from workers clamouring for salaries in USD due to the instability of local currency which has lost over 70% of its value year to date.

While traditionally gold has been used as the ideal hedge against inflation and general economic stability, can the Mosi-oa-Tunya coins quench the appetite for an alternative to the free falling local currency by the workers, who are mostly civil servants since the government is the largest employer?

Going by the trading price on the first day, of US$1 824.  Government workers currently take home US$$175 in Covid-19 and cost of living adjustment allowances and around ZW$30 000 (US$72) per month.

As such these gold coins will be beyond the reach of many who also have no capacity for keeping the coins for 180 days before redeeming them for cash.

These workers may also not have the sophistication in monitoring the pulse of the international gold prices and the Mosi-oa-Tunya coin pricing, so as to make prudent trading decisions.

Given a sizable informal economy and tendencies for speculation, there may be reluctance in the take up of the gold coin, as parallel market traders wait for the lapse of the 180-day window to gain any arbitrage opportunities that may unfold, given uncertainties in what form gold miners will be paid and varying conditions between local and foreign buyers.

In order to be a medium of exchange, money must hold its value over time; that is, it must be a store of value. The Mosi-oa-Tunya seems suitable for this purpose.

Companies and institutional investors with excess cash can find the coins useful to store value and also as an alternative investment asset.

These large scale holders of assets have the capacity to absorb the 180-day trading window. However, as a store of value, Mosi-oa-Tunya coins are not unique; as many other stores of value exist, such as land and even the US dollar itself, which is more liquid than most other stores of value because it is readily accepted everywhere.

Furthermore, the US dollar is an easily transported store of value that is available in a number of convenient denominations. As such, individuals and some companies are likely to continue preferring the US dollar.

Institutional economics may cast doubt once again on such decent overtures by Zimbabwean policymakers due to credibility concerns, which seem deep-rooted given the fresh memories of the volatility and frequent policy pronouncements that led to uncertainty.

Furthermore, Zimbabwe`s international appeal where it is ranked as the 157th least corrupt nation out of 180 countries, according to the 2021 Corruption Perceptions Index reported by Transparency International, dampens the attractiveness of and nobility of the Mosi-oa-Tunya gold coin and erodes the subsequent intended impact on taming inflation.

However, some prudent policy decisions by the Zimbabwean policymakers led to dollarisation in February 2009 thereby restoring stability while supporting an emerging economic recovery under the dictates of the Short-Term Economic Recovery Plan (STERP) where the inflation rate, which reached a record high of 231 million percent in 2008 went down into a deflationary trend, averaging -1% between 2013 and 2016(RBZ, 2016).

If the Mosi-oa-Tunya coins are used as security for loans and credit facilities, this could lead to the resuscitation of industry and increase product supply as more credit facilities emerge.

This would be instrumental in reducing inflation.

Furthermore, some positivity is drawn from improved gold deliveries, which as a result of appetising US dollar payments offered to artisanal miners as alluded to in the Morgan & Co market intelligence report.

The bullion stocks are fundamental to the success of this new intervention and there should not be a disparity between the amount of US dollars used to purchase the gold from miners and the US dollars used to pay for the coins, as this may lead to reduced deliveries by gold miners, who may seek other avenues to earn better for their stocks.

  • Mandeya is an economist and senior consultant at Salvo Consultancy.Harare. 25th July 2022. These weekly New Horizon articles published in the Zimbabwe Independent are coordinated by Lovemore Kadenge, an independent consultant, past president of the Zimbabwe Economics Society (ZES) and past president of the Chartered Governance & Accountancy Institute in Zimbabwe (CGI Zimbabwe). —  kadenge.zes@gmail.com and mobile No. +263 772 382 852.

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