HomeAnalysisGold coins, damp squibs

Gold coins, damp squibs

By Taisa Tshuma
ON July 25, 2022, the Reserve Bank of Zimbabwe (RBZ) started selling the Mosi-oa-Tunya gold coins.

The coins are 22 carats, one ounce denominated and 33,9g with a purity of 91,67%. The selling price was set in multiple currencies with a starting value of US$1 820, which is determined by international gold price per ounce plus 5% production cost.

This amount converts to the prevailing exchange values given for other currencies. The Zimbabwean dollar value of the Mosi-oa-Tunya gold coins as at July 29, 2022, was ZW$858 428,51. This is the equivalent of US$1 841,18 at the formal exchange rate of US$1:ZW$466.

The obtaining exchange rate on the parallel market is around US$1:ZW$1 000. This effectively means that the gold coins are being sold at over 50% discount price to buyers with the local currency.

Despite the presence of inscribed serial numbers and Know Your Customer (KYC) regulations, this discrepancy is another arbitrage window.

Zimbabweans are too streetwise not to take advantage of this glaring opportunity to make profit. No amount of legislation can close the gaps created by such an unrealistic policy stance.

Even the 180-day time lapse for the disposal of the gold coins is not going to stop speculative behaviour in Zimbabwe. The requirement to produce an original bearer certificate at buy-back and other measures could well curb outright abuse, but the Zimdollar’s many frailties will always provide gaps.

Opportunities will arise to exploit policies that go against market forces. The only difference will be to what degree the system will bleed.

It is clear what the authorities at RBZ and Finance ministry are trying to do, but it falls way below what is needed. Zimbabwe needs a stable currency. These half measures cannot solve the problem.

The gold coins will be impactful as a store of value or alternative savings platform.

At their announcement, there was hope that the gold coins would arrest loss of value being suffered by the local currency. The hope was that the demand for US dollar cash would slow down as the currency buyers direct their resources to the gold coins.

This would also give the central bank an opportunity to acquire enough US dollars to meet its obligations, especially the backlog on the currency auction. In the short-term, this might work, but it will soon be overtaken by the insatiable appetite for US dollars.

The usual government aligned economic pundits have lauded the gold coin as a “game changer” that would see the Zimdollar transition from being a fiat currency to a gold-backed potent currency.

The chatter on social media was how this would pave the way for Zimbabwe to be in league with the likes of Russia and China to invalidate the US dollar. This is a lofty ambition.

The irony is that China has a huge part of its currency reserves in the greenback. In July 2019, China’s state administration of foreign exchange announced that at the end of 2014, US dollar assets accounted for 58% of China’s total reserves.

The global average is 65% and Russia holds position number four on the list of countries with the highest amount of US dollar reserve assets.

Several countries have minted similar gold coins before and continue to trade them particularly on the commodities exchange.

The US, Canada, China and South Africa are market leaders in this regard. The Krugerrand in South Africa was first minted in 1967 to help market South African gold. These coins have historically been used to boost liquidity using precious metal assets.

For Zimbabwe, the gold coins will prove to be another damp squib.

The expectations of any currency related manoeuvres are extremely high in Zimbabwe because currency is the Achilles heel of the economy. The repeated tinkering with the currency is not helping the majority of citizens who are daily confronted with transactional complications.

The former co-deputy prime minister in the government of national unity, between 2008 and 2013, Arthur Mutambara, described the gold coins as a “self-enrichment scheme for the elite”.

It is undeniable that within the Zimbabwe economy, if one has US$1 800 to invest in a savings scheme for up to 180 days, they are part of the “elite”. Even small and medium enterprises with that much liquidity are part of a privileged few. Given this scenario, Mutambara is right.

The many loopholes, including the possibility to earn at least a 100% profit in six months if one buys the coins using the local currency, justify the assertion that it is an “enrichment” scheme.

The statement by Mutambara is not an exaggeration. In June 2022, Finance minister Mthuli Ncube, his permanent secretary George Guvamatanga and RBZ governor John Mangudya held a press conference. The event was an anti-climax because, as important as the announcements would have been to the average functional economy, in Zimbabwe it was a dud.

It seems as long as the currency issue is not addressed, everything else is pointless.

The mid-term fiscal policy review statement 2022, which was delivered in parliament on July 27, the highlight for the average person was the taxable income threshold increase to ZW$600 000 per annum. This is hardly a front foot tax break, but rather an attempt to play catch-up with the rapidly falling Zimbabwean dollar.

There is awareness that getting the Zimdollar to function normally has become an impossible expedition. The overwhelming desire is for monetary authorities to deliver a permanent solution to the currency crisis.

With political meddling on economic matters, it remains unlikely that a purely economic solution will be announced.

Politics weighs heavily on economic policy making.

How long can the Zimbabwe government tinker with the currency with no real commitment to fix the issue.

  • Tshuma is an entrepreneur and social commentator from Bulawayo. Twitter: @TaisaPT.

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