By Chenayi Mutambasere
IT IS important to highlight a couple of caveats in the analysis of the usefulness of gold coins in supporting the Zimbabwean economy.
Firstly, it has not been disclosed where the coins are minted and at what cost, such that the overall opportunity cost cannot be weighed up.
Another assumption is that indeed the coins are available at the stated outlets. At the time of writing this I have not been able to validate this assumption.
That said, much to my surprise the state newspaper is suggesting that the gold coins have sold out.
Using the parallel market rate, it could be a possibility that some rich elite bought the 2 000 coins.
Nevertheless, let us evaluate how well this plan may work.
There is a great expectation placed on the gold coin to fix runaway inflation measured by the Hanke index at 595% and an RTGS at 97% devaluation against the dollar trading at over US$1:ZW$850.
All this compounded by an import-backed economy and a production capacity that is failing to thrive across sectors. Will the use of gold coins solve our economic troubles?
I mentioned in an earlier article in this publication that the details of how the coin will be operationalised would tell us of the exact intentions behind this strategy and indeed whether there was a chance of it actually making a difference to the Zimbabwean economy.
There are at least eight reasons why this plan may fail to reduce demand on the USD as anticipated and create a viable alternative:
Discounted RTGS price
Given that it is being priced at the interchange auction rate of about US$1:ZW$400 at the end of the 180 days the cash paid for the gold coin is unlikely to be worth two loaves of bread considering the Hanke’s inflation index, which measures the devaluation of the RTGS at 97,61%. Using this valuation someone would require about US$2 million dollars to purchase all the gold coins using RTGS.
A replica model of the interchange auction results in rent-seeking behaviour and arbitrage from foreign currency dealing.
The interchange auction, which was launched nearly two years ago, allowed the corporate elites by virtue of meeting requirements to use their RTGS to access USD at a more favourable discounted pegged rate.
What ensued is what we see today, arbitrage opportunities were for foreign exchange dealing. This resulted in the remarkable devaluation of the weaker currency that we witness today as well as three-digit inflation and nearly half the population living in extreme poverty.
The gold coin again will attract only the corporate elite who have access to the required RTGS value.
They will at the end of the 180 days have the ability to sell in exchange for USD, benefitting from both devaluation and foreign exchange differences.
Some calculations show that just one individual who can afford to buy one coin using RTGS could manipulate arbitrage opportunities and make gains of 115% by simply trading six times.
While this will benefit the individual, the impact on the economy will be as much as we have seen from the interchange auction – a spiralling inflation and a devaluing weaker currency.
For every 1oz of gold sold as a gold coin using RTGS, the nation loses 50% the same way we lost out through the interchange auction.
There is likely to be low demand from foreign or local investors using USD or other foreign currencies.
The gold coin market is a niche market, which is targeted at collectors rather than for transactional purposes. For this reason, it is a false assertion to assume that this gold coin will perform the same way as, for an example, the Krugerrand coin in South Africa. The Krugerrand is composed of copper and steel, making it the most durable. It is well established and above all trusted as are others, like the Canadian and the American. All are selling at below the current USD price for the gold coin. There are many reasons why the Zimbabwean gold coin will not attract as much interest.
The gold coin as a market newbie has much to prove. What will happen after the first 180 days? How many coins will be minted and released each year? Will any external investors holding hard currencies be willing to exchange for the Zimbabwean gold coin? The gold coin has the feature of being transactional here; perhaps the policy makers are hoping that this will reduce the demand for US dollars.
Instead of demanding payment in hard currency, businesses will accept the gold coin. However, this will have to be accepted across the value-chain, which would require prices across the piece to be billable in units of the gold coin.
How would that work? This idea has already been flaunted by the RBZ, which has said instead of converting retention rates to RTGS it can be converted to gold coins.
The Krugerrand, which has been in circulation since 1967 is more popularly used as a collector’s coin for investor hedging against inflation for long term investment strategy rather than for transactional purposes.
Businesses have varied strategies for liquidity and investment where a gold coin is for investment and would not suit the bill as working capital replacement.
Some may argue that even if the coin is being sold at the RTGS discounted rate perhaps the economy will benefit from the numbers; so if we sell enough in the end a marginal utility is achieved.
By this, I mean if you are selling at half the price, perhaps you can increase volumes beyond levels when selling at a higher price. However, this depends on those buying maintaining a hold position for years.
This is contrary to the current status quo of the Zimbabwe market that typically has high demand deposits given the economic volatility. Instead, what is likely to happen in Zimbabwe is that gold coins will be bought and redeemed fast. This will increase pressure on the currency once again.
Impact of speculation
Speculating investors will be weary of maintaining a hold position not knowing what will happen with the currency situation in Zimbabwe.
The fear of losing to a local weaker currency will be off-putting for investors. Further, investors have been exposed to the current government’s policy flip-flops and infringement on property rights, such that the idea of state seizures or devaluation of the gold coins via statutory instruments in the future is not far-fetched.
Such a statutory response would not be new to Zimbabwe nor to the gold coin industry albeit something that predates the 1930s and 1950s in America and Australia, respectively. This will reduce demand from risk averse investors, who are atypical of investors in gold coin markets seeking to hedge against inflation in the long term.
Adverse impact on gold industry
The gold coins being sold at a discounted RTGS value means that artisanal miners, who currently produce 60% of gold in the country are going to be subjected to reduced prices as the gold coins are being sold in RTGS using a discounted rate.
This is likely to increase smuggling away from the formal structure through Fidelity Printers. Gold smuggling, which is already endemic in the country, will result in a further decline in income from gold as has been observed in recent years.
Having now seen the operational strategy of this gold coin, its purpose is leaning more towards the arbitrage looting as observed through the interchange auction.
Zimbabweans have become accustomed to monetary policy strategies that benefit the elite few at the expense of the suffering majority.
- Mutambasere is an economist and technology architect 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). — firstname.lastname@example.org and mobile No. +263 772 382 852.