“Over the past two years, for example, money supply in the United States has grown by more than 38 percent to about US$6 trillion, a rise that usually took decades to achieve.
Thus, a combination of unsecured money supply from the US, rising global inflation and fears that Washington is increasingly weaponising the US dollar to sanction other countries is driving investors to other investable assets.
While there is a shift to other global currencies, there is also a significant shift to gold.”
Reserve Bank of Zimbabwe (RBZ)’s recent announcement that it will soon introduce gold coins as another investable option that investors can use to hedge their investments has set tongues wagging.
Many are curious to know what gold coins are and the framework through which investors can buy them.
The decision was first announced as part of resolutions by the central bank’s Monetary Policy Committee (MPC) on June 24, 2022.
Not much information was shared by the central bank, except hinting the gold coins, which will be minted by Fidelity Gold Refineries, would be introduced “as an instrument that will enable investors to store value”.
Such announcements are normally followed by guidelines, regulations and modalities on how the coins are going to be introduced, including the price and target market.
The regulations are reportedly in the pipeline.
However, the only available information is contained in Exchange Control Circular No. 6 of 2022 to Authorised Dealers at various financial institutions, in particular banks.
The circular, which was issued on June 28, 2022, advised that the gold coins would serve “as an instrument that will enable investors to store value”.
“Operational modalities for the handling of gold coins shall be availed in due course,” reads part of the circular.
Last week, RBZ Governor Dr John Mangudya told The Sunday Mail Business that the apex bank would issue the attendant regulations.
So, officially, that is all that has been provided by authorities.
The biggest takeaway, however, is that the coins are being introduced “as a store of value”.
The issue of value preservation is topical not only in Zimbabwe but globally.
Inflation is ravaging the world.
Value erosion has thus not spared anyone, except probably those who have invested in gold.
Gold started the year at US$1 828 and touched a high of US$2 052 per ounce (28,3 grammes).
As of Friday morning, it was trading at US$1 791.
It is believed that gold coins will be sold in US dollars only.
The central bank is presently buying gold from miners in US dollars while the Zimbabwe dollar is not yet relatively stable.
Why gold and not US dollar?
There is a lot of pressure on the local unit, as the market is using the US dollar − a reserve currency − as a store of value.
But questions have been asked on why investors would prefer gold coins to the US dollar, which seems to serve the same purpose.
In mid-June this year, the dollar index, which tracks the greenback’s performance against six other major currencies, hit a fresh two-decade high.
With inflation and growth-related concerns plaguing economies around the world, the US dollar has benefited from safe-haven flows in recent months.
In that context, the US dollar is a better store of value.
But that’s a short-term perspective.
The global order is changing and the US dollar’s dominance and value is under serious threat.
According to IMF’s officers Serkan Arslanalp, Barry Eichengreen and Chima Simpson-Bell in an article titled “Dollar Dominance and the Rise of Non-traditional Reserve Currencies”, central banks aren’t holding the greenback in their reserves to the extent that they once did.
The dollar’s share of global foreign-exchange reserves fell below 59 percent in the final quarter of 2021, extending a two-decade decline, according to the IMF’s Currency Composition of Official Foreign Exchange Reserves data.
It is also believed that relentless money printing by the US Federal Reserve is also driving global inflation.
Over the past two years, for example, money supply in the United States has grown by more than 38 percent to about US$6 trillion, a rise that usually took decades to achieve.
Thus, a combination of unsecured money supply from the US, rising global inflation and fears that Washington is increasingly weaponising the US dollar to sanction other countries is driving investors to other investable assets.
While there is a shift to other global currencies, there is also a significant shift to gold.
Central banks around the world are increasing the gold they hold in foreign exchange reserves, bringing the total to a 31-year high in 2021, according to an article by Nikkei Asia.
Central banks have built up their gold reserves by more than 4 500 tonnes over the past decade, according to the World Gold Council, the international research organisation of the gold industry.
“The value of the dollar against gold has dropped sharply over the last decade as large-scale monetary relaxation has kept boosting the supply of the US currency.
“Although the US Federal Reserve is starting to tighten its grip on credit, other central banks continue their shift to gold, reflecting global concerns about the dollar-based monetary regime,” reads the Nikkei Asia article in part.
The same article adds:
“Since US President Richard Nixon announced a decision in 1971 to end the dollar’s convertibility to gold, the currency’s value has fallen to roughly one-fiftieth of its former level because the US supply of dollars, unshackled from gold, has increased some 30 times over the past 50 years.”
This provides some justification to the RBZ’s notion that there is scope in buying gold using US dollars.
However, gold and gold coins are not one and the same thing.
While other countries are increasing their gold reserves, the central bank is looking at selling gold coins.
Since the coins are going to be sold through banks, the assumption is that they are going to be sold to a wider market.
That’s the global norm as gold coins are minted for investors to purchase in small or large quantities.
Has this been done before?
Many countries have issued gold coins.
According to the Gold Bars Worldwide website, countries with gold coins include South Africa with its Krugerrand gold coins, Australia has Australian Kangaroo, the United States has the American Eagle, Canada has the Maple Leaf, Austria has the Vienna Philharmonic.
Some countries issue gram-denominated gold coins that contain irregular amounts of fine gold, while others issue gram-denominated gold coins that contain regular amounts.
In India, gold is one of the most popular metals in terms of both investment and sale.
Apart from the local jeweller, one can also buy gold coins from online e-tailers banks, and MMTC (a government-authorised public sector unit for the sale of gold and silver).
In that country, gold is seen as a form of saving and good returns on the money that is invested in it.
Gold coins are prepared in various denominations ranging from 0,5 grammes to 100 grammes.
The purity of gold coins is gauged according to karat and fineness.
Fineness can be defined as the weight of gold in proportion to the total weight of a gold coin including impurities.
Market watchers say some investors prefer buying gold coins because they are a tangible asset, have no counterparty risk, can be private and confidential, are liquid and portable assets, they come with no maintenance and carrying costs and can protect one’s portfolio in times of crisis.
The value of gold coins always increases with inflation and helps with purchasing power capacity.
Globally, gold coins are also sold at a premium.
The premium of a gold coin is simply the difference between the price of a gold coin and the value of the metal it contains.
The premium comes from factors such as the design, costs of minting as well as supply and demand.
What analysts think
Economic analyst Mr Farai Mutambanengwe believes people will want to hold gold coins just as much as they would want to hold the US dollar.
“In principle, gold coins are a superior investment asset to the USD, and most certainly the ZWL.
“Any investment manager worth their salt will readily and happily invest in them, provided the right framework is created to mint and manage them.
“The gold coins must be introduced as a means of incentivising ZWL holding and investment, as well as managing ZWL liquidity, rather than as a means of mopping up USD,” Mutambanengwe added.
Walter Mandeya, an analyst with Trigrams investment, said gold coins should be seen as “an alternative investment to USD, stock market, property”. – Sunday Mail
