First 6 months for gold coins: Time for a reality check

One of the biggest challenges we face in Zimbabwe, especially with the so-called learned individuals, is that we have made it a habit that no matter how brilliant an idea or economic policy is, as long as it was proposed by a political ideology that is different from the one I subscribe to, I do not support it.

By extension, this also implies that if an idea that ordinarily I would not have supported comes from the political group that I align with, I will use all intellectual effort to defend it. Politicians would call it a polarised society.

One of the side effects of this challenge is that our emotions get the best of us, and in most cases, we end up misleading other economic agents.

At this point, I think it is very important for me to highlight that this is by no means a political article, in fact, it’s more on the economics side, aiming to give an honest assessment of how gold coins performed in their first half year.

When the idea of the central bank issued Gold Coins hit the market, sometime before July 25, 2022 it was welcomed by mixed reactions. There was a school of thought that instantly believed they would be a colossal failure.

“Arbitrage, sold at a discount, are the coins real gold, you will end up holding just paper”, were some of the terms used in explaining how the Mosi Oa Tunya Gold Coins initiative would stand no chance of making it. Talks of gold coins being a scheme for the looting of public funds and a way for the most elite groups to benefit were also thrown around.

On the other hand, the believers of the idea claimed that it would mop up excess liquidity and slow down inflation, provide an investment vehicle and promote the savings culture and above all stabilise the exchange rate.

They based their argument on the fact that central bank-issued Gold Coins were not a new phenomenon, in fact, other economies already have them.

It is now 6 months down the line and probably a great time to look back and check if the warning signs were material or if the enthusiasm actually yield something.

To assess the gold coins, we must judge them on at least three factors. Have they managed to help slow down inflation and stabilise the exchange rate, have they been a good investment option, and are they even authentic products?

Uptake

One of the attractive features of the Mosi Oa Tunya from an Institutional Investor’s point of view, especially regulated pension funds and insurance companies is the issue of Prescribed Asset Class (PAC) status.

Unlike equities which do not have the PAC status, gold coins got a jump start as other asset managers aimed at complying with the regulations. By the end of September 2022, a total of 9,516 coins had been sold, ripping off of $9 billion in the market with institutions buying most of that.

The other concern raised was that US$1 800-2 000 to purchase a single coin was out of reach for many ordinary Zimbabweans.

This then prompted the introduction of smaller denominations. Starting from half, quarter and a tenth of an ounce were targeting that market that ordinarily wouldn’t afford one troy ounce.

Subsequent to that, the private sector has also nodded its heads in agreement to the idea with Bard Santner Inc, introducing something similar to the market recently.

Although we can not know how investors will react to the private sector-issued gold unit trust, we believe the research and needs assessment done by the issuers highlighted the appetite.

All this is happening at a time when Zimbabwe surpassed its 35 tones gold production target and pocketed over US$ 2 billion in gold exports.

This does not by any means imply that all the investors jumped into investing in these coins, but we are just sure that there were interested clients who invested in the initiative.

Performance

To compare the performance of the Mosi Oa Tunya coins, we had to pull out the performance of the broad index on the local exchange ie ZSE All Share Index. If any investor had pursued a buy-and-hold strategy in the market index from July 25 to January 25, they would have received a return of negative sixteen percent vis-a-vis a ninety-eight per centum return on the gold coins.

To be fair, these numbers do not give a clear comparison of investing in equities versus gold coins.

The period coincided with a time when investors were taking profits from a bull run that had lasted for over a year and also at a time when structural changes including additional taxes had been put on the equities front.

Perhaps, a clearer comparison picture could be seen after a year, but suffice it to say those who invested in the coins got a pretty much decent return in nominal terms.

Inflation and exchange rate stability

Although month-on-month inflation slowed from 25,6 percent in July to 2,4 percent by December, it would be a disingenuous claim to attribute that solely to the Gold Coins.

In as much as they could have contributed to the slowdown and price stability, other factors such as hiking up the policy rate and increased use of the greenback were also in play.

On the exchange rate part, when the coins came the official exchange rate was $403,4 for US$1 and now you need $779,3 for the same dollar representing a 48 percent depreciation of the local currency. These are official numbers, and anyone who stays in Zimbabwe will admit that it was even more on the alternative market.

However, there is no doubt that local currency for those early bird investors was locked up in the securities and if that continues it creates a savings culture which essentially is the backbone of any economic growth.

As I conclude my analysis, I acknowledge that various comments and opinions on this issue have been passed. Some are even as extreme as the IMF which thinks gold coins should be abandoned. If it were up to me to assess performance, I would check if they have achieved the intended goals as I have done above.-ebusinessweekly