Running a gold currency up the flagpole

At the end of last week’s emergency meeting of the Monetary Policy Committee of the Reserve Bank there was a throwaway line that there were plans this month for the “rolling out” of gold-backed digital tokens for “transactional purposes”.

Details were lacking, except for the fact that $35,2 billion had been mopped up with the tokens, a figure now in excess of the $31,8 billion spent on buying gold coins, but the inference is that Zimbabwe may soon have an extra de facto currency, one anchored on gold.

It looks as if the idea is being run up a flagpole to see if anyone salutes rather than any attempt, at least at this stage, of creating an exceptionally stable local currency.

While the gold standard ruled European and North American currencies for most of the 19th century, with silver continuing being the main standard in the rest of the world, practical convertibility was largely dumped with the First World War, although Britain after the war offered the option of buying gold bars on demand and South Africa even had sovereign coins for a few years.

Much of the world’s gold was locked up between the world wars, and especially after the Second World War, in Fort Knox.

The Bretton Woods agreement created fixed exchange rates, largely built on the US dollar which retained a degree of convertibility after President Franklin Roosevelt devalued the US dollar by increasing the gold price to US$35 a troy ounce during the Great Depression, although without coins in circulation.

Central Banks could still demand conversion of US dollars into gold bars, although only France took advantage of that, and did not have many dollars to start with. Charles de Gaulle liked the idea of showing his independence of the US.

President Richard Nixon ended Bretton Woods agreement for all practical purposes in August 1971 by ending even the theoretical convertibility of the US dollar into gold, still priced at US$35 an ounce, and thus allowing gold prices to float, the position the world is still in.

While many central banks will include some gold bars in their reserves, any tapping of those reserves would involve sales of gold to raise cash. A lot of gold bars now in existence are held by private people and organisations, although many will us a bank for storage.

So Zimbabwe creating an official way of using gold-backed tokens for transactional purposes will make the country unique, and perhaps shows the imagination of the authorities to try and create a future currency, or at least an alternative currency or currency-equivalent. It seems no decisions have been made, or are likely to be made soon, but that an extra service is going to be offered.

There is actually some gold already used for transactions in some rural areas, where a small number of shopkeepers have a set of accurate small scales and artisanal gold miners stroll in with a bag of gold dust and buy groceries and goods with that dust. Technically the shopkeeper is buying the gold and then selling the goods, but the actual transaction involves someone spending 1g of gold.

Gold tokens for transactions is a theoretical possibility in Zimbabwe because Zimbabwe is a gold producer, mining at least 2,5 tonnes a month. And all the gold so far converted into coins or stored for backing tokens cannot be far off half a tonne.

Total tokens after the fourth issue this month came to 288,7kg and the coinage is not that much less. So the supply side of gold is not a problem.

In fact the Reserve Bank could issue a lot more tokens without much problem, creating the liquidity needed for fairly widespread use of its 1mg tokens in transactions if it was prepared to devote less than a month’s output to that purpose.

One factor that is the subject of whispering in business corridors is that element of trust. Gold coins were trusted as buyers could physically hold the gold, or could store it with a bank that had decent vaults if they wanted to minimise risks. If they had a sudden urge to fondle their coins they could unwrap them and fondle.

The tokens are obviously far more convenient, potentially far more liquid, and the buying costs expressed as a premium are far less. But it does mean that physical gold needs to be stored somewhere, in the deeper cellars of the Reserve Bank probably.

A standard gold bar, the sort of thing you see in pictures, is 400 troy ounces, around 12,4kg, so there should be a pile of 24 gold bars somewhere to match the 288,7kg of tokens sold, with a little over, and more bars added to the pile when more tokens are sold. Gold bars can vary a little in mass, but generally the 12,4kg is seen as the best target mass, and at least 99,5 percent pure.

The whisperers would like to be able to see those physical bars, or have them locked up in commercial banks, or even have them locked up in the Reserve Bank of South Africa. Even a regular audit by one of the major accountants’ partnerships would satisfy most.

They fear that the Reserve Bank will not keep enough bars to back the tokens in issue, and will sell the bars when this became necessary for other purposes.

Considering the small quantity of physical gold actually need for 100 percent backing, less than nine percent of a month’s supply for the 288,7kg or around three and half days of average deliveries, the Reserve Bank has no reason to cheat, but the suspicions may have to be addressed if the quantity of tokens rises to ensure that everyone is on board.

There are serious problems in letting anyone who accumulates 12,4kg of tokens having physical possession of a gold bar, like the British offer in 1922.

For a start it removes the virtual element of the tokens, but far more importantly it opens Zimbabwe to widespread illicit capital movements, which is why possession of gold by private individuals is barred. A 12,4kg bar can fit comfortably in a briefcase, and can even be cut up by a determined smuggler.

The other point about a gold-based currency is that it is not that stable. The price of gold does fluctuate.

The fluctuations are not generally huge over a day or a month, but the price does move and there are no currencies at present where the value of the currency is tied to the price of gold. And the fluctuations can move up and down.

Gold is generally a fairly stable store of value, but it is not a perfect store, largely because while gold is an industrial metal, the bulk of the world’s gold is stored as value, rather than as a raw material. This makes the metal unique. Its price is what someone is prepared to pay for it, usually in a hard currency.

On the other hand, in the curious circumstances of Zimbabwe there is an opening for an additional currency or near currency.

There is not enough liquidity in US dollars even for de factor dollarization and while the Zimbabwe dollar should be a lot more stable than it is, it is fact that the pressures exerted often illegally make it a difficult currency for longer term transactions.

So the experiment of tokens seems worth pursuing.

After he had destroyed the old Zimbabwe dollar in hyperinflation, Gideon Gono, who still held the job of Reserve Bank Governor for a while, suggested a gold-backed new currency. No one listened and at the time the no one would have listened.

But it is an idea whose time may have come. The trust problems, and a lot of those date to the days of Dr Gono and hyperinflation, are not insurmountable and in the clear light of day are unreasonable, and verging on the irrational, but do need to be thought through even though they are not based on probabilities let alone facts.-ebusinessweekly