Consider everything the Reserve Bank of Zimbabwe has told us about the upcoming gold coins. When we do this and also look at the alternatives available to potential buyers, the picture is clear. At least clear to me. There is a large group of people destined to buy the coins.
The RBZ has made it clear that the primary reason gold coins exist is to be a store of value. The question then becomes, a store of value for whom?
Each gold coin costs US$1,622
Zimpricecheck went into great detail on how we arrive at this assessment here. Each piece will weigh one troy ounce (approximately 31 grams) and will be 22 carat quality. Using a price per gram of US$52.14, the calculation works out to US$1,621.74 per piece.
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You can use a different price per gram, but if it’s from a relevant open market, it’ll be in the 50s. So we can work with a range of $1600-1700 per piece.
This means that we seek to store value for the country’s minority. Very few ordinary Zimbabweans have US$1,600 or its equivalent. It was clear even before we knew how much the coins were worth, they were meant for a wealthy few.
This begs the question, what then should we make of the claim that the coins are intended to curb the nation’s demand for the United States? While the majority of Zimbabweans, who collectively operate the massive parallel market, cannot participate in the gold coin game, their demand for USD remains untouched.
It’s almost as if this isn’t the average Zimbabwean they have in mind. It will be clear that this is the case by the end.
Right off the bat, the fact that the RBZ uses the troy ounce betrays the type of use it intends or intends. In gold trading circles, the troy ounce rules, but in everyday Zimbabwean affairs, the metric system with its grams and kilograms is king.
Why do we follow international standards if not to enable easy trade across the world? It has nothing to do with storing the value, it seems to me.
Yes, I understand that the easy negotiability/liquidity is a good store of value in the short to medium term. If you can’t fetch the value quickly when needed, what’s the point of storing it?
However, are we looking to allow Zimbabweans to store value in coins locally or what? You can’t tell me that using the troy ounce is easy to find out the price while the price per gram is just as easy to figure out.
Nor can you tell me that the minting processes at Fidelity were built with the troy ounce in mind. It could be valid but I still don’t want to hear it.
We deliberately make it easy for smugglers to ship every coin if international prices rise enough, which is likely to happen with high inflation rates around the world likely to drive the price of gold higher.
We will be forced to conclude that this is a feature and not a bug.
The Stock Exchange
The Zimbabwe Stock Exchange has become a good store of value for businesses and high earners. They started “investing” on the ZSE just to preserve the value of their millions. They knew they could liquidate their shares fairly quickly if needed.
During the process, some realized that they could make excellent profits by trading stocks. The government claims that this speculative trade fueled the depreciation of the ZW$.
The government of course intervened and stopped all this jazz. They increased the tax on shares held for less than 270 days. Make stocks unsuitable as a liquid store of value.
The ZSE is up 77% from December 2021 but inflation has risen stronger and when this is coupled with a higher tax, if one sells their shares within 9 months of buying, what can we do to preserve the value?
The gold coins had to come true.
We have talked about the number of economists and businessmen who have lamented that the beneficiaries of huge tenders for infrastructure projects are flooding the market with ZW$, thus causing the exchange rate to plummet.
The government has promised to double infrastructure spending from 2021 to 2022 and I think this is one of the main factors behind the acceleration of the ZW$ depreciation this year.
So while the government scolds us for buying hundreds of dollars on the parallel market, it turns a blind eye to its infrastructure-building partners who mop up millions, if not billions of dollars.
So we can see that the government is not contradicting itself when it says that the gold coins are meant to relieve the demand for dollars. They know that most of the demand actually comes from these big contractors. The collective demand of the general public pales in comparison.
Quite frankly, a number of Chinese companies are involved in major infrastructure projects in the country. They are paid partly (mostly?) in ZW$ but they can’t bring our worthless currency back to their homeland so they do the sensible thing and exchange it for USD.
The problem is that they can only do this on the parallel market, which is illegal. It’s easy to manage. China offers the government a new parliamentary building and gives them loans and voila, the Zim government is literally blind to see what some Chinese companies are doing.
Gold for the Chinese
The arrangement above is a little too ugly. Now gold coins clean it up a lot. Everything about gold coins indicates that the Chinese and other big infrastructure players are the intended beneficiaries.
Of course, other fatcats can also benefit, even some working for the government itself. It’s just the icing on the cake.
I think we chose the troy ounce to allow our partners, the Chinese, to easily repatriate their profits. So you can see it’s laudable to complain that the average Zimbabwean can’t afford the gold coins. Real targets can easily afford the coins.
So all this talk about the average person not being able to verify the authenticity of gold coins is a waste of time. The average person is not invited to the party. Too few average people will be looking to buy the coins, which means our fears of people being ripped off left, right and center on the streets are overblown.
Look at it from the government’s point of view, the new parliament building has to be paid for somehow. It helps keep our foreign lords happy.
We pay dearly to keep our friends on the table, we sacrifice the health of our economy, we give them all our natural resources and give them all the major infrastructure tenders. Do we get an equivalent return?
Arbitrage opportunities abound
Even if the Zim government means well, its decisions only make things worse in the long run.
We are all speechless now after shouting about how the forex auction creates arbitrage opportunities that only a few connected people can take advantage of. However, the auction remains.
Their solution is the Willing Buyer-Seller Forex Market (WBWS) which cannot be called an open market by any stretch of the imagination. It remains a closed club to which a few, including our Chinese friends, can enter.
As a reminder, when we talk about arbitrage here, we are talking about the situation where a product is available on two different markets at two different prices. If one has access to both markets, one can simply buy in the market at the lower price and sell in the market at the higher price.
Gold coins can be purchased using ZW$ but to determine what the amount will be in our local currency, we will use the WBWS rate. The WBWS rate is artificially low because it is not an open market.
This is what happens with gold coins
Let’s work with the price per coin of US$1,622 that we discussed above. Using a WBWS rate of 1:395, the coin can be obtained for ZW$640,695. However, if we had used the actual market rate, say 1:720, the coin would have cost ZW$1,167,840.
Let’s do the chart, the gold coin can be sold in international markets just as it can be sold locally. Gold is still gold and there is a ready market for it.
You can sell one troy ounce of gold, per coin, for US$1,622. This would equate to ZW$1,167,840 on the black market. This means that if you buy the coin using ZW$ and immediately sell it for US$1,622, you will make a profit of ZW$527,145 (1167840-640695).
In US dollars, this is equivalent to 732 US dollars. My friend, this is crazy. All you have to do is convert your USD to ZW$ on the black market, buy the coin using ZW$, and then sell the coin for US$1,622.
It will depend on how quickly one can sell the coins. Few people have a gold buyer in their contact book. We’ll find out about them soon enough though. They’ll be in the corners with forex traders shouting “tochinja goridhe here blaz?”
There will likely be a limit to the number of coins a citizen can purchase, so the offline gold buyer will have to rely on us for their supplies.
So while on paper we can all take advantage of this arbitrage opportunity, I foresee obstacles that will make it impossible for you and me to get a piece of the action. Just like how I can, on paper, get USD for cheap on the WBWS exchange, but in practice I can’t.
What a crazy little country
The drama never ends in this teapot of ours. We will see how everything will turn out when the gold coins hit the market.
You may be thinking that you will surely be able to get at least one gold coin so you can sell it and retire. I remind you that it is the Zimbabwean government that we are dealing with here. You might end up buying a 5 karat gold coin, which is much lower in value than the 22 karat we were told about.
So unless you can verify otherwise, assume there might be something wrong with the parts.
Anyway, what do you think of all this? Let us know in the comments below.
You should also read:
RBZ Gold Coin: Who Can Get One, Can It Buy Anything, and Everything You Need to Know
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Government says willing buyer-willing seller for forex, but it’s more like lucky buyer-reluctant seller
Zim Government Introduces Potentially Game Changing Gold Coins, Commitment To Multi-Currency Regime Is Also Commendable