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GOVERNMENT’S plans to introduce gold coins as an asset class which hedges investors from inflationary pressure could create arbitrage opportunities as well as trigger massive withdrawal of foreign exchange from the formal banking system, a new report has shown.
Battling rising inflation and a weakening domestic currency, Zimbabwe’s central bank this month announced its move to introduce the gold coins against the backdrop of firming prices of the commodity on the international market.
The announcement further stipulated that the gold coins will be available for sale to the public from 25 July in both local currency and US dollars. The coins will be sold in foreign exchange at a price based on the prevailing international price of gold and cost of production. The coins will be sold through the central bank and its subsidiaries, local banks and selected international banking partners.
Market players say the coins will widen the country’s capital market with a new asset class which underpins the strong demand for the coins. Asset managers have been at the forefront of the lobbying efforts to increase asset classes beyond treasuries, equities and private equity since 2019.
“We also expect holders of nostro balances to liquidate their balances in a manifestation of the bird-in-hand phenomenon.
Given the volatile policies in the country, we assert that there is more confidence in gold’s ability to store value than nostro accounts. We also opine that, despite efforts to uniquely identify the coins and establish due diligence protocols, there will be arbitrage profiteering opportunities using the gold coin. ZWL holders could purchase the coin for hard currency and then sell the currency on the parallel market in the worst case scenario,” Morgan & Co says.
On whether the new investment option is good right for investors, Morgan & Co says: “The short answer is no.”
“Over the past four years, the current international price of gold has been supported by the Covid-19 pandemic and the Russia-Ukraine conflict. In the absence of these global crises, we opine that the gold price would hover below US$1400/oz. Hence we opine that there is notable downward potential for investors.
Official figures show that gold output for the first quarter of 2022 surged by 87% to eight tonnes compared to the same period in 2021. The increase in output was largely driven by small-scale producers who contributed 61%, while large-scale producers contributed 34% and the remainder was from secondary producers. NewsHawks
