Huge appetite for Zimbabwe gold coins

ZIMBABWE'S central bank has registered an overwhelming uptake of the Mosi-oa-Tunya gold coin after local financial institutions, pension funds, insurance companies and individuals bought the bulk of the 2 000 coins, amid concern that the new asset class could create arbitrage opportunities.

With inflation soaring and the country's currency in a free fall, the monetary authorities are now fighting back with a novel strategy.

The initial gold coins were sold at US$1 823.80 each on Monday or ZW$805 745.35 using the willing buyer willing seller rate as at Friday. The coins can also be bought using other foreign currencies such as the rand and Australian dollar.

Gold is Zimbabwe's single-largest foreign exchange earner and production of the yellow metal has been on an upward trend in recent years, driven by strong output from artisanal miners.

Market watchers say while gold coins may create a new inflation-hedging investment option for asset management firms, the new investment may become a haven for rent-seeking behaviour and arbitrage.

The Reserve Bank of Zimbabwe however said it will closely monitor the supply of the coins, adding that agents, mainly banks, will use the know your customer (KYC) principle in selling them.

"Most of our agents are banks so we have distributed through the head offices of banks. The banks are the ones that shall now proceed to disburse those gold coins to their branches," Mangudya said.

"Furthermore will also not allow the liquidation of blocked funds for the purposes of buying gold coins since the government has already put in place a framework for dealing with blocked funds under the Finance Act whereby the government has made a determination of how it will liquidate blocked funds. The bank shall also be releasing the gold coins (going forward) on a demand basis.

Zimbabwe's former deputy prime minister Arthur Mutambara says the newly introduced gold coin is "a self-enrichment scheme for the elites".

Mutambara notes: "You exchange your US$ on the parallel market for 950, buy gold coins in ZW$ at 441 and pocket 100% profit.

"That is the gold coin arbitrage opportunity. Is this not common sense? It gets worse. For the elites who are connected and have access, you don't have to involve your hard earned US$ in the first part of the transaction. You take your ZW$ to the RBZ and buy the US$ at the auction rate. You take these ill-gotten US$ to the parallel market and buy ZW$ at 950. That's a huge profit. Then you go and buy your gold coins at 100% profit as explained before. No production. It is shameful."

Morgan & Co, a brokerage firm, in its research note on the impact of the gold coins on the economy noted that the policy measure could result in unintended consequences.

"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. Zimdollar 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.

"The ability to sell the coin in the international market potentially opens the country to a withdrawal of foreign currency in the formal market and, even more so, withdrawal of Zimdollar liquidity in the country. While this could theoretically put downward pressure on the parallel market rate, we maintain that there remain other factors nullifying the intended effect."