Opinion / Columnist
Zimbabwe government's continued web of lies on ZiG gold-backing exposed!
11 Oct 2024 at 08:32hrs | Views
Yesterday's statement, in a ZBC interview, by Reserve Bank of Zimbabwe Governor John Mushayavanhu has sparked confusion regarding the country's new currency, the Zimbabwean Gold (ZiG).
The governor claimed that the ZiG is gold-backed and not gold-linked, which is why its value is not pegged to gold.
In the interview, he scandalously attempted to justify why the ZiG's value was not moving in tandem with the price of gold on the world market.
If anything, whilst the ZiG has been losing value in spectacular fashion since its introduction only six months ago, gold, on the other hand, has been firming.
Whereas the ZiG began its journey on 5th April 2024 at 13.56 to the greenback, it is now at a staggering 24.30 on the official market and around 50 on the parallel market.
Yet, the price of gold was US$2327.70 per ounce on 5th April 2024, but today it is way higher at US$2645.60.
This is what prompted many Zimbabweans to query why our own currency was depreciating whilst the price of gold was increasing.
Have the government of Zimbabwe and the central bank not repeatedly told us, ever since the introduction of the new currency, that the ZiG is backed by gold and as such there is no chance of it losing value (a fate met be all other previous local currencies)?
As a matter of fact, soon after the ZiG came on board, Mushayavanhu assured Zimbabweans that the new currency would be at par with the value of the physical Mosi-oa-Tunya gold bullion coin and the value of ZiG would fluctuate with the spot price of gold.
To directly receive articles from Tendai Ruben Mbofana, please join his WhatsApp Channel on: https://whatsapp.com/channel/0029VaqprWCIyPtRnKpkHe08
That is even why the initial value of the new currency on 5th April 2024 was ZiG13.56 to one US dollar.
This decision was made taking into consideration the spot price of gold on that day in the range of US$2300 with the ZiG standing at over 31,118 units of currency for one ounce of gold.
So, if one divides 31,118 by US$2300, you get 13.56, which was the rate of the ZiG on 5th April 2024.
This proves, without a shadow of a doubt, that the new currency's value was pegged to the price of gold.
However, this is not what we have been witnessing ever since that day.
The price of gold has been going up, whilst the ZiG is tumbling - with the RBZ itself devaluing the currency by a shocking 44% a fortnight ago.
Who can then blame Zimbabweans for demanding answers?
First to respond was the finance minister Mthuli Ncube, and then yesterday, it was the turn of the central bank governor.
Both elected to give the same, possibly scripted and rehearsed, response.
The ZiG was indeed gold-backed, but, according to the two men, the meaning had suddenly changed.
Ncube and Mushayavanhu chose to confuse the public by trying to make a distinction between a gold-backed and gold-linked currency.
Now, all of a sudden, what gold-backed meant was that there were simply gold reserves (as well as other precious metals and foreign currency) that were stored at the RBZ which could be used to buy US dollars to shore up the local currency.
Mushayavanhu, in a stark departure to his statement soon after the launch of the ZiG, even claimed that the value of a gold-backed currency was not fixed to the price of gold.
He alleged that a 'gold-linked' currency was the one whose value was determined by the gold price.
Wow! These people can change their colours faster than a chameleon!
Anyway, the question now is: Are these two men telling us the truth?
Is the value of a gold-backed currency, which they still insist ZiG is, not pegged to the price of gold?
This assertion raises fundamental questions about the nature of gold-backed currencies and their distinction from gold-linked currencies.
The concept of gold-backed currencies has been debated among economists and policymakers for centuries.
A gold-backed currency is a monetary system where a country's currency is directly tied to gold reserves.
Each unit of currency represents a corresponding amount of gold, and the currency can be exchanged for gold at a fixed rate.
Historically, gold-backed currencies have provided stability and trust in the financial system.
The gold standard, implemented in the 19th century, ensured that currencies were convertible to gold at a fixed rate.
For instance, the United States adhered to the gold standard from 1879 to 1933, with the dollar pegged to gold at US$20.67 per ounce.
Similarly, the United Kingdom maintained the gold standard from 1717 to 1931, with the pound sterling pegged to gold at £4.25 per ounce.
In contrast, gold-linked currencies have adjustable exchange rates pegged to gold, without physical reserves backing every unit of currency.
Gold-linked currencies allow for more flexibility in monetary policy but expose the currency to market fluctuations.
Examples include the Bretton Woods system (1944-1971), where currencies were pegged to the US dollar, which was, in turn, pegged to gold.
Modern commodity-backed currencies, such as the Singapore dollar, are managed against a basket of currencies and commodities, including gold.
Therefore, Ncube and Mushayavanhu's statements that the ZiG is gold-backed because the central bank holds gold and foreign currency reserves are misleading.
This description aligns more closely with a gold-linked currency, where reserves can be used to stabilize the currency but do not guarantee a fixed exchange rate.
According to Dr. Steve Hanke, Professor of Applied Economics at Johns Hopkins University, "A gold-backed currency requires a 100% reserve requirement, where each unit of currency is backed by a corresponding amount of gold. Anything less is a gold-linked currency, which is essentially a managed float."
The distinction between gold-backed and gold-linked currencies has significant implications for Zimbabwe's economic stability.
A true gold-backed currency would provide stability, whereas a gold-linked currency may fluctuate.
The central bank's flexibility is limited under a gold-backed system, and misrepresenting the currency's backing may erode trust among investors.
Switzerland's currency, the Swiss franc, is often cited as a model for a stable, gold-backed currency.
Although not fully gold-backed, the Swiss National Bank maintains a 40% gold reserve requirement.
Switzerland's economic indicators demonstrate the effectiveness of this approach: an inflation rate of 0.7%, GDP growth rate of 2.1%, foreign exchange reserves totalling US$1.1 trillion, and gold reserves of 1,040 tonnes (all 2022 estimates).
To establish a stable monetary framework, Zimbabwe should clarify the ZiG's monetary framework, explicitly stating whether it is gold-backed or gold-linked.
The country must establish a clear distinction between gold-backed and gold-linked currencies and ensure transparency in central bank operations, including regular audits and publication of financial statements.
Additionally, Zimbabwe should consider developing a robust monetary policy framework addressing inflation, interest rates, and exchange rate management is also crucial.
In conclusion, Ncube and Mushayavanhu's claims regarding the ZiG's gold backing require clarification.
A genuine gold-backed currency demands physical reserves, fixed exchange rates, and central bank guarantees.
However, they insist the local currency is gold-backed, something that is counter the reality on the ground.
If the ZiG was genuinely gold-backed, then its value would be aligned to the price of gold.
Yet, the opposite is happening.
This proves that both the government of Zimbabwe and the central bank are lying through their teeth.
These are the things that further erode Zimbabweans' confidence in and acceptance of their local currency.
It is because those in authority are totally incapable of telling the truth.
How then is our economy supposed to stabilize and strengthen with a government that is busy sabotaging its own currency?
© Tendai Ruben Mbofana is a social justice advocate and writer. Please feel free to WhatsApp or Call: +263715667700 | +263782283975, or email: mbofana.tendairuben73@gmail.com, or visit website: https://mbofanatendairuben.news.blog/
The governor claimed that the ZiG is gold-backed and not gold-linked, which is why its value is not pegged to gold.
In the interview, he scandalously attempted to justify why the ZiG's value was not moving in tandem with the price of gold on the world market.
If anything, whilst the ZiG has been losing value in spectacular fashion since its introduction only six months ago, gold, on the other hand, has been firming.
Whereas the ZiG began its journey on 5th April 2024 at 13.56 to the greenback, it is now at a staggering 24.30 on the official market and around 50 on the parallel market.
Yet, the price of gold was US$2327.70 per ounce on 5th April 2024, but today it is way higher at US$2645.60.
This is what prompted many Zimbabweans to query why our own currency was depreciating whilst the price of gold was increasing.
Have the government of Zimbabwe and the central bank not repeatedly told us, ever since the introduction of the new currency, that the ZiG is backed by gold and as such there is no chance of it losing value (a fate met be all other previous local currencies)?
As a matter of fact, soon after the ZiG came on board, Mushayavanhu assured Zimbabweans that the new currency would be at par with the value of the physical Mosi-oa-Tunya gold bullion coin and the value of ZiG would fluctuate with the spot price of gold.
To directly receive articles from Tendai Ruben Mbofana, please join his WhatsApp Channel on: https://whatsapp.com/channel/0029VaqprWCIyPtRnKpkHe08
That is even why the initial value of the new currency on 5th April 2024 was ZiG13.56 to one US dollar.
This decision was made taking into consideration the spot price of gold on that day in the range of US$2300 with the ZiG standing at over 31,118 units of currency for one ounce of gold.
So, if one divides 31,118 by US$2300, you get 13.56, which was the rate of the ZiG on 5th April 2024.
This proves, without a shadow of a doubt, that the new currency's value was pegged to the price of gold.
However, this is not what we have been witnessing ever since that day.
The price of gold has been going up, whilst the ZiG is tumbling - with the RBZ itself devaluing the currency by a shocking 44% a fortnight ago.
Who can then blame Zimbabweans for demanding answers?
First to respond was the finance minister Mthuli Ncube, and then yesterday, it was the turn of the central bank governor.
Both elected to give the same, possibly scripted and rehearsed, response.
The ZiG was indeed gold-backed, but, according to the two men, the meaning had suddenly changed.
Ncube and Mushayavanhu chose to confuse the public by trying to make a distinction between a gold-backed and gold-linked currency.
Now, all of a sudden, what gold-backed meant was that there were simply gold reserves (as well as other precious metals and foreign currency) that were stored at the RBZ which could be used to buy US dollars to shore up the local currency.
Mushayavanhu, in a stark departure to his statement soon after the launch of the ZiG, even claimed that the value of a gold-backed currency was not fixed to the price of gold.
He alleged that a 'gold-linked' currency was the one whose value was determined by the gold price.
Wow! These people can change their colours faster than a chameleon!
Anyway, the question now is: Are these two men telling us the truth?
Is the value of a gold-backed currency, which they still insist ZiG is, not pegged to the price of gold?
This assertion raises fundamental questions about the nature of gold-backed currencies and their distinction from gold-linked currencies.
The concept of gold-backed currencies has been debated among economists and policymakers for centuries.
A gold-backed currency is a monetary system where a country's currency is directly tied to gold reserves.
Historically, gold-backed currencies have provided stability and trust in the financial system.
The gold standard, implemented in the 19th century, ensured that currencies were convertible to gold at a fixed rate.
For instance, the United States adhered to the gold standard from 1879 to 1933, with the dollar pegged to gold at US$20.67 per ounce.
Similarly, the United Kingdom maintained the gold standard from 1717 to 1931, with the pound sterling pegged to gold at £4.25 per ounce.
In contrast, gold-linked currencies have adjustable exchange rates pegged to gold, without physical reserves backing every unit of currency.
Gold-linked currencies allow for more flexibility in monetary policy but expose the currency to market fluctuations.
Examples include the Bretton Woods system (1944-1971), where currencies were pegged to the US dollar, which was, in turn, pegged to gold.
Modern commodity-backed currencies, such as the Singapore dollar, are managed against a basket of currencies and commodities, including gold.
Therefore, Ncube and Mushayavanhu's statements that the ZiG is gold-backed because the central bank holds gold and foreign currency reserves are misleading.
This description aligns more closely with a gold-linked currency, where reserves can be used to stabilize the currency but do not guarantee a fixed exchange rate.
According to Dr. Steve Hanke, Professor of Applied Economics at Johns Hopkins University, "A gold-backed currency requires a 100% reserve requirement, where each unit of currency is backed by a corresponding amount of gold. Anything less is a gold-linked currency, which is essentially a managed float."
The distinction between gold-backed and gold-linked currencies has significant implications for Zimbabwe's economic stability.
A true gold-backed currency would provide stability, whereas a gold-linked currency may fluctuate.
The central bank's flexibility is limited under a gold-backed system, and misrepresenting the currency's backing may erode trust among investors.
Switzerland's currency, the Swiss franc, is often cited as a model for a stable, gold-backed currency.
Although not fully gold-backed, the Swiss National Bank maintains a 40% gold reserve requirement.
Switzerland's economic indicators demonstrate the effectiveness of this approach: an inflation rate of 0.7%, GDP growth rate of 2.1%, foreign exchange reserves totalling US$1.1 trillion, and gold reserves of 1,040 tonnes (all 2022 estimates).
To establish a stable monetary framework, Zimbabwe should clarify the ZiG's monetary framework, explicitly stating whether it is gold-backed or gold-linked.
The country must establish a clear distinction between gold-backed and gold-linked currencies and ensure transparency in central bank operations, including regular audits and publication of financial statements.
Additionally, Zimbabwe should consider developing a robust monetary policy framework addressing inflation, interest rates, and exchange rate management is also crucial.
In conclusion, Ncube and Mushayavanhu's claims regarding the ZiG's gold backing require clarification.
A genuine gold-backed currency demands physical reserves, fixed exchange rates, and central bank guarantees.
However, they insist the local currency is gold-backed, something that is counter the reality on the ground.
If the ZiG was genuinely gold-backed, then its value would be aligned to the price of gold.
Yet, the opposite is happening.
This proves that both the government of Zimbabwe and the central bank are lying through their teeth.
These are the things that further erode Zimbabweans' confidence in and acceptance of their local currency.
It is because those in authority are totally incapable of telling the truth.
How then is our economy supposed to stabilize and strengthen with a government that is busy sabotaging its own currency?
© Tendai Ruben Mbofana is a social justice advocate and writer. Please feel free to WhatsApp or Call: +263715667700 | +263782283975, or email: mbofana.tendairuben73@gmail.com, or visit website: https://mbofanatendairuben.news.blog/
Source - Tendai Ruben Mbofana
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