The RBZ releases smaller gold coins, here is what you need to know

Following the success of gold coins in the Zimbabwean economy, the RBZ will start selling smaller denominations of coins starting today. The RBZ is issuing 3 new coins which are the one tenth of an ounce coin, the one quarter of an ounce coin and the half an ounce coin. The original one ounce gold coin has been selling for around US$1 800 at a rate of around $652 ZWL per 1 USD. Given the fact that these smaller coins are pretty much the same in terms of composition it is quite easy for us to estimate how much they will sell for.

• The one-tenth coin, which is the smallest coin, will probably sell at a tenth of the original coin’s price. That is around US$170-US$180 per coin
• The one-quarter gold coin will sell for around $45o per coin
• The half-ounce coin will sell for about US$900 per coin

The draw of the smaller coins is pretty much the same reason why the RBZ has two foreign currency auctions one for large entities and the other SMEs. Smaller companies still need a way for them to retain the value of their savings and often times they cannot afford to buy the large US$1 800 coin. The RBZ is hoping that by introducing smaller coins, smaller businesses can also partake in the gold coin trade. This will probably ease the rate down for a bit as gold coins are sold at a favourable rate compared to USD which is selling for $900 ZWL per 1 USD and even more on the streets. Less demand for USD means a lower rate than would otherwise be the case.

A dubious longterm outlook

The gold strategy looks impressive in the short-run. Coupled with reduced government spending, gold coins have tightened up the liquidity on Zimbabwe’s streets resulting in much less ZWL chasing the few USD on the black market. The result has been that the rate which some claimed would have passed the $1 000 ZWL or even $5 000 ZWL mark by now, has remained at a more manageable current rate of $900 ZWL per 1 USD. That in itself is a very impressive achievement. It remains however to be seen if the government can pull this off in the long term.

There are many bets against this happening:

• We are in the penultimate year before the upcoming harmonised election. The government would want to spend money so as to make various constituents happy. That might tempt them to loosen the ZWL purse strings resulting in more ZWL in the market and a rise in the rate
• It’s not clear how contractors are getting paid at the moment. In times before they were paid using ZWL and they would rush to the black market to convert it to USD. The RBZ, eventually had to admit they were the true “saboteurs”, not businesses that were often blamed for being such.
• Currently, these contractors are probably finding relief in gold coins. The thing though is thanks to a still much lower official rate, the RBZ is still selling those coins at a subsidy. How long will that continue?
• Imports still remain much higher than exports. This means the demand for foreign currency is very high. If the foreign currency was cocaine, Zimbabwe would be an irredeemable cokehead. 90% of our clothes are imported. Thanks to an adverse business operating environment that includes expensive energy which is erratic, it costs more to produce clothes in Zimbabwe than it does to import second-hand bales of it. Practically everything is being imported with exporters mobbed by various foreign currency-hungry departments.

It will be interesting how it plays out in the long run.