I think I know who the gold coins are actually for and it sickens me

Let us consider all that the Reserve Bank of Zimbabwe has told us about the coming gold coins. When we do that and also look at alternatives available to would-be buyers, the picture is clear. At least clear to me. There is one major group of people meant to buy the coins.

The RBZ made it clear that the main reason the 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 detail about how we get to that valuation here. Each coin will weigh one troy ounce (approximately 31 grams) and will be of 22 karat quality. Using a per gram price of US$52.14, the math works out to US$1,621.74 per coin.

You can use a different per gram price but if it’s from a free and relevant market it will be in the 50s. So, we can work with a range of $1600-1700 per coin.

That means we are looking to store value for the minority in the country. Very few ordinary Zimbabweans have US$1,600 or its equivalent just laying around. It was clear before we even knew how much the coins would be worth, they were meant for the wealthy few.

That raises the question, what then should we make of the claim that the coins are meant to curb the nation’s demand for the US? If the majority of Zimbabweans, who collectively make the huge parallel market work, cannot partake in the gold coin game, their USD demand remains intact.

It’s almost as if it is not the average Zimbabwean they had in mind. It will be clear that that’s the case by the end of this.

Easy tradeability

Off the bat, the fact that the RBZ is using the troy ounce betrays the kind of use they foresee or plan for. In gold trading circles the troy ounce rules but in Zimbabwean day to day matters, the metric system with its grams and kilograms is king.

Why are we following international standards if not to allow for easy trade across the globe? That has nothing to do with storing of value methinks.

Yes, I understand that easy tradeability/liquidity makes for a good short to medium term store of value. If you can’t extract the value quickly in time of need then what was the point of storing it?

However, are we looking to allow Zimbabweans to store value in the coins locally or what? You can’t tell me that using the troy ounce allows for easy price discovery when the per gram price is just as easy to determine.

You also can’t tell me the minting processes at Fidelity were constructed with the troy ounce in mind. That could be valid but I still don’t want to hear it.

We are just purposefully making it easy for smugglers to ship out every single coin should international prices rise enough, which will probably happen with the high inflation rates across the globe likely to lead to the price of gold spiking.

We shall be forced to conclude that this is a feature not a bug.

The stock exchange

The Zimbabwe Stock Exchange became a good store of value for corporates and high income earners. They started ‘investing’ on the ZSE just to preserve the value of their millions. They knew they could liquidate their shares farily quickly should the need arise.

In the process, some realised they could turn nifty profits trading shares. The govt says this speculative trading fuelled depreciation of the ZW$.

The govt of course stepped in and stopped all that jazz. They increased tax on shares held for less than 270 days. Making shares unsuitable as a liquid store of value.

The ZSE is up 77% from December 2021 but inflation has roared louder and when that is coupled with the higher tax should one sell their shares within 9 months of purchase, what can one do to preserve value?

The gold coins had to become reality.

Infrastructure projects

We talked about how many economists and businesspeople becried that beneficiaries of huge infrastructure project tenders were flooding the market with ZW$, tanking the exchange rate in the process.

The govt promised to double 2021 infrastructure spending in 2022 and I think that’s one major factor in the accelerating depreciation of the ZW$ this year.

So, while the govt scolds us for buying hundreds of USDs on the parallel market, they turn a blind eye to their infrastructure building partners mopping up millions, maybe even billions of USDs.

So, we can see that the govt is not contradicting itself when it says the gold coins are meant to ease USD demand. They know that most of the demand actually comes from these large contractors. The general public’s collective demand pales in comparison.

Not to pick on them but a number of Chinese companies are involved in big infrastructure projects in the country. They are paid partly (mostly?) in ZW$ but they can’t take our worthless currency back to their motherland and so they do the sensible thing and exchange them for USD.

Problem is they can only do so on the parallel market, which is illegal. That’s easily dealt with. China gifts the govt a new parliament building and extends loans to them and voila, the Zim govt is literally blind to see what some Chinese companies are doing.

Gold for the Chinese

Of course, other fatcats can also benefit, even some working for the govt itself. That’s just the cherry on top.

I think we chose the troy ounce to allow our partners, the Chinese, to easily repatriate their profits. So, you can see that it’s laugable to complain that the average Zimbabwean cannot afford the gold coins. The actual targets can easily afford the coins.

So, all this talk about the average person not being able to verify the authenticity of the 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, meaning our fears that people will be swindled left, right and center on the streets are overblown.

Look at it from the govt’s point of view, the new parliament building needs to be paid for one way or the other. This helps keep our foriegn overlords happy.

We are paying dearly to keep our friends on the table, we sacrifice our economy’s health, we gift them all our natural resources and award them all major infrastructure tenders. Are we getting an equivalent return?

Arbitrage opportuities abound

We are all out of voices now from shouting about how the forex auction creates arbitrage opportunities that only a few connected people can take advantage of. Yet the auction remains.

Their solution is the willing buyer willing seller (WBWS) forex market that cannot be called an open market by any strecth of the imagination. It remains an exclusive club that a few, including our Chinese friends, can access.

Reminder, when we talk about arbitrage here we are becrying the situation where a product is available on two different markets at two different prices. If one has access to both markets, they can simply buy from the market with the lower price and sell on the market with the higher price.

The gold coins will be purchaseable using the 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’s not an open market.

Here is what happens with the gold coins

Let’s paint the picture, the gold coin can be sold on international markets just as it can be sold locally. Gold remains gold and there is a ready market for it.

You can sell a troy ounce of gold, the coin, for US$1,622. That would be equivalent to ZW$1,167,840 on the black market. Meaning if you buy the coin using the ZW$ and immediately sell it for US$1,622 you make a profit of ZW$527,145 (1167840-640695).

In USD terms that’s equal to US$732. My friend, that is nuts. All one needs to do is convert their USD to ZW$ on the black market, purchase the coin using ZW$ and then sell the coin for US$1,622.

It will go down to how quickly one can sell the coins. Not many have a gold buyer in their contacts book. We’ll know them soon enough though. They will be on the corners with the forex traders yelling ‘tochinja goridhe here blaz?’

There will probably be a limit on the number of coins a walk in citizen can purchase so the unconnected gold buyer will have to rely on us for supplies.

So, while on paper all of us can take advantage of this arbitrage opportunity, I foresee obstacles that will make it impossible for you and I to get a piece of the action. Much like how I can, on paper, get USD for the cheap on the WBWS exchange, however in practice I cannot.

What a crazy little country

You might be thinking you’ll surely be able to get at least one gold coin so you can sell it and retire. I would remind you that this is the Zimbabwean govt we are dealing with here. You might end up buying a 5 karat gold coin, much less in value than the 22 karat we have been told is coming.

So, unless you can verify otherwise, work under the assumption that there could be something wrong with the coins.