Zimbabwe Reconsidering a Gold-Backed Local Currency


WHEN Reserve Bank chief Gideon Gono announced plans to introduce a new gold-backed local currency two years ago, the move caused a furore of interest and criticism. However the proposal seemed to have died a natural death since then.

Now, amidst the firming of commodities prices, Gono has resurrected his push, criticising the United States’ Federal Reserve for running their printing press to the ground in order to finance a budget deficit.

Gono was quoted last week in a local paper saying: “The trillions of dollars being printed in the US to finance their budget deficit year-in year-out will one day run out of steam and its inflationary impact on other countries will likely lead to a resistance of this base currency if the US does not take immediate steps to rein in its appetite for deficit financing in the medium to long-term.”

The US budget deficit was projected at US$1,65 trillion after the announcement of the US$3,8 trillion 2011 budget plan. The pressure thrust on gold could be enormous as central banks which hold US dollar reserves are now opting to hold the precious metal rather than the dollar. Analysts say the continued printing of the dollar by the US seems to be dampening confidence in the dollar amid high inflation fears.

Gold broke the US$1 500 psychological barrier in the past weeks to establish a new support price.The precious metal had long been resisting the new benchmark and has since peaked at US$1 579,00 per ounce.

The firming gold price has also raised debate amongst investors and analysts alike on the direction of the precious metal and the way forward for Zimbabwe. China has been increasing its gold reserves despite being conservative in offloading their US dollar holdings. In 2009, China declared an increase of their gold reserves by 454 metric tonnes which they indicated as purchases since 2003.

China currently holds US dollar reserves of nearly $2 trillion. Analysts say China could be getting increasingly nervous about the dollar. The Asian giant had gold reserves of 1 054 tonnes as of April 2011, a figure representing only 1,6% of its forex reserves.

Russia has been the most active in the past two years and substantially increased its gold reserves by 230,6 metric tonnes to 792,3 tonnes, which represents 7,3% of its forex reserves.

This, analysts say, may indicate a deliberate move by most central banks to hold the bullion compared to the US dollar.

“I strongly believe that the days of the US dollar as the world’s reserve currency are numbered. There is need for us to begin thinking seriously and urgently about introducing a gold-backed Zimbabwe currency which will not only be stable but internationally acceptable,” added Gono.

But the use of the gold standard fell away in 1971 and if put in perspective does not really give a true value of the US dollar.

Reserves currently held by the US are 8 133,5 metric tonnes as at April 2011, according to the World Gold Council. With the price of gold at US$1 500, the US gold reserves are valued at US$434,2 billion. From this analysis, the US dollar could be overvalued or rather gold is undervalued if it really backs the US monetary base which stands at US$2,493 trillion.

Former ENG Capital Gilbert Muponda (pictured) was this week quoted supporting the proposal by Gono to introduce a gold-backed Zimbabwe dollar.

He said: “It is an idea whose time has come. If implemented properly, the gold-backed local currency will resolve the liquidity crisis currently ravaging the sanctions-hit economy.”

He further indicated that revenue from diamonds could be used to build the six months import cover and stock up gold reserves to support the Zimbabwe dollar.

An economist with a financial institution shot down the idea of introducing a gold-backed Zimbabwe dollar as an ambitious task saying the country does not have any stock piles.

“The country does not have any reserves, the only gold to talk about are untamed gold fields with no exact figures of deposits. The production side, if being optimistic for 2011, could just total 18 000kgs which translates to about $600 million dollars,” he said.

Zimbabwe has a long way before its reserves can substantiate a monetary base backed by gold, analysts say. Expansionary monetary policies may not be possible without an equal increase in the bullion. Adoption of the gold standard in isolation by any country could be costly.

Economic growth can be suffocated if money supply is directly linked to changes in gold reserves.

With US gold reserves at 8 133,5 metric tonnes and compared to a monetary base of US$2,493 trillion translates to a price of US$8,614.94 per ounce. Can this be an indication of the open upside of the precious metal? Other analysts in the market feel the use of the gold standard to determine the real price of gold or it being an impetus for future price increase is misleading.

“It is a matter of supply and demand. Gold is definitely enjoying huge demand given the inflationary pressures on the US dollar,” said a commodities analyst. “It is important to remember that gold is a commodity, subject to the laws of supply and demand. The price also is influenced by mining and extraction costs, or the expectation that central banks will buy more gold to diversify their assets.”

Gold has been in a 10 year bull market beginning at a low of US$271,10 per ounce in January 2001 to a high of US$1 388,50 an ounce in January 2011 — an increase of 412%. This implies a 40% average annually. Gold producing countries like Zimbabwe stand a huge opportunity in increasing their gold export earnings. There has been a steady recovery in the gold mining sector with 2009 annual output figures at 4 970 kgs and 2010 totaling 7 610 kgs.

In the budget statement, the forecast for 2011 was set to almost double at 13 500 kgs.

Gold production has been greatly hampered by funding constraints due to liquidity challenges and indigenisation laws hindering foreign investment into the mining sector. The mining sector is also being held back by power cuts which affect production targets.

At the moment, the Reserve Bank of Zimbabwe is not stocking any gold. Given the positions taken by other central banks it would be smart for the RBZ to begin stock-piling initiatives in anticipation of firmer prices in the future. But analysts say Zimbabwe’s economic situation is still too dire for such therapy.

Gono said: “We need to rethink our gold mining strategy, our gold liberalisation and marketing strategies as a country.”

Financial innovation by Tetrad Asset Management in introducing the Gold Fund as one of their unit trusts products places investors in a position to tap into the gold boom. Since inception in July 2010, the fund has increased by 17% to US$1,17 to-date from the US$1,00 issue price.

“From inception the fund has received significant response from the market but since it is a unit trust fund which attracts small investors, accommodation of huge investors like pension funds tends to cause liquidity shocks to the fund and affects the valuations when they decide to liquidate their units,” said a fund manager at Tetrad Asset Management. He indicated that they are working on a new tailor-made product which may give huge investors the exposure to invest in gold and ride the current bullish trend.