Gold coins hailed as an inflation hedge investment

Michael Tome 

Business Reporter

Analysts have said plans by the Reserve Bank of Zimbabwe to introduce gold coins would enable Zimbabweans to significantly hedge their local currency income from future inflation increases and also offer lucrative returns to holders on disposal.

A gold coin is made mostly or entirely of gold. Most gold coins minted since 1800 are 90–92 percent gold, while most of today’s gold bullion coins are pure gold, such as the Britannia, Canadian Maple Leaf, and American Buffalo.

The RBZ said on Monday its monetary policy committee had resolved to introduce gold coins into the market to provide an investment instrument that will allow investors to store value. It is expected the investment alternative will provide locals an alternative investment instrument, other than the US dollar, which can lock value.

The coins will be minted by Fidelity Printers and Refiners, a unit of the central bank, and sold through local financial institutions. Typically, gold coins have been used as an instrument of investment around the world.

A considerable population in the world economies see gold as an alternative to currency and gold coins are reputed to be a low-risk investment option as they offer better security, particularly in instances where the native currency loses its value.

In other countries, gold coins have not been used as a mechanism to tame inflation or stabilise currency but have been used as investment vehicles.

Closer to home, in South Africa gold coins have not been used as a monetary instrument but as an alternative investment instrument given that many investors hold gold and silver to hedge against various economic crises.

RBZ Governor Dr John Mangudya said it was early days yet to determine the format that the administering of the gold coins would take, stressing it was critically important to make sure the modalities leave little room for arbitrage and abuse of the investment option.

“Gold is money (forex), what if some people with access to a lot of money hoard it for purposes of smelting and smuggling it out,” said, adding “please wait a bit, we will give you all the information soon on the modalities”.

According to Muthoot finance, Muthoot Finance Ltd, is an Indian financial corporation and the largest gold loan non-banking finance company, gold coins are among the most reliable choices of investment and people have started to consider investing in them as a way of saving.

Gold coins usually have lower gold content than gold bars and are usually alloyed with silver and copper to produce a more wear-resistant coin.

Zimbabwe has lately been battling high inflation and the introduction of gold coins is expected to provide an alternative to store value besides the most sought-after United States dollar amid rising inflation, which has driven demand for the greenback to hedge inflation. Annual inflation surged to 191,6 percent in June this year from 131,7 percent a month earlier, which has largely been the result of resurgent inflation due to local currency depreciation and the negative impact of the war in Ukraine.

In an interview, Small and Medium Enterprises Association of Zimbabwe (SMEAZ) chief executive officer, Farai Mutambanengwe, said the gold coins should be accessible in Zimbabwe dollar so as to promote stability and strength of the local currency.

He also said the RBZ should carefully implement the system so as to prevent arbitrage opportunities just like those seen on the auction system has become a feeding trough for speculators as they access cheap US dollars and later dispose of them at higher prices on the parallel market.

“If gold coins are accessible as Zimbabwe dollar investment instruments then that will be beneficial for the economy but if they are sold in US dollars that can create a number of complications, firstly it means we are still supporting the US dollar economy, and that will leave an opportunity for arbitrage in the economy.

“We do not want a situation that will perpetuate what we have on auction right now, because if sold cheaply and not accessible to certain individuals not the generality of the market corruption will set in,” said Mr Mutambanengwe.

He said the introduction of the gold coins would deflate the US dollar mad dash which has undoubtedly led to spiralling exchange rates leading to high inflation levels.

Mr Mutambanengwe further stated that the initiative would present a vehicle at which people with surplus Zimbabwean dollars would spend on instead of chasing the US dollars.

“There are a lot of people with Zimbabwe dollars, they do not know where to invest and that is why people have been going for the US dollar or stock markets. Right now you find that people with excess Zimbabwe dollars are immediately converting them to USD, so instead of that, people with excess Zim dollars will now buy gold coins, which means RBZ will be reducing the number of Zim dollars in circulation, which would also strengthen the local currency,” said Mr Mutambanengwe.

Equity Axis, financial analyst and managing director, Respect Gwenzi, acknowledged that the initiative was only relevant if conducted in an appropriate manner.

“Gold coins can only become effective as an investment asset if they are minted with the commensurate value of actual gold or make sure there is a transparent mechanism to measure Gold value in RBZ vaults to back the Gold Coins,” said Mr Gwenzi.

Economist Eddie Cross said the gold coins should be traded in any currency that is considered a legal tender in the country since the country has a multi-currency system in operation. “Gold coins are mainly used as a store of wealth, they give people a new instrument they can invest in and hold value, I think they will be very popular given that locals are looking at ways to store value, this is likely to reduce the demand of US dollar as a hedging currency. 

“The gold coins should be sold in whatever currency and the price should be determined by the market at the time,” he said.

According to Muthoot Finance, gold is a tangible asset and has always commanded a good market value for centuries, thus buying gold coins for investment assures investors of good future returns. 

While other investment options might be risky, gold is relatively stable and one will always be able to protect their money in the long run. 

Price stability is an added advantage of buying gold coins for investment when compared to other investment options in the market as the price of gold never falls by a huge margin and is rather stable even during a global financial crisis.

People turn towards investing in gold whenever there is a crisis, thereby leading to a soaring price in no time.

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