Zimbabwe's Gold-Backed Assets Gain Popularity as Value Preservers

Zimbabwe's gold coins, introduced in 2022, have become a valuable tool for preserving wealth. Priced at the international gold rate plus production costs, they have gained 24.2% in less than two years. The coins come in various sizes, with the one-ounce coin currently valued at US$2,265.32. The central bank has also introduced gold-backed digital tokens, which have seen strong demand. Despite the gold coins' success, analysts believe more needs to be done to enhance their convertibility and adoption as a medium of exchange.

Zimbabwe's Gold-Backed Instruments Gain Traction as Store of Value

Introduction

In July 2022, the Reserve Bank of Zimbabwe (RBZ) introduced gold coins as a strategic measure to address the disproportionate demand for the US dollar in the economy and provide a convenient means of value preservation.

Gold Coins: A Success Story

At the time of their launch, the first batch of 2,000 gold coins was sold at US$1,823. Today, they command a premium of 24.2%, trading at US$2,265. The price is determined by the international market rate for gold, with an additional 5% production cost markup.

Gold coins are available in various sizes, ranging from one-tenth of an ounce (US$226.53) to one ounce (US$2,265.32). While specific sales data is not readily available, the pension funds industry alone acquired 2,009 coins by September 30, 2023, primarily in the one-ounce denomination.

Gold-Backed Digital Tokens: An Emerging Alternative

In May 2023, the RBZ expanded its gold-backed instruments by introducing digital tokens. These tokens can be purchased and utilized for savings, person-to-person transactions, and business settlements. They can also serve as a store of value.

As of March 20, 2024, the central bank had sold 814,339,222 milligrams (8,114.34 kg) of gold-backed digital tokens, representing a significant uptake of this innovative instrument.

Performance and Impact

The gold coins and gold-backed digital tokens have performed well as open market instruments, offering investors a hedge against currency depreciation and inflation. However, their impact on reducing demand for the US dollar or mitigating inflation remains a subject of debate.

Some analysts, such as Dr. Alfred Mthimkhulu of Bard Santner Inc., believe the gold coins have been an ideal investment, providing a substantial 25% return in USD over 18 months.

Others, like Mr. Rufaro Hozheri, emphasize the significance of considering the Zimbabwe dollar (ZWL) price of the coins, as over 90% were purchased in local currency. While the ZWL price tracks the USD gold price, Mr. Hozheri notes that the gold coins have outperformed the Zimbabwe Stock Exchange (ZSE) All-Share Index, indicating their effectiveness as a value-preservation tool.

Financial economist Mr. Malone Gwadu acknowledges the coins' and tokens' success as a store of value but stresses the need for improved convertibility back to the currency for trade. He believes that enhancing accessibility will increase their acceptability in the market.

Conclusion

The introduction of gold coins and gold-backed digital tokens by the RBZ has provided Zimbabweans with convenient and reliable instruments for value preservation. While their performance has been encouraging, further efforts are required to improve their liquidity and integration into the broader financial system. By addressing these challenges, these gold-backed instruments can play a more significant role in reducing demand for foreign currency, stabilizing the exchange rate, and supporting economic stability in Zimbabwe.