Time now ripe for small gold coins

WHEN the one ounce gold coins from the Reserve Bank of Zimbabwe went on sale in July, there was some criticism that while big companies and rich people could afford them there was not much chance for ordinary people, or at least ordinary middle income people with spare cash.

That was sorted out yesterday when the smaller coins of half ounce, quarter ounce and one tenth of an ounce went on sale. The smallest coin, the one tenth of an ounce, would have been selling for $123 706,22 or US$186, and that moves it into the salary scale of a lot of people, with bonus time coming up.

They can buy gold instead of rushing to a black market dealer. Of course many spend what they earn on essentials, such as rent, food and school fees, but there are those who earn more, especially at this time of the year, who want to lock in value or just fancy the idea of having a gold coin, even a small one, in their hand. Gold still has glamour and does make people feel safer. A good reason for waiting four months before going for the small coins was that a lot of economic stability was required first. The main reason for issuing gold coins was not so much to let Zimbabweans buy and own gold legally, although that was a pleasant and useful major by-product, but to remove spare Zimbabwe dollar liquidity out of the market and out of bank accounts.

That was part, and an important part, of the efforts by the Government and the Reserve Bank to kill the black market, or at least turn it from a gambling casino and a speculator’s paradise into a sort of convenience store for people who wanted to convert small sums sent by a relative in the diaspora or who wanted to buy small sums to buy a tank of petrol.

But the big deals, speculators borrowing money to buy large sums or businesses with large sums of cash slopping around their bank account after major payments for goods and services, were largely wiped out by the Reserve Bank using market forces rather than legal edicts to tame the black market by pulling out the suppliers of the local currency feeding the market. The black market was a double market, people wanting to sell foreign currency and people wanting to sell Zimbabwe dollars.

The imposition of 200 percent interest on borrowers hammered the speculators who were engaged in a sort of time-lapse arbitrage, borrowing money this month to buy foreign currency and selling it again when the price rose enough to take care of the interest and bank charges and taxes and show a profit. The 200 percent interest, even at the worst of the market rises, meant there was no profit, and in fact the only winner was the lending bank.

At the same time the coins meant that the potentially honest in the business community, and they form a majority, no longer faced the temptation of soiling their hands by dealing with a dubious character who was selling black market bank notes at an incredible premium and incredible margin over what the sellers had been paid.

Instead they could just contact their bank and buy coins, at a small 5 percent premium over the global gold price. The sale of more than 11 000 coins, almost all for local currency, has pulled something like $12 billion out of bank accounts.

In time, some of those buyers will, after the six month wait, want to sell them for foreign currency, but this is not a problem since only around 350kg of gold was used, less than a week’s supply, and the Reserve Bank will still have the gold worth exactly what it paid for any coins surrendered. It was zero risk and zero liquidity hassles for the bank.

But a large chunk of the surplus liquidity created within the private sector was efficiently removed from circulation. Money supply is no longer created by the Government, with its tight fiscal discipline since the advent of the Second Republic, but the banking sector and the private sector between them were creating extra money.

Converting most of that to gold rather handily removed a lot of inflationary pressures and so we have low inflation for the last few months, a stable black market exchange rate and that rate at very modest premiums on the real exchange rate which handles most transactions. By offering businesses a perfectly legal way of locking in value for any spare cash they had, the Government has been able to hammer cheating. Those 19 companies now blacklisted from any further Government business had the opportunity to buy gold, but decided instead to feed the black market, despite renewed warnings that no more blind eyes would be turned.

This was no shot across the bows, but a salvo straight into the hull, and everyone else will have picked up the message very quickly and the remnants of the business dealings are now switched off in the black market and that should reflect on its viability, making it even more something where you cannot make money. In fact when you put in the 10 percent premium on the mid interbank rate that retailers are allowed to use, around five percent on the interbank buy rate, you now have the interesting situation that it does not matter whether you spend your US dollars in a shop or sell them on the street.

The rate is about the same and even if a dealer slashes their margin to the bone, the two percent tax and the mobile money or bank charges will chew up any possible gain.

So shops, rather than street dealers, are now collecting those little diaspora payments and they have to bank the money and pay US dollar VAT on US dollar purchases, so the Government can pay part of civil servants’ bonuses in foreign currency.

So everyone wins and the black market dealers come second.

But there is still some black market dealing by people who have a little bit of extra cash and worry about inflation. Now they can move into gold as well, removing another batch of buyers of foreign currency from the black market. They were not the main drivers of those ridiculous speculative fluctuations, but then they will not be the main buyers of gold either, at least when we look at kilogrammes rather than actual small coins. But now that the ounce coins have brought stability, the small coin sales make sense, which they did not in July.

The move to offer the smaller gold coins now that so much stability has been won will help lock in that stability further by removing yet another pressure point, at zero cost and zero risk to the Reserve Bank, while introducing a bit of glamour into our lives.

All this will keep Zimbabwe on the straight path to a more normal economy, where people save spare money, banks pay positive interest on those savings, inflation is low and no one stays awake all night worrying too much. Using market forces to kill the wholesale black market, converting its remnants into a little convenience stall on the pavement, and killing almost all speculative behaviour with interest rates and banning speculators from Government contracts, worked far better than arrests and fines.

This latest move is just continuing that process as we keep driving down inflation and making our newly-won and viable stability something that can last forever since it is based on economics, not coercion.