As gold prices skyrocket, the Reserve Bank of Zimbabwe (RBZ) has resumed issuing gold coins.
The central bank introduced the coins in June 2022. The program was touted as a way for investors to store value in the face of rampant inflation. At the time, a Zimbabwean brokerage firm analyst told Al Jazeera that the coin was a “welcome development.”
“For a long time, the market did not have many investment options, and this is a new asset class. The thinking was inspired by the need to come up with an instrument that addresses the inflation problems in the economy, where purchasing power has been eroded. From what we are gathering, this is going to be a store value.”
He went on to say that the fundamentals of gold help it hedge against inflation and geopolitical risk, and that the gold coins would open the gold market to “ordinary investors.”
The RBZ suspended the sale of the coins 10 months ago, but they are now being reintroduced through local banks.
Fidelity Gold Refineries (Private) Limited mints the 22-carat "Mosi-Oa-Tunya" coin. It is available in various sizes, ranging from 1/10 ounce to 1 ounce.
The Zimbabwe central bank owns Fidelity Gold Refineries (Private) Limited, and it operates as the only gold-buying and refining entity in the country.
RBZ monetary policy committee member Persistence Gwanyanya told Bloomberg that the reintroduction of the gold coins comes at a time when “gold is more attractive to the market,” and that the move “supports our value preservation efforts.”
“We are taking advantage of firm gold prices and re-injecting the gold coins into the market.”
According to the Bloomberg article, the hope is that resuming gold coin sales will “ramp up the bullion stockpile used to back up the local currency, the ZiG.”
You might be wondering how selling gold increases a bullion stockpile.
The answer is it doesn't. Bloomberg seems to be oversimplifying a monetary policy scheme that will increase the reserves backing the ZiG, but won't increase the country's gold reserves specifically.
Propping Up the ZiG
Zimbabwe introduced the ZiG in an effort to stabilize the country’s financial system. It is a structured currency backed primarily by 2.5 tons of gold, along with other forex reserves, including $100 million in U.S. currency.
As the Zimbabwe African National Union-Patriotic Front (Zanu PF) explained when the currency was introduced, “Given that Zig is a structured currency deriving its value from gold (a valuable asset), it is likely to maintain a stable value, ceteris paribus. The value of zig against USD, therefore, appreciates or depreciates as the gold price increases or decreases in the international market. Given the stability of the gold price, the zig is more likely going to be stable in value currency."
Less than six months later, the central bank had already devalued the new money.
From a practical standpoint, selling gold coins won’t increase the country’s gold reserves. However, the sale of the coins could be used as a monetary policy tool by pulling local currency out of circulation, thereby reducing the money supply.
Even though the physical gold moves into private hands, the RBZ could treat the original gold acquisition to mint the coins, and the sale process as building financial reserves behind the ZiG. From a balance sheet perspective, the gold and the currency collected from selling the gold would become part of the "reserves" backing the ZiG.
Zimbabwe’s Sketchy Monetary History
To say Zimbabwe has a bad track record for monetary management would be a gross understatement.
The ZiG was the sixth government attempt to shore up the Zimbabwean currency since 2009.
The country has a long history of rampant inflation. The Zimbabwean dollar (RTGS) lost about 800 percent of its value against the dollar in 2023 alone.
Hyperinflation wiped out the value of the Zimbabwe dollar in the early 00s. In 2009, the government simply abandoned its own currency and adopted foreign currencies – primarily the U.S. dollar (or, more accurately, the Federal Reserve Note).
The African nation reintroduced the Zimbabwe dollar in 2019. But the government apparently didn’t learn its lessons, and the currency quickly devalued again. By mid-July 2019, price inflation had increased to 175 percent.
As economist Milton Friedman once said, “Inflation is always and everywhere a monetary phenomenon, in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.”
In other words, if a country is experiencing price inflation and currency devaluation, it is ultimately the government’s fault. Price inflation is a symptom of monetary inflation – government creating more and more currency to prop up spending.
During Zimbabwe's first round of hyperinflation, the government was printing money to finance Mugabe’s military involvement in Congo. It was also allegedly creating currency to pay for government corruption and to fill the pockets of politicians and their buddies.
More recently, Al Jazeera reported, “The printing of new money by the central bank has also worsened the situation, reversing gains made in the past two years that saw inflation decrease from a peak of 800 percent in 2020 to 60 percent in January [2023].”
The ZiG was supposed to slam the door on the country's monetary malfeasance. Backing currency with a hard asset theoretically limits money creation. The government shouldn't create more notes unless it gets more gold. A gold standard puts a natural brake on monetary expansion.
But merely pegging a currency won’t do the trick if the government can’t resist the temptation to arbitrarily change the peg. A gold standard only works when government officials leave it alone. And as Americans learned in the 1930s, governments can and will quickly unravel a gold standard when it suits their purposes.
With the dollar tied to gold, the Federal Reserve couldn’t significantly increase the money supply during the Great Depression. It wasn’t able to simply fire up the printing press as it can today. The Federal Reserve Act required the central bank to hold enough gold to back at least 40 percent of the notes in circulation.
But a lot of Americans were redeeming paper dollars for physical gold because they were losing faith in the paper currency. As a result, the central bank was low on gold and up against the limit.
This put President Franklin D. Roosevelt between a rock and a hard place. He wanted the Fed to increase the money supply and support government spending, but this was limited by the partial gold standard.
To solve the problem, FDR took several steps to untether the dollar from gold, including attempting to remove most gold from private ownership. He also raised the dollar peg, just like Zimbabwe recently did.
It appears the Zimbabwe government is going down the same path – again – using monetary smoke and mirrors instead of dealing with the root of the problem – government spending.
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