‘Long way before a gold-backed local currency’
http://www.theindependent.co.zw/
Friday, 20 May 2011 10:05
Reginald Sherekete
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.