The issue of Zimbabwe’s own gold coins, the Mosi-oa-Tunya, was deemed successful with 1 500 sold in the first week and 2 000 available for sale this week in market eager for more, and so we now need to look at what these coins are meant to achieve and why the supply is being spaced and why there is a six month wait before the coins can be sold back to the Reserve Bank of Zimbabwe.
They were issued as a store of value. The coins have a mass of 33.93g made up of exactly 1 troy ounce of gold, about 31,10348g, plus the one twelfth of an ounce, or around 2,83g, of the alloying metal, almost certainly copper.
They sell for the daily gold price plus a 5 percent charge for minting and distribution which will include the cost of that tiny bit of copper, about 2,2 US cents at present depressed copper prices.
The minting means buyers know exactly what they are buying including the mass of gold and the exact composition of the alloy, 22 carat gold.
But primarily and indirectly the coins were issued to contain the black market for US dollars, and thus stop that market continuing to crash the local currency, and that crashing of the currency, against all expectations from the fundamentals, has been the primary driver of inflation.
This is possible when you start doing the sums.
In the first week around 15 percent of the coins were sold for US dollars, around 225 of the 1500 coins.
Since the Reserve Bank will normally sell its refined gold ingots for US dollars it cannot lose since the 5 percent surcharge pays for the minting costs and that tiny bit of alloy.
But it is interesting that some holders of US dollars were ready to transfer into gold that can be legally held in Zimbabwe. Raw gold can only be held for a short time by miners, and no one else, while it is on route to Fidelity for sale.
It would be interesting to know who those US dollar buyers were, and it can be assumed that they were people or companies wanting to hedge against the almost 10 percent inflation rate in the US and bet on the gold price instead, which is fair enough but they were hardly the main target consumer group.
The other 1 275 coins were bought in local currency, and only the Reserve Bank can know exactly how much was spent on those coins, since the price in local currency varies daily according to the both the gold price and the interbank rate, so a calculation needs the daily sale figures or the actual cash spent.
But it should have been a little over $1 billion if we average out the two factors over five days.
That is a lot of Zimbabwe dollars withdrawn from circulation in just one week.
And these were Zimbabwe dollars sloshing around in bank accounts, not needed for immediate payments.
To be blunt they were the sort of Zimbabwe dollars most likely to be feeding the black market to buy bulk US dollars from dealers, not all of them because some people are hair-shirted in their honesty, but a lot of them.
So instead of another US$1,3 million being stacked in trunks and safes, or more prudently held in free funds US dollar accounts, once you calculate the amount of US dollars that could have been bought for $1 billion at the black market ask rate of around $750 to $850, there are those 1 275 coins in the same trunks and safes or, again prudently, held in bank vaults and worth almost US$2,3 million or so as gold.
So it easy to see why holders of large sums in local currency would prefer the coins to the black market
US dollars. In a sense it is a six-month arbitrage on the black market premium.
The gold buyers will win if the black market is tamed, and that the ask or sale rate does not increase very fast over the next six months.
And it is fascinating that they are betting this way, or at least hedging their bets since we should not assume 100 percent virtue in this group.
To see the effect on the black market we need to look into the depths of this informal and rather murky market, and moreover a market subject to manipulation.
Almost all comment and analysis concentrates on those buying US dollars in that market.
But we also need to look at those selling US dollars into that market, and they get a far lower price than the buyers of foreign currency pay.
One major source of the US dollars are those who live in that part of the informal part of the economy that is dollarised.
Another group are the recipients of diaspora remittances, and this group are probably the main original source of the foreign currency in that market.
Both groups leak fairly small sums at a time into the trading pyramid, and the Reserve Bank and Government measures to sharply limit mobile money and Zipit transfers mean that fairly small sums are involved in each transaction.
Basically this week sellers of these notes get $650 for US$1 in EcoCash or Zipit and $550 in Zimbabwe bank notes, basically for bus fares if you look at the trading near terminuses.
They want to buy groceries or pay staff. This is where the premiums start.
Shops and businesses can accept US dollars at the interbank rate plus 10 percent, close on an average of $500 “till exchange rate” for this week but it changes daily.
So the $650 for mobile money is a premium of just 30 percent, enough to attract customers but not huge.
The margin of more than 30 percent between what traders pay for US dollars and what they are eventually sold for is explained by the pyramid structure, the accumulation of all those little transfers into the large sums the hoarders, speculators and businesses that cannot access auctions want.
The need to maintain the 30 percent premium between the interbank rate and the black market buy rate, an arbitrary percentage but one traders seem desperate to maintain, is what has been driving the black market and making it work, along with the willingness of final buyers of black market US dollars are ready to pay, and some, before the coins, were not really counting.
But that buy rate is under increasing pressure as interbank rates rise.
So the large surplus local currency funds were ending up in shop tills, or paying taxes and rates, or paying staff.
But while supply and demand can be manipulated, there are serious limits, and here are the calculations the Reserve Bank and the Government must have made before agreeing to the coins.
For a start, the amount of US dollars entering the black market is fixed, or at least varies very little. And that is the supply side for the US dollars going in or the demand side for local currency, depending on how you look at it.
So far as the supply side for local currency entering the other end of the black market there are now a number of interventions: the enforcement of banking rules when banks make loans was a start, followed by the more meaningful imposition of the minimum 200 percent interest rate on loans.
Both dampen the creation of local currency money supply in the private sector, tying this more closely to the fiscal discipline in the public sector. So there is less speculative local currency coming in.
The gold coins remove another large chunk of local currency supply for the black market. Those wanting to hoard value, or speculate on inflation trends, can now do rather well in buying gold coins, and unless you are betting on a total melt down can do better than playing the black market. There is no secondary trading market for gold coins less than six months old, or none that has been seen, and while it will come buyers will be scarce as they can buy from the Reserve Bank.
This still leaves businesses needing black market US dollars for imports, ordinary people wanting to buy petrol or pay hospital and other medical bills, those wanting to buy illegal drugs and probably some hoarders.
But one large group of US dollar buyers are out of the black market. We do not know yet how the trading pyramids will continue to cope with their somewhat arbitrary premiums and profit mark-ups but the laws of supply and demand ensure that there are limits.
And once the premium between the interbank rate, plus 10 percent, and the street buy rate for US dollars starts falling the black market is being tamed. It might not reach a tipping point where holders of small sums prefer a bureau or bank, or more likely spend their foreign currency in a shop, but the pressures are in that direction.
Already the appalling margins in the black market between buy and sell rates have been falling, the accumulators and sellers of US dollars prepared to take a knock there rather than dry up supply of US dollars by pushing down the buy premium on the interbank rate, but again there are limits as to just how far they can cope with profit loss before they have to reduce the buy premium. And then the black market enters a whole new world that should see an accelerating movement to the tipping point where it starts to collapse.
There has been some criticism of the gold coins coming from would-be small investors and hoarders.
The Reserve Bank clearly wanted the big people first, but they could dry up some of the small hoarders and speculators with smaller coins.
The Canadians go down to 1g coins, which probably require a magnifying glass to read the text.
Meanwhile hammering the stocks of local currency built up in the private sector should tame the back market, if not collapse it, so long as the Reserve Bank quarantines what comes in and maintains it policies on bank loans. Then can come the point where going after the little stocks can be implemented to push the black market to its tipping point.