Investors who bought gold coins on the first day of trading are already enjoying unrealised positive returns as the precious metal has been on an upward trajectory lately.
The Reserve Bank of Zimbabwe introduced gold coins on July 25 as an alternative store of value to US dollars.
This is after the local currency depreciated from trading at $220 per US$1 in January to $460,77 as of Wednesday.
The central bank said buying pressure for the green back was coming from cash rich institutions looking to lock value amid high inflation and a fast depreciating local currency.
Inflation reached 257 percent in July.
On the first day of trading, the gold coins were priced at US$1 823,80, but were priced at US$1 849,31 as of Wednesday giving a positive gain of US$25,51.
The gold coins received reasonable support from the market with the central bank reporting that it had sold 1 500 of the 2 000 gold coins it released into the market in the first week.
As expected the bulk of the coins or 85 percent were bought using the local Zimbabwe dollar while 15 percent were bought using foreign currency.
On average, roughly $1,5 billion could have been channelled toward the purchase of gold coins.
Upon their introduction, some asset managers thought the gold coins would be an attractive asset to diversify into.
Zimnat Asset Management said given the monetary instability of Zimbabwe, buying gold coins using local currency, where possible, is always the best option, even at a reasonable premium to market.
This is because in the long run, investors benefit from the accumulation of a real asset, hence the preservation of value, said the asset management firm.
It placed a strong buy recommendation on the coins.
Zimnat went on to say investing in the gold coins presents a good opportunity for institutional investors to increase their regulatory compliance by investing in an asset with Prescribed Asset Status.
In addition, the gold coins allow investors to apply ZWL balances to an instrument that allows for inflation hedging and rate linked returns, that are generally uncorrelated to the performance of equity markets, said Zimnat.
While some market analysts have said the introduction of gold coins has resulted in the downward trend on the stock market, figures don’t seem to support that assertion.
As said before, roughly $1,5 billion found its way into the gold coins, but this was much less than what was invested in the stock market.
In the first week of the introduction of the gold coins, more than $7,8 billion was invested into the stock market, dwarfing what was invested in gold coins.
However, the stock market remains a buyers’ market as share prices continue to tumble.
In July, the Zimbabwe Stock Exchange shed approximately $400 billion to $2 trillion in market capitalisation.
July, however, saw $19 billion being invested, compared to $14,6 billion in June. This shows there is significant bargain hunting taking place on the stock market.
A 20 percent-plus decline in the stock market often is a signal to bargain hunters to step in. The ZSE has done worse from its $3,6 trillion peak.
Investors should, however, be wary of falling prey to value traps. It’s like buying the dip, but the dip keeps dipping.
Some bargains may appear promising, but might with time prove to be just sinking holes.
The stock market looked cheap in June, but by July it was even cheaper, trapping value.
Value traps are investments that are trading at such low levels and present as buying opportunities for investors but are actually misleading.
While the share prices or market capitalisation of certain companies might be lower than before, there is a need to look at company specific fundamentals.
The down turn of specific stocks, though in line with the overall market, might actually be justified when it comes to particular companies. There is thus a need to look at company specific numbers.
Companies and stocks need catalysts in order to advance. If the company cannot improve upon its position operationally, doesn’t have new products on the horizon nor expects to show earnings growth or momentum of some kind, it could be a value trap.
Such a company will probably have trouble garnering interest from fellow investors.