RBZ implored to shore up gold reserves as the current 2.5 tonnes insufficient to fully back ZWG currency
In order to fully support the recently devalued Zimbabwe Gold ( ZWG) currency analysts have implored the authorities to shore up the reserves as the current gold reserves of 2.5 tonnes are not sufficient to fully back the troubled local currency, Mining Zimbabwe can report.
By Ryan Chigoche
In an unsettling turn of events, Zimbabwe’s gold-backed currency, established recently in April, experienced a 44% devaluation last week, amid rising market pressure on the Reserve Bank of Zimbabwe (RBZ) to adopt a more realistic exchange rate. The steep decrease has created severe concerns about the currency’s stability and trustworthiness, particularly when world gold prices have risen significantly.
The Zimbabwe Gold (ZWG) currency has devalued despite rising gold prices the ZIG had plummeted by more than 80% in value on the black market. In contrast, the gold backing this currency has seen significant price increases After hitting a historic high of US$2,480 per ounce in July, gold set a new record at US$2,530 (US$90 per gram) on August 20.
Economists have expressed skepticism, pointing out that while the ZIG was supposed to be gold-backed, its value has fallen even as gold prices rise. This disconnect with gold prices has raised concerns over the actual backing of the currency and whether its promise of stability, tied to gold, can hold up under the current economic conditions.
Commenting on the development investment analyst Takudzwa Kudenga said the reserves are insufficient to support a fully backed gold-backed currency as he edged the authorities to adjust policy surrounding the currency or shore up the gold reserves, although challenging.
”With only 2.5 tonnes of gold and total reserves of US$370 million, Zimbabwe’s current reserves are insufficient to back a fully convertible gold-backed currency in any meaningful way. This would severely limit the country’s monetary flexibility, increase vulnerability to economic shocks, and potentially lead to a crisis of confidence in the currency. To successfully implement a gold-backed currency, Zimbabwe would need to accumulate significantly more reserves or redefine the scope of its gold-backing strategy,”
”Given the limitations of the current gold reserves, Zimbabwe may have to adjust its gold-backed currency policy. This could involve limiting the scope of gold convertibility (e.g., only offering gold-backed digital tokens rather than physical currency convertibility) or pursuing efforts to accumulate more gold reserves, though that would be a significant challenge” Kudenga said.
Renowned economist Gift Mugano commenting on the same development concurred with Kudenga arguing that Zimbabwe lacks the foreign reserves necessary to support a floating exchange rate and the ZWG.
Since late 2022, miners have been required to pay part of their royalties to the state in both commodities and cash to help bolster reserves. Through Statutory Instrument 189 of 2022, the government mandated that mineral royalties, including those from gold, diamonds, and platinum, be paid partly in kind and partly in monetary form.
Amid the currency conundrum Minister of Finance and Investment Promotion Mthuli Ncube this Wednesday addressing journalists in Mt Hampden maintained that the local currency was indeed backed by gold but surprisingly said the currency wasn’t fixed to gold.
However when the currency was introduced was introduced in April 2024, the government touted it as a currency backed by gold reserves, claiming this would make it resistant to exchange rate fluctuations. These recent statements by Ncube have cast doubt on this assertion, echoing past instances where government promises about currency stability have fallen short.
The Reality of Gold-Backed Currencies
The concept of gold-backed currencies has gained renewed interest in recent years, especially as concerns about inflation and fiat currency stability grow. For a currency to be genuinely considered gold-backed, several key conditions must be met:
Establishment and Maintenance of a Fixed Exchange Rate
A fundamental requirement for a gold-backed currency is the establishment of a fixed exchange rate between the currency and gold. This means that a specific amount of currency is directly tied to a specified weight of gold, creating a stable and predictable value. Maintaining this fixed rate is crucial; any fluctuations can undermine trust in the currency. It necessitates careful management by the issuing authority, which must be prepared to intervene in the market to uphold the peg, especially in times of economic instability or sudden changes in gold prices.
Sufficient Gold Reserves
The issuing authority must possess adequate gold reserves to fully back the currency in circulation. This involves not only having enough physical gold to match the amount of currency issued but also ensuring that these reserves are securely stored and regularly audited. Transparency regarding gold reserves is essential to maintain public confidence. If the public perceives that the gold reserves are insufficient or not properly managed, it can lead to a loss of trust in the currency, potentially resulting in currency devaluation or a run on the currency.
Mechanism for Exchange
A viable gold-backed currency must include a clear mechanism for currency holders to exchange their notes for gold at the established fixed rate. This feature is critical for ensuring liquidity and allowing individuals to convert their currency into a tangible asset. The process should be straightforward and accessible, fostering confidence among users that they can redeem their currency for gold whenever they choose. This might involve designated banks or institutions where exchanges can be made, along with clear regulations governing how the exchange process works.
Market Confidence and Adoption
Ultimately, the success of a gold-backed currency hinges on market confidence and widespread adoption. For individuals and businesses to use such a currency, they must believe in its stability and value. This requires effective communication from the issuing authority about the currency’s backing, its redeemability, and the overall health of the economy. The more trust that users have in the gold-backed currency, the more likely it is to gain traction in everyday transactions.
Zimbabwe boasts over 4,000 recorded gold deposits. More than 90% of gold
deposits are situated within the greenstone belts. According to the RBZ, Zimbabwe possesses the second-largest gold reserves per square kilometer in the world with 13 million tonnes of confirmed deposits. At least 95% of Zimbabwe’s total gold production has been derived from orogenic lode gold style mineralisation, which occurs within many of the greenstone belts.
According to financial experts to back a currency effectively, the total amount of gold reserves must equal or exceed the value of all currency in circulation. For instance, if a country issues $1 billion in currency and the fixed exchange rate is set at $1 per gram of gold, the country would need at least 1 billion grams (or approximately 32,150 ounces) of gold reserves.