BY Vince Musewe
Worldwide, gold remains one of the best investment products for a long-term hedge against inflation, especially when they are economic uncertainties, there is no debate about that.
The debate on the recently launched gold coins for me has revealed the deep-seated fear of loss and lack of trust in the system and not necessarily on the merits of investing in gold.
It has also exposed the pervasive arbitrage mentality of making short term gains which has become a pandemic in our economy and is the root cause of the ever-increasing United States dollar (USD) parallel market rate.
We must take note that the USD parallel market rate is based neither on its supply and nor demand, but merely on speculative profiteering.
There is no scientific reason on why it is where it is, but rather there is a psychological reason which is based on how we perceive value and the fear of loss.
I have always intimated that the financial trauma of 2008 weighs heavily like a nightmare on the brains of those who had to live through the hyperinflation period.
Because this traumatic experience has not been healed, Zimbabweans in general have become very suspicious and sceptical of any government initiative, simply because of historical experiences and the lack of trust.
This psychology is continually reinforced when nothing is done about financial corruption and a lack of urgency in addressing teething economic problems. Trust is very easy to destroy and yet very difficult to build.
The question I am continually getting is: “If I buy the coins, will I be able to get my returns? Will I be able to sell them at market value or they will be worth nothing?”
We also have many “experts” out there, who have become very good at looking at everything that can go wrong with regard to the gold coin initiative and I must say there seems to be widespread negative sentiment. The herd mentality rules.
For me the underlying logic behind the gold coin as articulated by the Reserve Bank of Zimbabwe governor, John Mangundya, makes economic sense; offer the market an alternative credible asset which can be used a store of value and thereby attract excess cash into that asset away from the USD.
This would in turn, stem speculative increases in USD parallel market rates and thus have a direct impact in slowing down inflationary pressures to the benefit of everyone.
Economically speaking, a good investment asset is tangible, its value can be determined easily, can be easily liquidated and gives above inflation returns, thus preserving value.
The gold coin is among the most preferred choice on investment in countries such as India, especially with loan and saving schemes. Gold coins are a low risk investment which offer excellent security over a long period of time.
A tangible asset with good market value for centuries, buying gold almost assures good market returns over a long period of time.
While other investment options might be risky gold has tended to be relatively stable.
Price stability, as opposed to price volatility, is another added feature of gold coin investments. Historically, the price of gold has never fallen by a huge margin and actually increases in times of crisis making gold a safe investment.
Transferability is also a key characteristic of gold coins in that they can be easily transferable among investors or families for generations without hassle. Gold coins do not lose their shine and value over the long term and their value keeps increasing with age.
Despite market volatility of other assets, gold coins tend to keep their value and are synonymous with stability, security and longevity.
Added to this, gold coins can also be used as security for loans by banks and micro-lenders and this will open up opportunities of access to credit.
It is clear that until lesser denominations are launched, the new gold coins are certainly not for everyone, but for those with excess cash to invest and institutional investors who want to diversify their portfolios.
This includes both local and foreign investors. We must also note that due to dwindling disposable incomes and the dominance of an informal sector, we no longer save as a nation.
The culture of saving for the future has become a luxury and not a necessity for obvious reasons and this, therefore, means that, even if made available at a larger scale, participation would be limited.
In any market there are what are called first movers, that is, those who see the opportunity before the herd does and they tend to make exceptional returns for having the foresight and being willing to take the risk before everybody else comes to the party. The uptake of the coin will, therefore, determine its future trajectory.
What one can gather from initial reaction is that those who are sceptical are not buyers and the real buyers are quietly going on with their business because they see the opportunity.
The fundamentals of gold as an investment asset are non-debatable, what matters is one’s ability and motive of investing and this differs with everyone.
There is a term used in investment circles and it says: “When the herd moves, it’s too late!”
- Vince Musewe is an economist and you can contact him on firstname.lastname@example.org