“THE IMF mission team to Zimbabwe did not fully appreciate the bank’s noble objective of introducing gold coins into the domestic economy. They view the issuance of gold coins as tantamount to intervening in the foreign exchange market, thus depleting foreign exchange reserves. The bank, however, views the gold coins as an alternative product or asset to foreign currency in the economy’s dual currency system,” says the Reserve Bank (RBZ) of Zimbabwe governor John Mangudya.
Calls to make gold in Zimbabwe through gold coins an investment asset class have been supported given the first move taken by BARD Santner.
BARD Santner Investors, an asset management firm, made the first move in promoting the RBZ initiative by launching a unit trust, the Bard Santner Gold Coin Unit Trust. The instrument is designed to ensure financial inclusion and contribute to the resuscitation of a savings culture in Zimbabwe.
The underlying asset of the unit trust is the Mosi-oa-Tunya Gold Coin issued by the RBZ. The gold coin, due to its price, has generally not been accessible to the majority of Zimbabweans, especially those with lower amounts to save. In this initiative, Bard is the fund manager responsible for investing unit holder funds, while CABS is the trustee. The trustee keeps the fund assets in custody on behalf of unitholders. The minimum investment is set at US$120. Alternatively, investors can invest in monthly instalments of US$15 or equivalent in Zimbabwean dollars at the bank rate, making gold accessible to all as an investment asset class.
This is a great initiative by Bard Santner. To all investors, gold is a clear complement to stocks, bonds and alternative assets for well-balanced investor portfolios. As a store of wealth and a multi-faceted hedge, gold traditionally has outperformed many major asset classes while providing robust performance in both rising and falling markets.
Illustration of the Bard Santner Gold Coin Unit Trust Gold can enhance a portfolio through generating long-term returns, acting as an effective diversifier and mitigate losses in times of market stress, providing liquidity with no credit risk and improve overall portfolio performance.
In this new “normal economic environment” characterised by supply shocks, investors face an expanding list of challenges around asset management and portfolio construction. Gold is not only a useful long-term strategic component for portfolios, but one that is increasingly relevant in the current environment.
Gold prices, though highly fluctuating, have been generally trending upwards. Research shows that adding between 2% and 10% in gold to a hypothetical average investment portfolio over the past decade would have resulted in higher risk-adjusted returns. As such, the Bard Santner initiative and the push by the RBZ to make gold coins an investment asset class accessible to all are very noble.
Gold is long considered a beneficial asset during periods of uncertainty. Historically, it generated long-term positive returns in both good times and bad. Looking back almost half a century, the price of gold has increased by an average of 10% per year since 1971 when the gold standard collapsed. Over this period, gold’s long-term return was comparable to stocks and higher than bonds.
This duality reflects the diverse sources of demand for gold and differentiates it from other investment assets. Gold is used to protect and enhance wealth over the long term and it operates as a means of exchange, because it has global recognition and is no one’s liability. Gold is also in demand as a luxury good, valued by consumers across the world. These diverse sources of demand give gold a particular resilience: the potential to deliver solid returns in good times and in bad. As such, every pension fund should desire to have a gold component in its fund portfolio.
In Zimbabwe, investors did not have the opportunity to directly hold gold as investment but would invest through buying stocks of gold-mining companies. The opportunity has been presented through gold coins. As such, gold coins are expected to deliver positive returns over the long run, outperforming key asset classes.
For every investor, particularly pension funds, the goal is to beat inflation, guarantee returns, liquidity and secure.
Gold coins guarantee this for long-term investors. Gold is long considered a hedge against inflation and the data confirms this. The average annual return of 10% over the past 50 years has outpaced the US consumer price index (CPI). Why use US inflation as a yardstick?
Gold coins in Zimbabwe, according to the RBZ, are priced based on the prevailing international price of gold plus 5% to cover the cost of production and distribution of the coin on a Payment versus Delivery basis. As such, local inflation dynamics are captured in the exchange rate.
Gold also protects investors against extreme inflation. In years when US inflation, for instance, was higher than 3%, the gold price increased 15% on average. Over the long term, therefore, gold has not just preserved capital but helped it grow. In other words, investing in gold coins through the Bard Santner initiative will not only preserve your investment but help it grow.
Moreover, research by Oxford Economics shows that gold should do well in periods of deflation too. Such periods are characterised by low interest rates, reduced consumption and investment, and financial stress, all of which tend to foster demand for gold.
Every investor and fund manager acknowledges the benefits of diversification but effective diversifiers are hard to find. Many assets are increasingly correlated as market uncertainty rises and volatility is more pronounced, driven in part by risk-on/risk-off investment decisions. As a result, many so-called diversifiers fail to protect portfolios when investors need them most.
Gold is different, in that its negative correlation to stocks and other risk assets increases as these assets sell off. The 2008-2009 financial crisis is a case in point. Stocks and other risk assets tumbled in value, as did hedge funds, real estate and most commodities, which were long deemed portfolio diversifiers. For example, the S&P 500 fell by 50% from December 2007 to February 2009. Gold, by contrast, held its own, rising 14% over the same period.
This robust performance is perhaps not surprising. Gold has consistently benefited from “flight-to-quality” inflows during periods of heightened risk. It is particularly effective during times of systemic risk, delivering positive returns and reducing overall portfolio losses. Importantly too, gold allows investors to meet liabilities when less liquid assets in their portfolio are difficult to sell, undervalued and possibly mispriced.
But gold’s correlation does not just work for investors during periods of turmoil. It can also deliver positive correlation with stocks and other risk assets in positive markets.
This dual benefit arises from gold’s dual nature: as an investment and a luxury good. As such, the long-term price of gold is supported by income growth. Research shows that when stocks rally strongly, their correlation to gold can increase, likely driven by a wealth-effect supporting gold consumer demand as well as demand from investors seeking protection against higher inflation expectations. The picture for Zimbabwe will be clear in the future when more data emerges as a result of increased usage of gold coins as an investment asset.
Generally, perceptions of gold have changed substantially over the past two decades, reflecting increased wealth and a growing appreciation of gold’s role within investment portfolios worldwide.
Gold’s unique attributes as a scarce, highly liquid and un-correlated asset prove that it can act as a genuine diversifier over the long term.
Gold’s traditional role as a safe-haven asset means it comes into its own during times of high risk. But gold’s dual appeal as an investment and a consumer good means it can generate positive returns in good times too. This dynamic is likely to persist, reflecting the current environment of high political and economic uncertainty, historically low real interest rates and concerns surrounding stock and bond markets.
The move by Bard Santner, through the Bard Santner Gold Coin Unit Trust, therefore will allow the general public to tap into this lucrative investment asset class. A unit trust is a collective investment and in Zimbabwe is registered under the Collective Investment Scheme Act, which is administered by Securities and Exchange Commission.
Bard Santner Investors (Private) Limited is an asset manager licensed and regulated by the Securities and Exchange Commission of Zimbabwe.