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Gold coins rush propelled by arbitrage calculations

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WHILE Zimbabwean authorities recently released gold coins to encourage individuals, corporates and institutional investors to buy them as a store of value and hedge against exchange rate risk and inflation, as well as mop excess liquidity in the market, the move also has unintended consequences: arbitrage.

BERNARD MPOFU

Traders are arbitraging between buying the gold coins in Zimbabwean dollars and selling them in United States dollars. Although officially the coins will be sold after 180 days, transactions are already happening.

At least 90% of the coins have been bought in local currency at the official rate, which is cheaper. They will be sold in hard currency.

Individuals, companies and organisations are buying the coins as a store of value to get rid of the fast depreciating Zimbabwean dollars and hedge against exchange rate risk and inflation, while also seeking to benefit from arbitrage opportunities.

The official exchange rate was US$1:ZW$478.6 yesterday. The parallel market rate US$1:ZW$750.

Inflation climbed to 256.9% in July, from 191.6% in the prior month – June. It reached its highest point since February of 2021.

A gold coin is being bought for an average of US$1000 using local currency at the official exchange rate and sold for US$1 800.

Reserve Bank of Zimbabwe (RBZ) governor John Mangudya yesterday confirmed in his latest monetary policy statement that 90% of the gold coins have been bought through local currency.

“As at 10 August 2022, 4 475 gold coins had been sold realising ZW$3.7 billion of which 90% was paid in local currency and the balance in foreign currency, and evenly distributed throughout the agents,” Mangudya said.

This is consistent with the sentiment and calculations of different arbitrageurs.

Arbitrage over the gold coins is rife largely because of different currencies and exchange rates used to buy and sell them – officially after 180 days, and face value differentials in different markets.

In economics and finance, arbitrage is a practice of taking advantage of a difference in prices in two or more markets; striking a combination of matching deals to capitalise on the difference, the profit being the difference between the market prices at which the unit is traded.

Put differently, it is an investment strategy in which an investor simultaneously buys and sells an asset in different markets to take advantage of a price difference to generate a profit.

While price differences are typically small and short-lived, the returns can be impressive when multiplied by a large volume.

Just like in the trade of shares or currencies, arbitrage dealers sell for a higher price in one market ,while buying for a lower price in a different market in order to make a profit quickly. Financial arbitrage as a short-term trading strategy takes advantage of price inefficiencies.

Arbitrage is commonly leveraged by hedge funds and other sophisticated investors, but in Zimbabwe currency traders are the biggest arbitrageurs.

RBZ released a further 2 000 gold coins into the market during the week beginning 1 August, following a successful launch on 25 July during which all the 1 500 coins introduced were sold out.

The central bank launched the gold coins as a store of value amid the continued depreciation of the local Zimbabwean dollar, and buyers wasted no time in procuring them.

“A total (of) 1 500 gold coins were sold by the bank’s agents during the first week of their release into the market, with 85 percent having been bought in local currency and the balance of 15 percent in foreign currency,” Mangudya said recently.

Monetary authorities say Mosi oa Tunya gold coins are an instrument that the RBZ was using to mop up excess liquidity which was in the hands of a few contractors, institutional investors and pension funds. 

The price of the gold coins is determined by the London Bullion Market Association PM Fix gold price plus a margin of 5% to cover the production and distribution costs.

The price of the gold coin on the date of initial release – 25 July 2022 – was US$1 823.80 or ZW$805 745.35 in local currency, which was the official exchange rate.

Fluctuations will be experienced on the US$ and ZW$ prices as a result of the movement in the international price of gold and the exchange rate, thus arbitrage opportunities.

Following the resolution by the Monetary Policy Committee on 24 June to introduce gold coins into the market as an alternative stable investment product for value preservation, the RBZ sold the coins through authorised dealers, banks, and its subsidiaries Aurex (Private) Limited and Homelink (Private Limited.

However, there have been mixed feelings about the introduction of the gold coins, with some observers saying that they were elitist and excluded low-income groups. The coins entered the market at US$1 823.83 per piece, which is far beyond the reach of many Zimbabweans.

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