As a Potential Covid-19 Induced Recession Looms… Lets go for Gold!

Mining analysts are predicting a strong 2020 for Gold prices. An ostensible Covid-19 prompted global recession is set to result in investors exchanging cash deposits for physical gold as a haven against a likely depreciation of the United States dollar.

By: Daniel Nhepera – Minerals Economics, Economic Research Unit

Global prices of refined gold have firmed by about 13.7% since the turn of the year, inflating from US$49.01 per gram on 2 January 2020 to a peak of US$55.82 per gram around the end of April 2020, according to the London Bullion Market Association. This was punctuated by a particular acceleration in prices in the 30 days to the first week of May 2020, where prices shot up by about 5.39%. Taking a cue from the 2008 financial crisis, it is anticipated that the restoration of normalcy for mineral markets, in the wake of the Covid-19 pandemic, may take as many as 24 months. In this time Gold is expected to outperform all other minerals on the global market, thus presenting an opportunity for Zimbabwe to ramp up efforts in output and enjoy golden returns through the downtimes.

Global markets have endured losses over the past three months on account of supply disruptions caused by the suspension of industries in China, as well as the restricted access or closing down of borders by countries worldwide. This was exacerbated by the fact that China manufactures up to one-third of world’s commodities and industrial implements, while also boasting of the world’s largest industry for the conversion of metals (Copper, Chrome and Platinum Group of Metals) and numerous Rare Earth Elements which form essential components of many hi-tech products.

This has had a knock-on effect on the economies of industrialised countries like the United States of America, who, while also battling the ravaging health effects of the Corona Virus, have had to deal with delays in the supply of essential elements from China, such as stainless steel and various technological components, to keep their own industries alive. There is, therefore, an anticipated recession on the horizon, as evidenced by the reactive measures being taken by the USA’s Federal Reserve.

In late March 2020, the Federal Reserve announced the release of a US$1.5 trillion stimulus package which is described as “short term loans to the banks to address unusual disruptions in treasury financing markets as a result of the Covid-19 outbreak.” Pursuantly, in the same month, the Federal Reserve cut its benchmark interest rate to near zero, in an action which is anticipated to permeate through the banks to the banking public, availing low-interest loans to US companies, thereby cushioning them against the effects of the pandemic. Commendably, Zimbabwe has followed the same internationally prescribed recession-proofing model, announcing a ZW$18 billion Economic Rescue Package for distressed companies, as well as trimming the RBZ lending rate from 25 per cent to 15 per cent annum.

The positions taken by the USA Federal Reserve and the Government of Zimbabwe are synonymous with authorities anticipating a recession and implementing necessary defences to avoid the recession from degenerating into a depression. The potential increase in money supply in the USA, on account of the stimulus package and the cheap loans, compounded by the possible printing of money to stimulate demand, may trigger the deflation of the United States dollar. This will bring about an investor exodus from the currency to the customary investor havens, in the form of Gold and Real Estate, as has already begun.

In lieu of this, there is room for Government, through the Ministry of Mines and Mining Development, to identify the potential returns inert within the Gold price trend, and position itself ideally, by means of appropriate policies, to harness the gains. This is particularly so given the likelihood of a converse fall in the prices of Base Minerals, Precious Stones, and Semi-Precious Stones, whose prices are, for the most part, associated with the levels of industrial activity and relative per capita level income in world economies.

Cognisant of the short term nature of the Gold price rally, which is forecast to peak at about US$58 per gram in 2021, measures instilled by Government to ramp up Gold output would have to be of immediate impact. This thereby points to targeting of the small scale gold sector, whose activities are less capital intensive and therefore require less long-lead investments; but whose work efforts notably contribute approximately 60% of Zimbabwe’s total gold output. The government has set aside ZW$1 billion from the Economic Rescue Package for the mining sector, with a healthy portion of the fund expected to benefit the small scale sector. However, despite the financial support, there is still consensus within mining circles that gold submissions to Fidelity Printers and Refiners (27.6 tonnes in 2019) may only represent about 50% of the gold output being achieved from the country. It is therefore apparent that the first port of call for Government would have to be the plugging of gold leakages. If achieved, this alone could double gold submissions to the country’s sole gold buying and marketing agency, without necessarily increasing mining activity from current levels.

Sentiments from the miners are that for the Government to achieve this it is imperative to revisit the Reserve Bank of Zimbabwe foreign currency retention policy.

Sentiments from the miners are that for the Government to achieve this it is imperative to revisit the Reserve Bank of Zimbabwe foreign currency retention policy. This was identified as a significant contributing factor to the smuggling of Gold out of the country. RBZ currently retains 45% of the foreign currency earned by miners from the export of Gold, replacing it with an equal amount in Real Time Gross Settlement, calculated at the Inter-Bank rate. This, however, submits miners to foreign exchange losses on account of the disparity in exchange rates between the RBZ and the parallel foreign exchange market. At current rates of approximately ZW$25: US$1 at the Inter-Bank market, and ZW$50: US$1 at the parallel market, and a gold price of about US$52 per gram, a miner stands to lose about ZWL$585 for every gram of Gold sold to FPR, as opposed to going the illegal Gold buyers route where they receive full payment in hard currency. It is, therefore, a no-brainer as to why a miner, keen extract all possible value from his hard-earned Gold, would opt for the risky illegal route over the Government regulated one.

The RBZ, therefore, needs to assess the gains made from maintaining the foreign currency retention policy at the status quo, against the potential losses being incurred through the smuggling of gold out of Zimbabwe to the benefit of other countries. With pleasant times for Gold prices potentially on the horizon, the Government may need to consider easing from its hardline stance on the foreign currency retention policy and parleying with the miners to the end of finding mutually amenable ground and plugging Gold leakages. This is necessary if the Government is to allow Zimbabwe an opportunity to benefit fully from its Gold resource in the times ahead.

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