You think you’ve got problems?
Consumer price inflation in Zimbabwe is running at 75% a year. And that’s only the official rate. The International Monetary Fund thinks it’s nearer 175%.
Either way, you get your paycheck and you run, not walk, to the supermarket.
No wonder the country’s central bank, the Reserve Bank of Zimbabwe, is trying something new. Or rather, something very old.
It is launching a new “digital currency.” But don’t think bitcoin, ethereum, dogecoin or any of that jazz.
Think: Gold. Old fashioned gold bullion.
The Reserve Bank is selling digital tokens that effectively give you an ownership stake in a small amount of the gold bullion in its vaults. The tokens, which use blockchain technology, can be easily exchanged from one person to another through online accounts, known as digital wallets.
And while the future direction of gold is anybody’s guess, it’s a reminder that the yellow metal, near record highs at just under $2,000 an ounce, remains a respectable asset as part of a broader retirement portfolio.
“Holders of physical gold coins, at their discretion, will be able to exchange or convert, through the banking system, the physical gold coins into gold-backed digital tokens,” the Reserve Bank of Zimbabwe says. “The digital tokens held in either e-gold wallets or e-gold cards will be tradable and capable of facilitating Person-to-Person (P2P) and Person-to-Business (P2B) transactions and settlement. It therefore means that the gold-backed digital tokens would be used both as a means of payment and a store of value.”
The International Monetary Fund has cautioned Zimbabwe about the move, warning of potential risks.
But when you have a monetary system like Zimbabwe’s, what do they have to lose?
It’s a year since the government in Harare launched their version of the South African Krugerrand or U.S. Eagle, the one-ounce gold coin called “Mosi-oa-Tunya.” That’s the indigenous name for the country’s most famous natural feature: The Victoria Falls, the world’s biggest waterfall.
Zimbabwe is certainly looking a bit cleverer right now than emerging markets El Salvador and the Central African Republic, both of which adopted bitcoin as currencies in recent years. Bitcoin has fallen almost exactly 50% in price since El Salvador embraced the digital monopoly money in 2021, and 30% since the Central African Republic followed suit last year.
The thing about gold is that it makes no sense as an asset—the economic conditions that made it so essential in ancient times have long since passed – but it still seems to work even in the digital age. This is why Doug Ramsey at the Leuthold Group includes it as one of the 7 assets in his All Asset No Authority portfolio, hedge fund honcho Ray Dalio includes it in his “All-Weather Portfolio,” and the U.S. government continues to hold the world’s biggest pile.
Gold has risen by a third in dollar terms during the crisis that began with Covid: From around $1,530 an ounce at the start of 2020 to $2,000 now. And that is even though real interest rates have risen sharply during that time — something which should, in theory, have made gold go down.
But if you think it’s done well in dollars, check out how it’s done in other currencies. Over the same period it’s risen 40% in British pounds, 50% in Indian rupees and a stunning 65% against the Japanese yen. It’s even up 22% against the Swiss franc.
During that time it has been vastly better as portfolio insurance than bonds. The iShares Core U.S. Aggregate Bond Index exchange-traded fund AGG, -0.34% has lost more than 5% over that time — before inflation.
Why does gold still persist as a reasonable investment in the modern, digital age? To answer that question, just imagine you live in Zimbabwe. There have been five official currencies since the country became fully independent in 1980. Each one has collapsed. According to the Reserve Bank itself, the most recent was introduced in February 2019 at an exchange rate of 2.56 to the U.S. dollar.
The latest? Er…1,266 to the U.S. dollar.
Now imagine someone offers you the chance to use gold instead—via a digital wallet, with the actual bullion held in a vault somewhere. (And even better if the vault is somewhere politically and economically stable)
There’s no reason gold has to continue to work as an asset class. And I can’t imagine allocating more than Doug Ramsey’s one-seventh of a portfolio to it. But rumors of its demise, as so often, appear to have been exaggerated.