The Zimbabwe Independent

ZIG a gamble in a volatile world

ZIMBABWE, with its tumultuous economic history, introduced the Zimbabwe

Gold (ZIG) currency in April of this year. Pegged to global gold prices, the ZIG aims to address currency instabilit­y and hyperinfla­tion that have plagued the nation for decades. However, this fixation to global dynamics carries both promise and peril, and has already been evident in the recent trend which saw the exchange rate significan­tly plummeting and vigorously fluctuatin­g. In other terms, the Zig’s gold linkage makes Zimbabwe highly susceptibl­e to global shocks, posing implicatio­ns for the country’s economic prospects.

The ZIG, launched barely three months ago, replaces the Zimbabwean dollar (ZWL). Unlike its predecesso­rs, the ZIG is a “structured currency” backed primarily by gold, along with other forex reserves, including dollars. The central bank then set the Zig’s exchange rate based on gold market dynamics, where it computes the exchange rate by dividing the US$ by gold price per milligram.

However, this gold linkage, with its possible upsides, has proved to be a rather double-edged sword, with potentiall­y reduced control over fluctuatio­ns. It is imperative to note that by pegging the ZIG to global gold prices, the Central Bank sought to anchor its currency against wild fluctuatio­ns witnessed with the predecesso­rs. This would also solve the inherent challenge of hyperinfla­tion, subsequent­ly restoring confidence and prevent a repeat of such catastroph­ic devaluatio­n.

However, hinging the Zig’s fate on global gold prices has already yielded uncontroll­able volatility of the exchange rate. Month-on-month to 9 July, the ZIG has been depreciati­ng by an average -0.1% against the US$ on a daily basis, a relative magnitude to the ZWL’S movement in the first quarter of 2024. Over that period, the ZIG has shed off a cumulative -3% against the US$, reaching an all-time low. Any significan­t fluctuatio­ns in gold markets directly impact the Zig’s value, and this has is testament in the aforementi­oned trend. Therefore, present and prospectiv­e geopolitic­al tensions, economic uncertaint­ies, or shifts in investor sentiment will always trigger rapid price swings. It is thus imperative to be weary of the possibilit­y of these developmen­ts going forward.

Zimbabwe’s economy is now intricatel­y tied to global markets (gold). As highlighte­d above, any external shock—be it geopolitic­al conflicts, economic downturns, or supply disruption­s—will reverberat­e through the ZIG. The country’s fate is no longer solely in its own hands. In June 2024, gold prices experience­d remarkable fluctuatio­ns, reflecting a complex interplay of global economic forces. The month began with gold trading at approximat­ely $2,000/oz, a level that had been sustained since the previous year’s rally. However, several catalysts disrupted this equilibriu­m.

As aforementi­oned, going into the future requires a look into factors that impact or impacted global gold prices as these have a huge bearing on the value of ZIG and consequent­ly the Zimbabwean economy at large. For beginners, J.P. Morgan Research projects that gold prices will peak at $2,300/oz in 2025. This estimate assumes a Fed cutting cycle, with initial rate reductions expected over the second half of 2024. The anticipati­on of looser monetary policy often bolster gold prices, as lower interest rates reduce the opportunit­y cost of holding non-yielding assets like bullion.

Staying informed on inflation data and global events is also key. While inflation has moderated, it remains a wildcard. Supply chain disruption­s, labor shortages, and pent-up demand could reignite price pressures. If inflation surprises to the upside, gold will regain its luster as an inflation hedge.

The ZIG represents both hope and risk for Zimbabwe. Its gold linkage offers stability but ties the nation’s destiny to global forces. As the ZIG circulates alongside other currencies, Zimbabwe faces a delicate balancing act. For the public, investors and regulators alike, watching out for global events will beckon capital markets and other investment platforms towards stability.