Zimbabwe’s economy had already plunged into an economic downturn prior to the COVID-19 pandemic as GDP shrank by nearly 14% in 2019. Economic stagnation and the abolition of subsidies on corn flour, gas, and energy prices reduced the country’s productivity. Even though the economy recovered well after Covid (GDP surged over 45% in 2021), the country always has a huge problem — inflation. Or should I say hyperinflation, because it certainly is a hyper one.
About a week ago, Zimbabwe’s central bank issued gold coins in an attempt to battle rising inflation and the currency crisis. The price of the gold coins will be according to the market rate plus 5 percent manufacturing costs. The public can purchase the gold coins in local, U.S. dollars, and other foreign currencies.
The central bank allows the gold coins as legal tender, which means citizens can use them as a medium of exchange in any shop, providing that they have enough change. The coins are intended to serve as a store of value wealth and to decrease the dependency on the U.S. dollar, which has been attributed to causing the local currency’s devaluation. This is the case for many countries as their people value the U.S. dollar more for its stability than the local currency. According to Gresham’s law, good money drives out the bad. People will spend the least “valuable” money they own first, and the “valuable” money will be hoarded. As more and more people escaped their local currency and hoarded the dollar, the downward spiral of devaluation of local currency began. I don’t think the dollar is a “good” or sound money in any way; it’s just better than most fiat money out there.
The Zimbabwe gold coin is a prime example of how precious metals, especially gold and silver, can be used to fight inflation. Another example is Russia. When the Ruble was falling, they used gold to pump their currency back up. Currency depreciation occurs whenever people lose faith in it and start escaping it. One way to stop the currency from further devaluing is for the government to buy back their currency using foreign reverses, which could stop the devaluation temporarily. But, the best way to fight hyperinflation is to back the currency with precious metals. Think about it, buying back your own currency won’t restore people’s faith and could only work until the forex runs out eventually. By introducing gold to the currency, you will restore trust as people don’t have to trust you, but they trust the inanimate objects. Fiat currencies are just empty promises of countries printed out of thin air; they are bad as a store of value and could be printed infinitely. On the other hand, precious metals are finite, making them precious.