FINANCIAL markets expert Miles Sampa has said converting some of Zambia’s foreign exchange (FOREX) reserves into gold will be financially viable, but warned government to exercise caution since the country lacks the capacity to engage in risks related with precious metals.

And Bankers Association of Zambia (BAZ) chairperson Saviour Chibiya has said holding reserves in gold will present additional challenges due to the unpredictable nature of commodity prices which will result in gains or losses as the price of gold fluctuate.

Last week, International Monetary Fund (IMF) managing director Dominique Strauss-Kahn warned against a single currency dominating the world global economy, saying the world could no longer rely on a currency issued by a single country.

Due to less confidence in the US dollar which has tremendously fallen in value owing to the global economic and financial crisis, many governments have embarked on serious diversification of their countries’ FOREX reserves into various investment portfolios that include the purchase of gold.

It is projected that in the short to medium term, many investors (including reserve or central banks) at different levels would feel more comfortable with some gold in their portfolio.

Last September, the IMF board approved the sale of 403.3 tonnes of its gold reserves, of which the reserve bank of India bought 200 tonnes worth US $ 6.7 billion and last week, the reserve bank of Mauritius also bought two tonnes worth US $ 71.1 million.

And market analysts and traders are predicting that other central banks, particularly China or Brazil, and sovereign wealth funds from the oil-rich Middle East countries could buy IMF gold.

So far, these two emerging ‘super powers’ (Brazil and China) have not indicated intentions to purchase gold but China surprised the market earlier this year when it revealed that its gold reserves had nearly doubled over five years since the government bought secretively from local miners.

Commenting on this seemingly US dollar versus Gold ‘tug of war’ last Friday, Sampa said converting some of the country’s reserves into Gold would be financially viable given that the projection value of the metal was likely to increase while that of the US dollar looked weak as the United States struggles to restructure its economy.

“Historically a weakening US dollar relates inversely to the value of Gold as investor turn to the metal as a safe haven, however, Zambia needs to be careful before making the switch. We will need to ask whether we have the technical skills and capacity to engage in risks related with precious metals,” Sampa said.

“Given the huge value involved, trade in precious metals is highly risky and Zambia may not have the experience in dealing with international Gold brokers or traders and on the local scene we have no known experienced Gold traders or dealers and there the risks are high of losing out either through market and price related risks or simply being swindled.”

He said there was also need to consider how fast Zambia would be able to convert Gold in times of urgent needs without incurring losses or delays.

“Finally, in a country where about 30 percent of our budget depends on donor funds, do we really have the luxury or enough reserves to save into metals? I will say we save slightly above what we really need like six months import cover and use the surplus for infrastructure development like roads,” he said.

And Sampa has predicted that the kwacha is likely to come under increased pressure from the United States dollar as the festive season approaches due to an anticipated increase in imports.

Sampa said the local currency was expected to experience the seasonal pressure arising from an increase in imported goods to satisfy the market during the festivities.

“Towards the year end, the kwacha usually goes through the seasonal pressure from the US dollar, thereby depreciating. During the festive season, there is an increased demand for the US dollar especially in the retail industry as imports increase and this is what we are likely to see in the next few weeks,” he explained.

The kwacha has in the last few weeks held its ground and has basically been drifting in the K4,600 to K4,700 range.

Last week, the local unit traded within a thin band of K4,645 to K4,685, failing to meet earlier assertions that it would beat the K4,600 psychological level, which has been its support for some time now.

Sampa also hinted that the local unit could suffer a setback on the basis of fuel imports that had been ongoing since the country started facing supply crises more than a month ago.

In a bid to avert the fuel supply shortage, government waived taxes on fuel imports and allowed oil marketing companies to bring in the commodity at no tax cost.

Sampa explained that government was receiving imported fuel on letter of credit basis, and pointed out that the kwacha was likely to succumb to pressure once the letters of credit mature.

“The kwacha has so far been resilient on the back of oil imports. However, when the letters of credit mature, demand for the dollar will go up and exert pressure on the local unit,” he said.

However, Sampa observed that the kwacha had so far not yielded to the aforementioned pressures.

He also projected that the local unit was not likely to depreciate by more than five percent.

“Thus far, these pressures have not kicked in yet, but later we expect a slight depreciation of not more than five per cent,” said Sampa.
The kwacha last week saw hardly any shifts as the foreign exchange market recorded mild activities, with interbank mostly quiet.

Meanwhile, Chibiya said the usual challenges in maintaining large currency reserves included fluctuations in exchange rates, low international interest rates and reduction in purchasing power of the reserve currency due to inflation.

“However, holding reserves in Gold also presents challenges due to the unpredictable nature of commodity prices which will result in gains or losses as the price of gold fluctuates and we also need to be mindful that the recent increase in Zambia's international reserves has been due to IMF Special Drawing Rights,” said Chibiya.

“Though diversification of how reserves are held is in theory encouraged for all countries, including China which has the largest reserves in world and holds about two-thirds of its reserves in US dollar denominated assets, the pace and extent of diversification will continue to be limited by the current global trade trends and financial system where the bulk of transactions are in US dollars.”

Speaking at the Tsinghua University in Beijing, China, on the global economy and IMF reforms, Strauss-Khan stated that the imperative of a greater global currency stability meant that the world could no longer rely, as it has done since the end of the Gold standard, on a currency issued by a single country.

He stated that a new global currency might evolve out of the Special Drawing Right which is the IMF’s in-house unit of account.

“That probably has to be a basket on the eventual replacement for the dollar since in a globalised world there is no domestic solution,” Strauss-Khan stated.

He also expressed concern that political willingness to overhaul the international monetary system would weaken if, in a year’s time, the visible signs of the economic crisis faded.

“The momentum to cooperate had already eased somewhat, six months after the London summit of the Group of 20 agreed on a need for change to ensure a more stable global financial order,” stated Strauss-Khan.