To say that Zimbabwe has not had much luck in its recent, post Robert Mugabe-goes-berserk, history with fiat money is putting it lightly.
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But did you know that with gold trading at prevailing depressed prices, driven over the past several years not by physical demand but by paper supply, Zimbabwe is about to have another "money" moment, only this time not with fiat but with real money.
The reason: the same one why every so often we show the gold cost curve [7]: because some miners simply can not continue operating if the "market" price of gold, with or without central bank and BIS intervention, is below their blended cost.
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And while not shown explicitly on the chart above, unfortunately for the south African country, the cost curve of the entire Zimbabwe gold mining industry is on the wrong side of the gold price line.
According to Reuters, [9]Zimbabwe's gold mining firms are suffering huge losses due to low gold prices "and could collapse unless the government reduces royalties for producers, the Chamber of Mines said."
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The problem for Zimbabwe is that after relying too much on paper printing, it is now all too reliant on gold mining: gold is the single largest export earner in the southern African country, whose economy is flatlining as a result of lack of investment, electricity shortages and high cost of capital. Losing the mining sector would likely result in another major economic and financial crisis, although the local population is quite used to these by now.
So while gold trades based entirely on where the Bank of International Settlements decides any given morning where it should close that day, physical gold production is about to lose a major source, something which in a normal world would result in a huge surge in the price and, as a reminder, is the entire premise behind Saudi Arabia's strategy to crush the US shale industry:
More from Reuters [9]:
In a report issued in December the mining chamber said that mines were making losses of up to $100 an ounce due to weak gold prices and high electricity charges.
Mines are charged higher electricity tariffs to ensure continuous supplies but this is not always the case in a country that produces 1,200 MW against a peak demand of 2,200 MW.
In the report by the mining chamber seen by Reuters on Tuesday, the group said lower power tariffs and uninterrupted supplies would save gold mines up to $55 an ounce.
"The above measures would have ensured the gold mining companies operate on a cash break-even basis and avert gold industry from collapse," the chamber said.
Chinamasa said in November the mining sector, which brings in more than half of Zimbabwe's export earnings, shrank for the first time in five years in 2014 due to low metal prices.
The government has set an ambitious target of 28 tonnes of gold in the next five years, to match a record set in 1990. Chinamasa has forecast that gold output could rise to 16 tonnes this year from 14 tonnes in 2014.
"If no immediate measures are taken, the likelihood of production reaching 1990 levels is very slim and in the extreme mines will go under care and maintenance to preserve assets," the mining chamber said.
And even though none of this is surprising, we certainly can't wait to see the price of gold to plummet once the news that one of Africa's largest producers of the yellow metal turns the lights of its gold miners out. Because when it comes to that metal most hated by central planners and bankers everywhere, the laws of supply and demand have long since become inverted.
