On February 13, 2024, it was reported that the nation of Zimbabwe had accumulated approximately a ton of gold.
In this posting, we’ll address the elephant in the room on how that gold was accumulated.
“The Central Bank in Zimbabwe has accumulated nearly a ton of gold since introducing a law that forces mining companies to pay part of their royalties using gold.”
Suffice to say, any nation that successfully manages to extract gold from companies operating within their nation usually begin to asked for more and more, in violation of previous agreements. Whether the strategy is right or wrong is immaterial to the overall trend that emerges. The usual history of these kinds of agreements tend to take place after it is realized exactly how much money the companies are making in the business of extracting resources and the country believes that they have made agreements that they wish to rescind or change.
Let’s look at the typical pattern for how a nation goes from a simple agreement to a form of bureaucratic buyers remorse.
The example of Chile is the best most recent example. In the case of Chile, it allowed private companies to mine Lithium. However, as global demand for Lithium increased, the government of Chile decided that they wanted to control the level of production or gain greater profits from the high level of demand.
Previously viable companies in the business of extracting Lithium began to see their share prices drop as the potential impact was immediately transmitted to the markets.
However, it is worth noting that Sociedad Química y Minera de Chile S.A. (SQM) had already been in decline after the May 22, 2022 peak. However, the Chilean government talk of nationalization was just another blow to an already faltering stock price.
As we frequently point out, where a trend begins transmits far more information than any point along the way up or down. In the case of SQM, the May 2022 peak in the stock price was an indication that Lithium was on the way down (a basic tenet of Dow Theory).
Notice that the stock price transmitted the coming peak (saturated market) for Lithium in spite of the fact that Lithium prices moved higher after May 2022. Finally, in April 2023, Chile talks of nationalization at the time when it is apparent that demand is on the decline.
Most nations embark on a nationalization scheme during a glut and find that the hoped for gains don’t materialize.
Zimbabwe’s “accumulation” of gold will likely follow the same path that we’ve seen throughout history. As prices start to rise (and maybe not, in the case of gold), the government will want increased payments. Those increased payment demands will effectively shut down the industry and kill the golden goose. Those celebrating the increase of gold holdings will not see their hopes fulfilled with similar actions.
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