Zambia is moving to amend gold-mining rules in order to treat the metal as strategic asset. Cabinet agreed to amend the Mines Act to align it with a policy set last October to recognize gold as a strategic mineral. That requires production by artisanal miners to be bought through the state-owned mining investment company ZCCM-IH Plc. Cabinet’s May 20 approval to modify laws and regulations stemmed from a proposal from the mines minister.
There is no standard definition of a strategic asset in the context being specified by the ministry. According to strategic management, Strategic assets are anything rare and valuable that a firm owns. This definition does not prove very helpful in our analysis in this context.
The only reference of a strategic asset that makes any sense in this context is with regards to portfolio management of investors. Gold has been used as money to a greater or lesser extent for much of the history of civilisation. As a store of wealth and, a hedge against systemic risk, currency depreciation and inflation, gold has historically improved portfolios' risk-adjusted returns, delivered positive returns, and provided liquidity to meet liabilities in times of market stress.
THE Bank of Zambia (BOZ) [1]says preparations to start keeping gold as an alternative foreign reserve with a mining firm have advanced. BOZ is currently preparing to house gold as an alternative foreign reserve as the metal is not kept the same way as currencies. The issue at hand was where the final purification would be done. The strategic importance of an asset relative to a given set of asset classes and risk policy is traditionally evaluated in the context of asset allocations for optimised portfolios on the Markowitz (1959)[2] mean-variance (MV) efficient frontier. The optimised allocations are presumed to be a measure of the asset’s importance and role in improving portfolio reward-to-risk.
There have been some studies that have found an important role for gold or its surrogates in a strategic asset allocation. Such studies are almost always based on a relatively large return premium for gold. Strategic asset allocation typically focuses on asset classes rather than individual assets. For this reason institutional investors may consider that investment in gold should properly be considered in the context of a basket of well diversified investable commodities.
The context in which Gold has been declared a strategic asset is an important consideration. In Zambia, declaring gold as a strategic asset has led many to presume that gold should now become the preserve of Zambians only. Whilst this view has its merits, the flipside is if gold is made as a preserve for Zambians only then it will become difficult for small scale gold miners to source finance and partnerships from foreign partners to help them mine at a large scale.
As economist Milton Friedman once said, “There is No Such Thing as a Free Lunch.” The first rule, which is always true, is that there is scarcity, and scarcity necessitates trade-offs. The second, which is almost always true, is that when someone offers you something “for free,” he expects something in return. There is a trade-off that has to be accepted by all stakeholders, failing to recognize this trade off will inevitably lead to inaccurate conclusions.
[2] Markowitz, H. (1959) Portfolio Selection Efficient Diversification of Investment. John Wiley & Sons, New York.
[1] BoZ ponders gold reserve, Daily Mail, Nancy Mwape, April 22, 2020
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