GRAHAM BARR AND BRIAN KANTOR: The gold price, the rand, and the economy

In early 1980 the rand reached a peak of 1.32/$; yes, the rand was actually stronger than the dollar! At the time, the gold price had surged to $820 an ounce after Russia invaded Afghanistan and World War 3 looked like a real possibility. It was an incredible move higher considering that the gold price had been just $35 an ounce a decade before.

Things have not been as rosy on the exchange rate front since; it’s about R19.30/$ now. This means that in purely nominal terms, the rand is now 1/25th (against the dollar) of what it was in those heady days of 1980. At current prices, our calculations indicate that the rand is about 50% undervalued relative to the dollar. In other words, the rand buys roughly 50% less in New York than it does in South Africa, something South African visitors will testify to.

In the 1970s and 1980s, the rand used to track the gold price quite closely. After all, South Africa was the largest gold producer in the world and the metal accounted for 60% of all exports and 16% of GDP.

Gold mining was hugely lucrative for shareholders in the gold mines — and for the South African government, which collected much extra revenue from taxes and royalties paid by the gold mines.

South Africa is now the eighth- largest producer of gold in the world, producing about a sixth of the gold that it delivered in 1970. The link between the gold price and the exchange rate is now correspondingly weak and has done little to save us from facing the lowest exchange rate on record.

With strong platinum, iron ore and coal exports in addition to gold, South Africa remains a commodity-based and export-orientated economy, and the strength of the rand is still primarily determined by the state of the commodity price cycle.

It is also determined in large part by perceptions of South Africa’s economic future and the associated safety of investing in the country. Foreign and local investors require a return that compensates for the perceived risk of investing in South Africa, including the risk of rand weakness. These perceived risks influence the flows of capital to and from South Africa, and can strongly influence the foreign exchange value of the currency, as they have this year.

As an emerging market, South African risk generally follows the average emerging-market risk quite closely, but South Africa-specific risk has recently risen dramatically in the face of income-destroying load-shedding, and more recently from the reputation-destroying toenadering with the reviled Russians.

Seen another way, the ratio of the rand/$ exchange rate to the emerging­ market/$ average provides a useful indicator of local risk. This ratio indicates that South Africa is again in economic crisis territory. Relative to an average emerging-market currency, the rand has never been weaker than it is now.

Unfortunately, surging rand prices for our mineral exports may not help the exchange rate this time, due to a dysfunctional Transnet, unable to ship metals and goods out of the country, and load-shedding.

It means we are probably saddled — for now — with a weak rand and a near-term uptick in inflation. Yet the weaker rand is not an unmitigated disaster. Exporters and firms competing with more expensive imports will benefit from higher rand prices received for their output. This window of extra profitability will be supportive of extra output, incomes and employment.

The big danger to the local economy is that the Reserve Bank will raise interest rates even further. The most recent attempt to support the rand by raising interest rates by 50 basis points has been a conspicuous failure, and has further depressed spending and the growth outlook.

Nor will the current record-high gold price significantly contribute to solving our economic problems. The only road to faster growth and lower risk is the elimination of load-shedding, the repair (and maintenance) of our exporting infrastructure and a Bank that understands that raising interest rates cannot help the rand now. 

Graham Barr is emeritus professor of economics and statistical sciences at the University of Cape Town. Brian Kantor is head of the Investec Wealth & Investment Research Institute and emeritus professor of economics at UCT