Rand and Gold in Transition

Over the past 18-24 months, the Rand and gold have both receded about 30%-35% in value. Both reflect global tendencies and local events weighing on these key prices. During 2003-2011 gold increased nearly 8-fold to peak at over $1900. The Rand moved in a 5.50-7.50 trading range throughout the 2000s decade, except between mid-2001 and mid-2002 when it experienced a blowout towards 14:$. After this late-2001 event, it clawed back all its losses, becoming even seriously overvalued during 2004-2005 (coinciding with the meteoric rise of the gold price towards $1000 and beyond. In other words, never a dull moment, for most of the past decade reflecting exceptional global events (China-driven globalisation, Anglo-Saxon and European financial crises) but of late also reflecting our inner turmoil (labour) and loss of momentum (supply constraints and caution).

With the Rand at 10:$ and gold at $1200, what are we to expect the next few years through 2015? Both these key prices mostly stabilizing, the Rand around 9-10:$ and gold around $1100-1300? Or are the events that have given us 30%-35% declines since 2010-2012 still incomplete, and if so, how much more do they still have to play out over what time frame? Are we heading for 13:$ and $900-1000? If so, would this necessarily occur coincidentally, or could we get the one doing so and not the other, these relative movements parting ways, with a more stable gold price externally determined and more Rand weakness domestically (labour) driven? Or is the world about to go through another convulsion, creating new windfall conditions for us, driving Rand and gold both stronger, even much stronger than seen so far, gold back towards $2000 plus and the Rand towards 5-7:$?

Put this way, the Rand prospect straddles 5-15:$ and the gold prospect straddles $500-2500. Such numbers suggest extreme uncertainty the way either cat could jump. In my view, there is only a small chance of a big global windfall soon, but a much bigger chance of the world more completely and successfully recuperating from its financial crises and thereby further undoing our earlier windfall conditions. World recuperation and our labour disruption, supply constraint, lack of confidence and large current account funding requirements are still too incomplete to expect a period of stability at present trading ranges. The Americans have so far only announced their intention to start QE tapering from later this year, and tightening interest rates probably only from 2015 onward. The UK, Europe and Japan remain in full accommodative mode, with the Japanese aggressively buying bonds and the BoE and ECB indicating that interest rates will remain low for long (though not necessarily stretching beyond Fed intentions).

All that should in the interim still provide substantial support for key safe havens, except the water has broken on expectations (we are at the beginning of the end of unconventional monetary policies) and technically the market discounting involved tends to front-load large price/risk changes, with more still to come. The US 10yr Treasury bond now sits at 2.6% and no longer at 1.6%, with the focus on how to get back to 4%. Provided the global scenario plays out as envisaged (clear recovery leadership by the US, but the others following in her footsteps to varying degrees ere long, with China a special case), the central banks may be calling this roughly right and markets are fully buying into it. If the 1980s are any guide, this means less safe haven premiums through the end of this decade. In the case of that decade, it meant lower inflation and thus lower bond yields and lower precious metal prices.

In the 2010s decade, it means higher bond yields as growth and policy rates normalise and lower precious metal prices as crisis conditions and fears fade. This does not suggest early support for gold. Instead one would expect to break below $1000 before stabilising after mid-decade (always in volatile fashion, as in the past as global events gradually moderate). After initial shock declines, gold may fade further but possibly more slowly as the start of Fed tapering and eventual policy tightening is for a long while counterbalanced by ongoing Japanese monetary expansion and still generous BoE and ECB accommodation. This is also not a promising environment for the Rand, with domestic labour strife yet to be tamed, growth revived, debt ratings and global perceptions stabilised. Foreigners can sell outright or hedge, both actions putting downward pressure on the Rand. Locals have already gone beyond prudential external limits (and may have to repatriate mildly), but otherwise trade leads and lags can still seriously go against the Rand.

Much may hinge on our domestic behaviour as to whether global investors want to impose more risk premium and locals want to hedge their bets yet more. Although a mining peace accord has been brokered, it is not clear whether labour demands have been contained, union turf battles ended and institutional weaknesses (collective bargaining) adequately addressed. Long running supply constraints may similarly not ease soon. There is a world of difference between muddling through in these areas as compared to strife still further deepening, the balance of payments vulnerability getting bigger and foreigners imposing bigger risk premiums. This suggests a Rand trading range of 10-12:$, with breakout potential towards 15:$ in the case of greater strain needing to be absorbed domestically and foreigners (and locals through leads and lags) not buying it. It would represent a period of Rand undervaluation, just as was encountered in the 1980s, then also on account of both global and local developments.

Thus over the next 2-4 years, we could be looking to a more comprehensive completion of global recuperation and policy approaching greater normality, while domestically supply disruption may require much time to play out. When looking longer term, in particular the 2020s decade, it is possible to encounter another long prosperity decade globally focused on the US, Europe, Japan and EM space such as China, India, Brazil and second rankers. This could strengthen our SA external fundamentals at a time when supply bottleneck easing, energy fracking windfalls and a NDP-inspired policy mix were to be improving domestic growth and risk metrics. Such a decade could see the pendulum change direction once again, reducing Rand undervaluation and boosting SA export commodity prices.

For now, however, Rand and gold may still have to complete some unfinished business that started to fall into place by 2010-2011 and which may have further to run before being fully played out. My main expectation through 2015 is for more weakness in both these price counters, to the point of long-run undervaluation. The 2020s could eventually see another boon, and offer a new feather in our cap.

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