South African Rand Finds a Bid on Sharp Gold Price Rally

- Gold is SA's top export
- Rising prices aid country's terms of trade
- Gold can go higher says Investec

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Rising gold prices and a falling U.S. Dollar have been two engines behind a recent appreciation in the value of the South African Rand, a trend that could still have further to run according to a leading South African economist.

"The climb in the gold price has aided the strengthening trend in the rand," says Annabel Bishop, an economist with Investec in Johannesburg. "The gold price continues to see a boom."

Gold is South Africa's top export, accounting for around $18BN in annual foreign exchange earnings; higher gold prices imply higher export earnings and improved terms of trade which ultimately provides a fundamental source of support for a currency's value.

An avenue of recent gold price strength has been the falling U.S. Dollar, which not only aids the Rand higher but "places upwards pressure on the gold price given its measure of real value," says Bishop.

One reason for the Dollar's recent decline is the sheer scale of quantitative easing being undertaken by the U.S. Federal Reserve which has the impact of diluting Dollar valuations, while also prompting flows into developing markets, such as South Africa.

"The unprecedented large scale of US QE has bolstered portfolio inflows into EM’s, and lifted the gold price. Indeed, such is the quantum of US QE that it is currently overriding opposing forces for rand weakness, including interest rate cuts and the rising country risk for SA due to the sharp deterioration in the country’s government finances," says Bishop.

Gold prices peaked at $1980 an ounce on Tuesday, before fading back and technical indicators suggest the recent rally might have reached a temporary exhaustion point.

The Rand's recent strength has meanwhile faded in sympathy, with the Pound-to-Rand exchange rate rallying half a percent to reach 21.28 on Tuesday.

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The U.S. Dollar-Rand exchange rate has also recovered some recently lost ground, going three quarters of a percent higher to reach 16.54, but the trend since late April has been one of decline as the Rand recovered lost ground.

The outlook for the Rand will ultimately rest on whether gold can keep rising and whether the global economic recovery can maintain its recovery, developments that are for now likely to mask significant domestic headwinds.

"The gold price likely has further to run, as the global recovery will be extremely uneven, with further bouts of risk off," says Bishop. The rand is likely to remain volatile, and could see further strength."

Analysts at investment bank UBS have meanwhile told clients that the value of gold could soon approach $2000/ounce by the end of September, a forecast that is in turn partly built on expectations for further U.S. Dollar weakness.

"While we think gold will continue to be supported by rising geopolitical tensions, in our view the primary drivers of the gold price are its negative correlation to real interest rates and the dollar," says Mark Haefele, Chief Investment Officer, Global Wealth Management at UBS AG. "We think these three factors, in combination with limited supply growth as miners continue to restrain capital spending, will drive gold prices higher."

UBS say the recent broad US dollar depreciation appears to be gathering pace as, "demand for USD liquidity, which pushed the greenback higher at the start of the pandemic, has fallen," says Haefele.

"Policymakers have now learned enough about COVID-19—for example, observed mortality and transmission rates are far lower than initial estimates—to make it unlikely that national lockdowns will be reimposed. Absent this, the fading US yield advantage and increased political uncertainty ahead of the US presidential election in November are likely to keep USD under pressure," adds the analyst.

If the gold price continues to rise in line with these expectations, the Rand could find itself further supported over coming weeks.