Gold And South Africa

Published 04/19/2013, 08:20 AM
Updated 05/14/2017, 06:45 AM

The major story in the global financial markets this week has undoubtedly been the major and sudden drop in gold prices. There are a number of reasons for the drop in gold prices, but none of them are likely to give any comfort to gold-producing countries such as South Africa.

Gold remains one of South Africa’s most important exports so a sharp drop in gold prices is likely to have quite a negative impact on the South African economy and markets. While the sharp drop in gold prices has already put significant pressure on the South African rand, which has weakened significantly this week, one might argue that the rand has not weakened enough to soften the blow from lower gold prices. Hence, the gold price measured in rands has also dropped sharply. From the perspective of the South African economy, this is the important thing to watch as we think the gold price measured in rands is a very good forward-looking indicator for both growth and inflationary pressures in the South African economy. In that sense, a drop in the gold price measured in rands is an indication of a tightening of monetary conditions in South Africa.

The South African Reserve Bank (SARB) can counteract this shock to aggregate demand in two ways -- it can either cut its key policy interest rate and/or it can try to talk the rand weaker. So far SARB has not changed its rhetoric and in a speech earlier this week SARB governor Gil Marcus gave no hints of rate cuts. That said, inflation numbers for March also released this week showed that South African inflation remained within SARB’s official 3-6% inflation target despite expectations of a moderate increase. Furthermore, with aggregate demand easing sharply on the back of sharply lower export prices and food and energy prices also dropping, we would expect South African inflation to inch down further in the coming months.

That certainly could open the door for renewed interest rate cuts in South Africa. This week the market has started to price in some rate cuts but it is still not fully priced for a 25bp cut and certainly not for 50bp. The risk therefore in our view is that we start to see rate cuts being priced in by the market and that could put additional pressure on the rand.

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