Demystifying the Rand's Relationship with Gold

In our April 2013 post, we pointed out that the common-held belief – that South Africa has been and is a commodity-based economy which is closely aligned with the fortunes of Gold – had some serious flaws.

Aligned with this belief, one of the most common fundamental reasons still given for the rise and the fall in the Rand is its close correlation with the Gold price.

The fundamental theory is in essence this:-

But what is the reality?

Let us show you.

The inserted Chart reflects the historical Rand vs Dollar exchange rate and Gold price against each other from 1999 to date, color-coded with positive, negative and negligible correlation.

Click to see full size...


To help you in understanding the import of the above chart areas:

• Positive correlation (green area) occurs when the Gold price rises (strengthens) and the USD/ZAR price falls (Rand strengthens) or vice versa
• Negative correlation (pink area) occurs when the Gold price rises (strengthens) and the USD/ZAR price also rises (Rand weakens) or vice versa)
• Little or no correlation (mauve area) occurs when one of the markets is trending while the other is range-bound

This is a very revealing picture.

What does it tell us?

• And as can clearly be seen, the past 14 years show extended periods of both positive and negative correlation, and at times virtually none at all.
• Using a 30 day rolling return on both markets, the negative correlation between these markets since 1999 is just 32%.
• We see no predictable nature and nothing that suggests cyclic movement or repetition in the relationship.

OK, then, you might ask, "What about the longer term? Maybe there was a better correlation historically?"

Let us look at that as well.

Below is a longer term chart with the Dollar/Rand and Gold prices since 1973 plotted on top of one another, and below that a chart showing the 90 day correlation on a rolling basis (above zero is positive correlation, below zero negative).

Click to see full size...


Again, what does this tell us?

• The 90 day rolling correlation shows extended periods of both positive and negative correlation since 1973.
• The average correlation over this 40 year+ history based on the above rolling correlation is also 32% (negative)
• A 5 year moving average shows that there was a higher average negative correlation (up to 53%) in the early and late 1980s, but this was still interspersed with periods of positive correlation
• Since the early 1990s, the correlation has reduced significantly, while the frequency of change between positive and negative correlation has noticeably increased.
• Again, even looking long term, we see no predictable nature and nothing that suggests cyclic movement or repetition in the relationship.

SO...IN SUMMARY:

In reality, there is no consistent historical correlation between Gold and the Rand

Clearly this theory is just that – a THEORY. And with an accuracy of just 32%, one which has little credence.

Furthermore, using Gold to forecast or explain Rand movements is clearly not a valid methodology.

From experience, the most reliable method to predict future Rand (or any other) market movements, is to analyze the patterns in that market itself.

These patterns are a perfect reflection of the mass psychology active in that market...

As a result, through understanding the laws that govern these patterns, one is therefore able (once we have determined where we are in such a pattern) to predict with a high degree of accuracy where the current pattern is likely to be heading next...

...based on how the "investor herd" has reacted in similar circumstances historically!

Hopefully this is as enlightening, intriguing, and empowering for you as it was for me.

As always, would appreciate your feedback and comments.

To your success~

James Paynter

P.S. And if you are exposed to Rand currency fluctuations, and are feeling frustrated by the Rand's wild movements, let us assist you by giving you up-to-date forecasts so that you can better time your transactions, and save you time, money, stress and effort.

Simply subscribe here to our forecast service on the Dollar/Rand, Euro/Rand or Pound/Rand (and remember we offer a full 60 days risk-free money-back guarantee).