A differnt perspective on the value of the randAccurately and reliably forecasting a currency is near impossible, however, its easy to have an opinion. The question is, what do you base your opinion on?
As a South African, I follow the rand closely, particularly against the US dollar and the pound. One can use a purchasing power parity (PPP) or real effective exchange rate (REER) chart to calculate a "fair value" through analyzing the numbers. But the rand has everything to do with sentiment and the global economy and very little to do with the South Africa economy.
I put this chart together to try and understand the rand from a global context.
Assumption: there is a high correlation between the price of gold in US dollars and the M2 money supply.
The chart shows the M2 money supply in orange compared to the price of gold in rand terms which is shown by the blue line. We can see that the two lines have significantly diverged from each other over the last 8 months. If we assume that the M2 line will only ever go up and can never revert down, then we can assume that the price of gold in rand terms must also go up over time, all else being equal.
It would therefore stand to reason that the price of gold in rand terms is in a cyclical low and may suggest an attractive entry point.
What about the correlation between the price of gold in rand terms vs the rand dollar exchange rate?
The green line shows the rand dollar exchange rate in comparison to the price of gold in rand terms. It's evident that there is a high correlation between the two however, the the divergence between the two particularly over the last 2 years, shows the real appreciation in the price of gold.
So where does that leave us?
The assumption that the price of gold in rand terms is correlated to that of the M2 money supply, suggests that the price of gold in rand terms needs to increase. The correlation between the price of gold in rand terms and the rand dollar exchange rate suggests that the rand needs to weaken or depreciate over time. Makes sense?
I therefore ask the question as to whether the denominator that one should also follow over time is actually the direction of the M2 money supply in relation to the rand?
This also backs into monetary policy in the largest economies and the US in particular.
It stands to reason that the rand is far to strong at these levels if the world continues to print money? Its not sustainable!
Thoughts?
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Please note, this idea is shared for educational and discussion purposes only and should not result in speculative investment decisions in any asset class.
