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The Dollar IS Rising... In South Africa, That Is |
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| The Dollar IS Rising... In South Africa, That Is |
| Friday, 23 May 2008 | ||||||||
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The chart you’re looking at compares the South African rand’s performance (versus the U.S. dollar) and the iShares MSCI South Africa ETF (EZA). This is what’s called an inverse correlation. When the rand becomes inflated, South African companies don’t perform well. The opposite is also true: When the rand gains in strength versus the U.S. dollar, South African companies perform better. ![]() Over the past couple months we’ve seen exactly that. The interesting thing is South Africa is in the midst of a power crisis. In fact, many of its mining companies are scared they won’t have enough power to produce things like gold and platinum. With aging power plants and failing infrastructure, South Africa needs an injection of investment cash into its power sector. And while its economy technically maintains a budget surplus, it’s constantly battling things like unemployment and poverty.
In short, a commodities bull run, with gold and platinum prices soaring, won’t mean much to the resource-rich country if it doesn’t have the power to produce them -- or if the workers wage strikes against low wages and immigrant workers. My take? Without some positive news on the situation soon, expect the EZA to drop back, and the rand to inflate a bit more. Here’s some numbers: EZA could drop to $110 and the rand versus the U.S. dollar could fall to a ratio of 7:1. S.R. Nunnally Editor, Taipan Trader
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