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Adam Hamilton

Adam Hamilton

Mr. Hamilton, a private investor and contrarian analyst, publishes Zeal Intelligence, an in-depth monthly strategic and tactical analysis of markets, geopolitics, economics, finance, and investing…

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Who Ransacked the Rand?

Although far from the elite money-centers of the world in New York and London, the Republic of South Africa still carries great importance in the world of international finance. Long an outpost of European civilization on a continent continually wracked with wars, plagues, famines, and unimaginable human suffering, South Africa was blessed with some of the richest and most bountiful goldfields on planet earth.

Since the breathtaking discovery of enormous gold-laden rock reefs in the Witwatersrand Basin of South Africa in the 1880s, the small African nation has played an important and often indispensable role in supplying gold to the nations of the world. By 1898 gold production in South Africa eclipsed the United States' to enable it to become the largest gold producer on the globe, a distinction it has held almost continuously ever since.

The total amount of gold that has already been chiseled and blasted out of the reluctant rock of the Witwatersrand is so large it is staggering to comprehend. Out of the 140,000 metric tonnes or so of the fabled yellow metal that have been mined on earth in the whole six millennia of human history, more than one-third emerged from the dark subterranean depths of South Africa.

By 1970 South Africa was producing almost 1000 tonnes of gold per year, over two-thirds of total global production. By 2000 the annual South African gold mined had withered significantly to 429 tonnes, but the country still easily retained its crown for being the largest single producer and exporter of gold on the planet, accounting for one-sixth of all the gold mined on earth. Today the Ancient Metal of Kings constitutes over one-quarter of South Africa's total exports.

The colossal gold mines of the Witwatersrand, which means "White Water Ridge", dive deep into the belly of the earth, over two vertical miles in places, to follow a thin but very rich band of gold-bearing ore locked in what geologists call a reef. The deepest mine on the planet, Western Deep Levels in the Far West Rand, extends over 13,000 feet below the surface. Virgin rock temperatures are very warm at these great depths, over 120 degrees Fahrenheit, necessitating great logistical and technological feats to pump cool air into the mines to make working conditions bearable and safe.

Gold is so inexorably intertwined in and important to the national history of South Africa that its national currency, the Rand, was actually named after the legendary Witwatersrand gold-mining region!

The recent odd machinations in the South African rand currency in late 2001 have perplexed many market participants and governments around the world and investigations are being launched to attempt and determine the cause of the tremendous rout of the rand in 2001. As 2001 dawned, a single US dollar would have bought 7.59 rand, but by the end of the year the rand had plummeted. By New Year's Eve 2001, a single US dollar could command 11.96 rand, an enormous 58% plunge in the South African currency.

Because the recent enigmatic plunge of the rand is rapidly growing so controversial, both in South Africa and in the global money-centers, we would like to examine the raw data in this essay and offer another potential explanation for the seemingly unexplainable price action of the besieged South African currency.

As always, when beginning any foray into the perpetual vagaries and mysteries of the complex global markets, a historical longview is absolutely essential to keep the current action in proper macro-perspective.

Our first graph outlines three decades of average monthly rand exchange rate data. The left scale, graphed in blue, corresponds to the number of rand it takes to buy one US dollar, the common way that the rand exchange rate is usually expressed (for example, R11). In the graph we used the label "Rand/Dollar" to denote x quantity of rand to one US dollar, or rand to dollar. The right scale, drawn in red, inverts the perspective and shows the cost in US dollars and cents for purchasing a single rand (for example, US$0.09). While both data-series are simply opposite sides of the same coin, each illuminates the plunge of the rand from a slightly different and potentially valuable perspective.

The Cratering Rand

Beginning with the usual way to express the rand exchange rate, the blue line and the left axis, the near catastrophic plunge of the rand in recent years is readily apparent. Although somewhat counterintuitive in a chart-world in which we expect that a line moving up is good in any particular market, in this case it indicates that the rand is rapidly bleeding value, with more rand necessary to buy a single US dollar. As the arrow pointing to the blue line illustrates, the rand's sickening decay curve recently began accelerating exponentially. If this was a graph of a stock instead of a currency, we could say that it had gone parabolic, a bubble blow-off, and was unsustainable.

But in the peculiar world of fiat currencies, such a slope is unfortunately fairly normal for a devaluation. For many decades now the currency world has been sailing rudderless after having cast away the golden compass and golden anchor which prudently placed a natural limit on the inherently insatiable and universal greed and folly of men. With all the currencies in the world now reduced to feeble paper-backed shadows of their former selves, backed by literally nothing except potentially fragile confidence, central bankers and their ilk can simply zealously run the printing presses 24-by-7-by-365.

A politician or dictator wants more money created out of thin air to buy votes or influence? No problem, they just get on the horn to their local central banker and tell him to crank up the fiat presses.

One of the bitter fruits of the foolish Keynesian belief that paper money can be created out of nothing and still have real worth has been increasingly chaotic global currency markets. Most fiat currencies can initially survive massive inflation for a season, which is literally the printing of more paper currency, and everything seems fine on the surface. Then, seemingly out of the blue, some quasi-random event can suddenly spook-up a stampede out of the soft currency on the global markets and its value plunges. The markets, after initially turning a blind-eye to the demented fun-and-games of vain central bankers relentlessly destroying their own currencies, inevitably grow weary of the inflation and the day of reckoning for an over-inflated currency arrives, devaluation.

The long-term South African rand graph above could be construed as a classic currency devaluation. The South African government, much of it hopelessly infiltrated by Marxist lackeys who have no idea how free markets truly work, could simply finally be reaping the agonizing fruits of its financial promiscuity in recent decades. Yet, with no particular widely-heralded crisis of confidence in South Africa that can be easily singled-out to have sparked the rand slide, other possibilities must also be considered. What if the steep slide in the rand is really what governments call a "speculative attack"?

What if some deep-pocketed group of entities began to aggressively sell the rand short right before the rand's decay went parabolic? Note the period of relative stability in the rand in the graph above right before the white arrow. What caused the rand to plunge suddenly on no news? As George Soros has abundantly proved, aggressively shorting a currency and calling a sovereign government to task for its horrible mismanagement of its fiscal affairs can yield legendary profits if properly executed. For example, the short-sellers could have sold massive quantities of rand when it was worth $0.12 (about R8) and bought back to cover their shorts at $0.08 (about R12.5) for enormous profits.

The recent gut-wrenching plunge of the rand may indeed prove to simply be a coincidental mass exodus from the rand in global FOREX markets due to rampant South African government mismanagement of its currency. Or it may prove to be a well-orchestrated speculative attack motivated purely by rand-shorting profits. However, with no clear and direct evidence yet surfacing to clearly suggest one of the above options, the slide in the rand may have been initiated by other forces. More on this front a little further below.

Back to the graph above, the red line and the right axis offer a different perspective on the rand. In terms of how many US dollars a single rand is worth, the rand really was first massively obliterated in the early 1980s following the implosion of the notorious gold bubble. After gold prices began plunging from their stellar peak of $878.50 on January 21, 1980, it is not hard to imagine why currency speculators and investors became less enamored with the rand. With the South African economy so dependent on gold, when gold was plunging the relative attractiveness of the rand as an investment waned. The white arrow pointing at the red line above shows this precipitous plunge where the rand, once worth more than the US dollar, quickly plummeted through parity and stabilized at a level of roughly $0.50 per rand in the mid-1980s.

Since this initial massive plunge in the rand's value relative to the dollar it has traded within a relatively narrow but perpetually down-sloping trend channel, bound by the red dotted-lines in the graph above. Interestingly, even provocatively, the recent steep slide in the rand hasn't even broken out of the roughly seventeen-year-old negative trend channel. From this longview perspective, the data indicates that South Africa has faced chronic rand depreciation for a long time and the latest episode of rand weakness is well within trend. We included this graph to show that, in the grand scheme of things, in US dollar terms the rand, while no-doubt weak, has not broken-out of trend to an extraordinary new low… yet.

The quite different perspectives that result in examining both sides of the exchange rate coin between dollars and rand are very interesting! Depending on whether the rand's slide over 30 years is viewed from the perspective of the rand or the perspective of the dollar, the initial conclusions drawn can vary dramatically. Nevertheless, the recent rand events still deserve some serious investigative scrutiny.

Wading deeper into the melee, our next graph shows the rand in dollar terms (we prefer it this way because when the chart-line moves down it actually means the rand is losing value, which is the way most investment charts work … up is good and down is bad for players on the long side) and gold in dollar terms since 1999. Because the rand is not gold-backed there would seem to be no reason for any correlations on the surface, but the actual data may be suggesting other conclusions.

SA Rand vs. Gold (US$)

Since the spectacular Washington Agreement gold rally of 1999, there have only been four relatively large spikes in the price of gold in US dollar terms. Even though one would think that there is no reason that the price of gold and the price of the rand should be related, except possibly quite indirectly as both gold and the rand are competitors of the US dollar, the timing of the four biggest gold rallies in the past two years relative to the slide of the rand is quite provocative.

The four blue dotted-lines above, each numbered, bisect four crucial points on the red rand timeline that mark renewed slides in the rand relative to the US dollar. The first big rand drop, point 1, occurred almost simultaneously with the exciting early 2000 gold-spike that occurred on news that a major Canadian gold producer was reducing its forward hedges, implying that its management foresaw a higher gold price in the future. The rand stabilized a few months later and was trending higher, but then another slide commenced at point 2.

Again immediately after another fledgling gold rally at point 2, the rand slide commenced again. The next gold spike, the exciting May 2001 action, occurred right before point 3, when the rand slide once again steepened significantly. Is a pattern emerging here? Correlation certainly does not necessarily imply causation, but the timing is certainly interesting nevertheless!

Following the September 11th attacks at point 4, once again the rand slide steepened dramatically into a near freefall, with the embattled South African currency plummeting for much of the rest of 2001. Of the four largest gold spikes since 1999's amazing Washington Agreement rally, 100% of these gold events were followed by renewed and significantly sharper slides in the rand.

To add even more fuel to the fire, note the vertical white arrow in the graph above pointing down at the yellow gold data series. At the point marked by the arrow, the primary short-term trend in gold changed from negative to positive, at least when reckoned by a trend-channel defined by interim bottoms. When gold was in a generally negative trend, the slides in the rand immediately following the gold rallies were fairly moderate. After gold had made an interim bottom and its short-term uptrend commenced, however, the two slides in the rand that began at points 3 and 4 were much sharper and more severe. Coincidence? Probably, but certainly interesting!

As I mentioned above, what if the sharp deterioration in the rand was not only a direct speculative attack designed to capitalize on short-sales of the rand, but what if other shady ulterior motivations led to the rand liquidation? What if the target market for the speculators was not really the rand, but something else entirely? What if the speculative attack on the rand, if there indeed was one, was simply the means to another interrelated end?

By now you are probably thinking, "Hamilton, you have been watching too many X-Files! Get a life." Please hear me out though. Here is where the rand slide starts to get really interesting. I wrote the following paragraph for the January 2002 issue of Zeal Intelligence produced for our private clients. The newsletter was published on New Year's Day, about four weeks ago…

"Many theories exist trying to explain the recent speculative attack on the South African currency, but the most provocative we have heard came from a friend. What if the anti-gold forces are having a tougher time seducing central bank gold onto the market due to the collapsing gold-carry-trade profits? (see our "Rate Cut Scorecard Round Two" essay) What if they desperately need to increase the mined gold supply to meet insatiable Asian demand but are deathly afraid of a dollar gold rally that could spark enough Western investment demand to blow the lid off the gold-capping operations? By launching a speculative attack on the relatively small rand currency, the anti-gold forces, if they are behind this, could elegantly achieve both strategic objectives. Aggressively shorting the rand causes the rand gold price to rocket, but the dollar gold price remains as lethargic as ever. Higher rand gold prices enable the largest gold producing and exporting country in the world, South Africa, to dramatically increase gold output if the rand's swoon is sustained. The net result? More South African gold is supplied to the world markets to meet growing demand but gold stays under the Western investment world's radar since the dollar price is static. Interesting cannon-fodder for thought since no one seems to have a concrete explanation of why the rand is being obliterated!"

Wild theory, eh? What if the entities attacking the rand are involved in the current great gold game raging behind the scenes? The effect of the rand slide on the price of gold denominated in rand has been extraordinary.

South African gold mines, almost every gold mine in the world for that matter, sell their mined gold for US dollars. The global gold markets are transacted almost exclusively in dollars. When a South African gold mining operation sells its gold, it receives US dollars in return for the ancient yellow metal. While gold is sold for US dollars, the South African mines pay the vast majority of their costs in rand. Here is another excerpt from the current issue of our private Zeal Intelligence newsletter…

"No matter where on the planet that gold is wrestled from the earth, it is sold for US dollars. The South African mines pay their expenses in local currency, the rand. Mining labor, administrative salaries, electricity, some heavy equipment, and most expenses are settled in rand. At the dawn of 2001, times were lean for South African mines with gold fetching around US$270/oz, or R2,049. On December 31, gold was trading at US$279/oz, a meager 3.3% gain on the year. In rand terms however, gold was selling for R3,337/oz at the end of the year. This is an amazing 63% gain in rand gold! Since the South African mines sell gold for dollars and pay expenses in rand, they have earned wondrous profits in 2001, especially in Q4 when most of the rand slide occurred."

For example, if a mine can sell gold for US$280, and each dollar buys 11 rand, that means, in rand terms, that each ounce of gold is fetching R3080/oz. The phenomenal rally in rand gold during late 2001 due to the rand rout is simply incredible and immediately jumps out when graphed. The following graph shows rand gold in blue, and US dollar gold in yellow. The impact of the plummeting currency on the local gold price is incredible.

Gold (Rand) vs. Gold (US$)

Once again in this graph, please note the trend change in dollar gold marked by the vertical arrow above. Up until after that subtle trend change in dollar gold, rand gold was rising, but relatively slowly and bound within a two-year-old well-defined trend channel, marked above by the blue dotted-lines. Then, for mysterious reasons that remain unknown, the rand suddenly plunged in the second half of 2001 and rand gold exploded out of its trend channel, marked by the first arrow on the blue line. Then, following a short period of consolidation, the rand plummeted off a cliff at the second arrow and rand gold literally soared.

What does this mean for South African mines? The answer can be pictured both in dollar terms and rand terms.

In dollar terms, the dollar price of gold has been relatively flat. South African mines essentially aren't making any more dollar revenue than they were one year ago. But, since their expenses are paid in rand, which is plummeting, much fewer dollars are needed to cover mining expenses. In effect, from an accounting standpoint the actual cost of each ounce of gold mined has fallen dramatically with the vexed rand. Constant dollar revenues and plunging dollar costs yield much larger dollar profits.

In rand terms, the rand price of gold has soared. South African mines, as long as they aren't shackled with poisonous hedges, are making a great deal more rand revenue than they were one year ago. But, as rand gold has taken flight, costs for mining the gold have stayed relatively constant. Although this situation won't last forever if the rand slide yet proves to be far more than a speculative attack and actually an honest-to-goodness devaluation, for now gold mines' contracts with labor, suppliers, and other entities are locking-in rand prices that assumed a much stronger rand. Soaring rand revenues and relatively flat rand costs yield much larger rand profits. Marxist labor unions and maybe the South African government will eventually try to extort some of these profits away from the capitalists, but for now the rand slide has created enormous operating margins.

Either way the current South African gold mine situation is analyzed, either from the dollar or rand perspective, the profits available for the taking for mining gold in South Africa have rocketed heavenwards in 2001. As every student of economics learns early in his or her studies, dramatically growing profits always encourage more production. In the South African gold mining arena, the moment that mine managers decide the rand slide is either a permanent devaluation or is at least likely to last for a few years, they will begin making plans to increase production at other idled mining locations in order to reap the huge profits.

In dollar terms, the falling dollar costs of mining mean that more difficult-to-extract gold ore that formerly wasn't profitable at previously existing cost levels is all of a sudden quite doable for substantial profits. In rand terms, the rocketing rand gold price means that higher rand costs can be expended extracting gold from more marginal locations and great profits can still be earned. Either way, if the rand slide is perceived as a long-term phenomenon, it could dramatically increase aggregate South African gold output.

But who ransacked the rand? And why?

No one in the gold world today disputes the hard fact that central banks have been liquidating their gold hoards like mad as if they were radioactive. Bones of contention certainly exist concerning whether or not the gold dumping actions are orchestrated and collusive or simply coincidental, but there is no argument on the basic fact that central banks are racing to deluge world markets with their dishoarded gold.

As I have written on and elaborated in many past essays, after years of painstaking research trying to prove to myself that some other explanation for gold's extraordinarily odd trading action since 1995 had to exist, I arrived at the uncomfortable conclusion that the central bank selling is indeed centrally orchestrated and collusive. I discussed the potential motives for such a course of action in my "Gold Shorts DOOMED" series of essays in 2000.

If the central banks really need to sell gold to capture the gold price and disable the ultimate warning sign and barometer of systemic fiat currency problems, what will they do as they run out of physical gold that they are able to sell or lease? As ace researcher James Turk has pointed out in his phenomenal deep-probing research into the central bank gold-selling campaigns, a moment in time is rapidly approaching when central banks simply cannot sustain current very aggressive rates of dishoarding.

What if the central banks who want to keep a lid on gold, as well as their commercial partners who are short thousands of tonnes of gold, are running out of official gold in their vaults that they can liquidate to feed into the global markets to meet gold demand that may be twice as high (5000 tonnes annually) as global mined production (2500 tonnes annually)? What if these "gold-shorts" absolutely have to keep the dollar price of gold in line so the international community does not perceive any problems with the US dollar's coveted status as a world reserve currency, but they still need more gold? If a rising dollar gold price would spur enormous western investment demand in gold and bring the dollar's very virility into question, why not organize a shadowy syndicate to obliterate the rand to provide an incentive for the enormous South African mines to ramp up their huge gold production?

Could the ransacking of the rand be yet another clever stratagem employed to entice more gold onto the global markets while keeping the dollar gold price slumbering under sedative?

Of course I don't know for sure, but I continue to come across more information that makes this theory grow ever more provocative.

On January 9th, South Africa's equivalent of the Wall Street Journal, the Business Report, ran an article by Amanda Vermeulen titled "JP Morgan and Deutsche Bank fingered in rand's recent depreciation". The article stated that rampant rumors were buzzing in the South African financial community that JPM and Deutsche Bank had helped organize the massive shorting of the rand. Ms. Vermeulen stated that JPM was connected with two previous speculative rand attacks in 1996 and 1998. Provocatively, both JPMorgan and Deutsche Bank are named in Reginald Howe's landmark legal case against the BIS and major banks allegedly involved in actively manipulating the gold price. Coincidence?

On January 10th I received a private e-mail from a client that added more grist for the mill. My client had read of this rand slide/gold manipulation theory in the January 2002 issue of Zeal Intelligence and at the time he told me that it was interesting but said there was no hard evidence. In his e-mail however, he told me he had seen some information that had changed his mind.

He told me that, almost simultaneously, both Deutsche Bank and Credit Suisse First Boston predicted a $280 gold price for 2002 and both companies actually cited increased South African gold production due to the cratering rand as one key reason. As Bill Murphy of GATA has often pointed out, free-trading markets do not always end every year at the same number, yet the gold market has magically closed every year at almost $280 for several years running now. Also, it is a common and old Wall Street propaganda ploy to simultaneously release the same logic and rational for identical forecasts from multiple supposedly independent sources. By blitzing the investment community with identical forecasts released simultaneously from multiple houses, big Wall Street players sometimes attempt to monopolize information flows and mold investor opinion for their own ends. Coincidence?

Finally, on January 13th the Sunday Times of South Africa ran an article about the South African government officially probing "top firms" including "a foreign banking group" about rand manipulation in the global FOREX markets. President Thabo Mbeki's Economic Advisor, Wiseman Nkuhlu, confirmed that the South African government was in possession of "prima facie evidence" indicating that the rand had been manipulated. The article stated that an official judicial inquiry into the rand attack would commence. Is the openly Marxist-leaning South African government simply blowing-off steam and full of hot air? Do they really have evidence? Another coincidence?

A coincidence here, a coincidence there, and pretty soon a complex tapestry is woven that is very difficult to explain by pure chance!

Although this rand attack/gold manipulation theory is a little off-the-wall and is probably difficult or impossible to prove, I continue to find it ever more provocative that perhaps, just maybe, the usual-suspect gold-shorting crowd organized a concerted speculative attack on the small rand currency to entice the massive South African mines to pump out more gold to meet the growing global gold structural supply and demand deficit. The theory offers a potential explanation for the rand's mysterious and sudden plunge and there is little doubt that motive certainly exists for the massive and in-deep-trouble gold shorts.

Who ransacked the rand? Quite possibly the same entities that have garroted gold.

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