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The South African rand was the world’s second best performing currency in 2009. The rand rallied 28% versus the US dollar. In addition, the South African rand paid out 7% in interest income. In a leveraged forex account, that’s 700% in leveraged interest income alone. Australian Forex Broker Mt4
King of Bling
South Africa is the King of Bling. It is among the world’s leading exporters of gold, diamonds, platinum, palladium, silver, ferrachrome, maganese, and gemstones.
As bling prices go up, so does the South African rand. As platinum and gold prices appreciated in 2009,the rand and the Australian dollar (AUD) soared along with them. Like South Africa, Australia is a leading gold miner.
The outstanding performances by gold, the South African rand, and the Australian dollar were not a coincidence. South Africa holds the world’s largest gold reserves, estimated at 40% of the world’s total. Australia is currently the world’s leading exporter of gold. As a result, the rand’s and AUD price moves in tandem with gold prices. One study found the ten-year price correlation was in excess of 80%
Better than owning Gold
When bullish on gold, I prefer owning the South African rand and the Australian dollar versus owning gold for the following reasons:
Leveraged Interest Income: Leveraged interest income is a beautiful thing. You deposit $ 1,000 with your forex broker. With that deposit you purchase a standard $ 100,000 South African rand currency position. The South African rand pays 7% interest on the $ 100,000 currency position. If the rate remains unchanged for a full year, you can earn $ 7,000 in interest income on your $ 1,000 original investment. Australian Forex Broker Mt4
Leveraged Appreciation: This one can work for good or bad. In 2009, when the South African rand appreciated 28%, that was roughly a $ 28,000 profit on your leveraged position. Add that to your $ 7,000 in leveraged interest income, and you could have earned $ 35,000 on a $ 1,000 investment. Conversely, if gold prices and the South African rand would have fallen 28% in 2009, your leveraged position would have lost $ 28,000 less your $ 7,000 in interest income for a net loss of $ 21,000. Since you had deposited only $ 1,000 in your account, your account would have went into debit, except for your no-debit guarantee.
No-Debit Guarantee: Like leveraged interest income, the no debit guarantee is a beautiful thing. The no debit guarantee turns the two-edged sword of leverage into a superior speculative investment structure that resembles a limited-risk long call option position. You have unlimited upside from the rand’s leveraged appreciation and interest income. But your downside loss is limited to the amount of your deposit in your forex account.
Choice of Funding Currency: When you buy stocks, gold, or other assets you pay with USD. When you buy a currency, you pay for it with the currency of your choosing. To buy the rand (ZAR), you can sell USD/ZAR or you can sell EUR/ZAR, or JYP/ZAR. You can greatly enhance your return by choosing the weakest currency. In 2009, the USD was the biggest dog. So far in 2010, its the EUR-this pig has fallen almost 10% in the last month alone. So even if the rand does not have a good year, you can earn great returns by purchasing it with a weaker currency.
Although the South African Rand pays higher interest and continues to outperform the Australian Dollar, if you are betting on higher gold prices, you should own both currencies. The diversification reduces your exposure to country specific risk (earthquakes, national strikes, etc). Australian Forex Broker Mt4
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