SARB balance sheet, Rand, and Gold

A follow-up to our end of year post “What backs the Rand?” We established that the size of the SARB’s balance sheet has grown considerably over the past decade, according to its own financial statements. The majority of growth in the SARB’s assets was due to rising foreign exchange reserves, which are up by 287% from November 2001 to November 2009. 

This means that the SARB has been creating new Rands (albeit mainly computer entry Rands), with the help of Primary Dealers (selected local financial institutions) who purchase government debt on the primary market. This is reflected in the SARB’s financial statements through the rise of government deposits with the central bank (liability). So, basically, the rise in government debt through government borrowing has facilitated a larger SARB balance sheet, which has led to a rise in broad Rand supply in the economy (as well as in the rest of the world as evident in doubling of foreign liabilities over the period). This higher broad Rand supply is reflected in the Rand gold price (XAUZAR, see below). Note how closely the Rand amount of the SARB’s assets (we refer to it as the size of balance sheet) correlates with the Rand gold price.

The reason XAUZAR is going up faster than the USDZAR exchange rate is because the rate of increase in supply of the USD is outpacing that of the increase in supply of the Rand, while the rate of increase in supply of gold is unchanged. Also, gold is again taking on an increasingly monetary role to investors and central bankers, highlighted by the divergence between USDZAR and XAUZAR in October and November 2009 (as well as divergence between SARB balance sheet and XAUZAR in above chart).

The SARB’s foreign reserves will keep growing slowly in h1 2009, but at some point a USDZAR that drops below 7 and then 6 is going to be enough of an irritation to the political establishment that aggressive reserve building and a lower repo rate will follow, maybe toward Q3/Q4 2010 and certainly in h1 2011. The very low price inflation in 2010 will act as the excuse for this behaviour. So, the rand price of gold could stabilise for most of 2010, but when the USD slide really kicks in and gold runs, coupled with a flood of new rand into the system by h1 2011, so XAUZAR will climb strongly in 2011 and beyond. Only monetary stability would keep XAUZAR in check, but judging by history SA will resort to the printing press before too long unless a major dose of sanity were to descend upon the powers that be in the government and its bank, the SARB.