Making money with the falling rand: Lessons from Zimbabwe

It is no secret that the rand is falling like there is no tomorrow. This year alone it has fallen by over 18%. And if you look closely, at the last 3 years- it has fallen by 35%!

This is not neglecting the economic setup where the slightest thing leads to ‘toi toi.' This trend of continuous striking and pay rate increase bargains has created such a vicious cycle.

Prices rise, people strike, economy starts going through stuff. And we back at square one. We all know for sure that this cycle is bad. Zimbabwe and South Africa might not be different soon, only difference being that Zimbabwe chased the farmers, South Africa is chasing stabilisation. (Maybe the paradox of thrift (prompted by the large population) will save them! Hope so.)

In Zimbabwe 2008, a lot of people made a lot of money from ‘burning money’. This was whereby people took advantage of the bank rate versus the ‘streets’ rate of forex. The streets rate for forex was lower than the bank rate. Problem was now that, although the bank is giving a good rate- you will have money in your account. But not actual cash. To buy things that time. You would need cash.

To get the cash, you would then need to ask for contacts who worked at the bank or you go by things by cheque (prepaid phone cards, cement etc...) then you have the much needed cash.

With the cash you proceed to buy the forex at the low rate for forex and the cycle begins again!

Enough of the history lesson, here is a quick legal version that you can do now. How to make money from it. In fact, I personally think you will make more money from these methods faster than the falling Rand. (Trust me- I was in Zimbabwe 2008)

1)    Currency Swap

In stock broking there exists a phenomenon called ‘currency swapping’. Go to a broker and tell them you want to trade currency futures. (Still think the superpower of seeing the future isn’t cool? lol).

Basically a currency future is a contract that stipulates the agreed currency exchange rate which you will buy forex at. (Not the illegal disparity that existed in 2008 Zimbabwe forex rates between the bank and the streets).

So with the rand you trade the contract for maybe at R13 for US$1. The rand falls, you will still not be affected! It provides some sort of security for the falling forex.

That way, if the rand falls further against the dollar, your currency losses will cancel out by your futures profits.

2)    Good old shares

It’s nothing personal, It’s just business. Buy shares in companies that stand to make more profit when the rand weakens. As I said, it’s just business- but buy rand hedge shares like Sasol, BMW, Acer.

My argument is this: These companies earn the bulk of their profits from outside of South Africa. And because of this, they receive payment in foreign currency.

So as the rand weakens, they receive the equivalent of more and more rands. And that means more profits for you as an investor.

Another angle to this is investing in companies that produce and sell locally. Let me explain, multinational companies stand to raise their prices due to increased cost of production and delivery, people will most likely prefer purchasing from companies that sell cheaper. Growth, growth growth!

Confused? Buy shares in mines. You won’t go wrong. Despite the strikes and all, minerals are still minerals- after all, they are the parents of money.

3) Gearing

No I am not talking about cars and driving. Although I must say I saw the Audi A4 today and I will admit that’s an awesome car! There exists a trading tool called gearing- what this is basically is being able to gain control of a large amount of assets or money using a small amount of money. Kinda similar to how in Zimbabwe 2008 you could do that, not as smart as gearing though.

Now, gearing is simply the ability to gain control of a large amount of assets or money using a small amount of money.

A recommended way to do this is to use CFDs. These are financial instruments that allow you to reap the returns from as much as ten times the money you put down. Simply put, these instruments can turn a small 12% move in a share into a massive 120% gain in your portfolio.

With returns like that, you won’t have to stress about the rand falling 18%.

So I was thinking of a cool conclusion, decided a fitting one is a quote on the weakening rand vis-à-vis strengthening dollar. Here’s one:

"If SA does not create an investment climate by addressing electricity woes and creating a more harmonious labour market, we will continue to forego market share and face an increasingly closed global export market," -  Ballim (ahead of the start of the GTR Africa Trade Finance Week in Cape Town.)

All the best in your endeavours, and if you have me to thank. Don’t hesitate!