11 December 2009
	Necessary recipe for expansion

Gold traded at record prices above US$1 200/oz in the past week. Other commodities, such as energy, platinum, palladium and copper, have also risen strongly from last year's lows. It may be premature to call this a new commodities boom, but the price recoveries are an important and favourable indicator for the SA economy. Decades ago, the influential historian Prof CW de Kiewiet said SA progressed through political disasters and economic windfalls. The political disasters included invasions and wars. By economic windfalls, he was referring mainly to discoveries of mineral wealth and periods of rising prices. Our need for windfalls has not diminished much. In global terms, SA has a relatively small economy with high production costs, limited competitiveness and inadequate skills. The downturn in the world economy pushed the local economy into recession, though some of the seeds, such as excessive consumer debt, were sown closer to home. A commodities recovery reflects improved demand in some sectors and regions. Customer restocking has helped lift prices of some metals, such as copper. Continuing overcapacity may restrain steel and aluminium prices for a while yet. Others, including ferrous metals and coal, may continue to strengthen over the next year thanks to strong growth in China and gradual recoveries elsewhere. Gold has risen because of purchases by investors who see bullion as a hedge against paper money, inflation and crisis. If it runs too far, we should expect a quick retreat. Fortunately, SA's reliance on gold is far less than it used to be. A continuing recovery in commodities will represent another windfall for SA (though a strong rand may dilute the benefits). It should support capital inflows, boost export earnings and lift confidence in the economy. These are necessary ingredients for the next expansion phase.