Gold surged over $1 100 (R8 136) an ounce yesterday to hit a new record high of $1 106.75 at 3pm in London, little more than a month after it topped $1 000. The rise in the price of the precious metal as well as in other commodity prices contributed to rand strength. The local currency was bid at R7.3967 a dollar at 5pm from a weak point of more than R8.20 a week earlier. Bullish sentiment about commodity prices is attracting offshore flows. According to Nedbank Capital, R2.8 billion worth of net foreign investment flowed into South African shares and bonds last week, bringing the year's total net portfolio inflow to R85.6bn. This compared with a net outflow of more than R70bn in the same period last year. Grant Barrow, the head of foreign exchange trading in Investec's capital markets division, said the portfolio inflows had been supported by the carry trade attracted by South Africa's relatively high interest rates. Carry traders borrow in low interest currencies and place funds in deposits or buy bonds in countries that offer good returns. Barrow said the rand was recovering from weakness after a recent report that the government was considering fixing the currency and from news last month of a further relaxation of exchange controls. George Glynos, the managing director of market analysis firm ETM, said there was a variation of the carry trade, described as "the risk trade". "People are investing in emerging market equities and in currencies with high levels of volatility mostly because they bring better returns." Glynos said demands that the Reserve Bank cut interest rates to weaken the rand were misguided. "Low interest rates are not the silver bullet to solve all economic ills. We can't solve problems of low growth, weak exports and high unemployment by cutting interest rates. There are far bigger, more deep-seated issues that need to be tackled." Trade union Cosatu wants the central bank's repo rate cut from 7 percent to 3 percent to weaken the rand, stimulate growth and create jobs. However, Glynos pointed out that lower interest rates might have the opposite effect and boost the rand because a low interest environment improves the outlook for equities. Underlying the rand and gold strength is a shift out of the US dollar as investors seek better returns in other assets. Bloomberg said yesterday that the dollar declined against 14 of its 16 major counterparts "after the Group of 20 (G20) governments agreed to keep stimulus measures and remained silent on the greenback's decline this year". The G20 met at the weekend. Gold bulls are on the rampage after India bought 200 tons of the precious metal from the International Monetary Fund last month, reportedly for an average price of $1 045. And the London Daily Mail said China had doubled its gold reserves, "becoming the world's fifth-largest holder of the metal".

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