South African Gold

While I have previously commented on the potential for growth in South African markets related to hosting the World Cup, the country has caught my attention again for a different reason. While the gold selloff from its May peak has been downright nasty, things in the Johannesburg Stock Exchange (as measured by the EZA ETF) have been far worse. Gold prices and risk aversion in the form of emerging market selloffs have been a double-whammy for South Africa, however when I see EZA and the price of gold (GLD ETF) I can't help but think there has been some over-selling here. The first half of the year saw gold and the JSE move fairly closely together, parting ways after the May/June selloff:


Notice that after the two separated, from July through the present they are highly correlated directionally, they are just at very different levels relative to where they began the year.

Warranted or unwarranted?

What we can infer from the above chart is the relative expectations the market has regarding non-precious metals sectors in the South African market. If the JSE were composed entirely of precious metals/gold stocks the two lines above would overlap almost entirely. The deviation can be thought of as the returns on the remainder of the companies that make up the JSE, and I don't see how the outlook for the remainder of the market can be THAT awful, despite the riskiness of the market.

I don't think there is any doubt that any investment in South Africa should be thought of as long-term in nature, but I do think the outlook is more promising than the market is currently giving it credit for.