South Africa’s Stock Index Glitters Even as Gold’s Appeal Fades

Updated on

In South Africa, once the world’s biggest producer of gold, it’s the stock market that is glittering more than the precious metal.

As gold prices tumbled to a five-year low on Monday, the nation’s benchmark equity index rose to a record relative to the price of bullion, according to data compiled by Bloomberg.

This ratio between the FTSE/JSE Africa All Share Index and gold has almost tripled since 2011, helped by a rally in consumer-product companies that have replaced gold miners over time as the dominant industry on the gauge. The gap widened on Monday after China, the largest consumer of bullion and the biggest importer of South African goods, reported gold reserves that were smaller than expected.

“If even the Chinese are not buying gold, who else is going to buy?” Jean Pierre Verster, an analyst at 36one Asset Management Pty Ltd., said by phone from Johannesburg. “The All Share in the past has offered the best value and probably currently offers better value than the dollar gold price.”

A gauge of five South African gold miners plunged to a 14-year low on Monday, while bonds and the rand also fell, amid concern the economy will suffer from a drop in global demand. Meanwhile, the broader stocks index extended its monthly gain, led by Naspers Ltd. and Cie. Financiere Richemont SA.

Shrinking Share

South Africa was the world’s largest gold producer until 2006 and has now slipped to the sixth position after China, Australia, Russia, the U.S. and Canada, according to U.S. government data. China buys more than 36 percent of South African merchandise, according to data compiled by Bloomberg.

A rally in its fourth year has pushed the valuation of the All Share index to the most expensive among so-called BRICS nations, driving some investors to switch their money to cash-like securities. The scope for further gains may be limited, Paul Chakaduka, a trader at GT247.com, said.

“I wouldn’t be so crazy about equities at the moment,” Chakaduka said by phone from Johannesburg. “People will be looking for high yields in areas and territories where interest rates could potentially go up in the next six to 12 months.”

For now, though, shares continue to beat bullion. Gold has declined 6.6 percent this year, while the All Share measure has climbed 6.4 percent. Gold miners’ diminished role in the stock market as well as any currency weakness would sustain equities, David Hauner of Bank of America Corp. said.

“This divergence is likely to continue until resource stocks start to outperform consumer stocks,” Hauner, a London-based strategist, said in an e-mail. That would require “more bullish sentiment on China given its leading role in commodities markets,” he said.

The FTSE/JSE Gold Mining Index rebounded from three days of declines on Tuesday, adding 1.6 percent and paring this year’s decline to 25 percent. The spot price of gold rose for the first time in seven days, gaining 0.9 percent to $1,106.52 an ounce by 1:08 p.m. in Johannesburg.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE