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Can Gold Prices Alone Explain the Senior Gold Miners’ Exuberance in 2016?

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Apr. 27 2016, Published 7:02 p.m. ET

Senior gold miners

Senior gold miners are large miners with an established position. They are usually less risky, with highly liquid stocks. While there are variations between different miners, as a group, they usually follow gold prices.

Among all the sub-categories of precious metal miners, senior gold miners have the strongest correlation with gold prices at 0.98, starting from 2013 until now. Even YTD (year-to-date) as of Apri 26, 2016, these companies have closely followed gold prices with a correlation of 0.93. Because they are large, stable entities, they tend to amplify gold’s price movements.

Can Gold Prices Alone Explain the Senior Gold Miners' Exuberance in 2016?

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Reasons for recent divergence

That said, depending on their operating and financial leverage and other company specific issues, these senior miners’ performances have diverged from that of gold and other precious metals.

Barrick Gold (ABX), Newmont Mining (NEM), Goldcorp (GG) and Kinross Gold (KGC) make up a substantial 28% of the VanEck Vectors Gold Miners ETF’s (GDX) asset holdings. Of these four stocks, Kinross and Barrick have outperformed the GDX by a wide margin, rising by 147% and 111% YTD, respectively, as of April 26.

By comparison, GDX and gold prices (GLD) have risen by 62% and 15% YTD, respectively. Newmont and Goldcorp have posted smaller yet significant returns of 72% and 47%, respectively. We should note here that the iShares MSCI Global Gold Miners ETF (RING) represents an alternative way of investing in gold miners.

Barrick and Kinross are more leveraged

These two stocks are more leveraged to gold prices than other senior miners, mainly because of high financial leverage for Barrick and operational leverage for Kinross. (For an in-depth discussion of this outperformance, check out “Why Did Barrick and Kinross Outperform the Senior Gold Peers?“) When gold prices were falling in 2015, Kinross fell by 35.5%, as compared to gold’s 11% fall, and underperformed peers.

Now let’s take a look at intermediate gold miners and their YTD performances.

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