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How Gold Prices Influence Senior Gold Miners

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Jul. 27 2016, Published 3:54 p.m. ET

Senior gold miners’ performance

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 had the strongest correlation with gold prices at 0.97 from 2013 until now. Even YTD (year-to-date) as of July 25, 2016, these companies have closely followed gold prices with a correlation of 0.90. Because they are large, stable entities, they tend to amplify gold’s price movements.

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Senior North American gold miners (RING) have had a strong run since the start of the year. This is not to say that all the senior miners have gained in the same proportion. Kinross Gold (KGC) and Yamana Gold (AUY) are higher-cost producers. With increasing gold prices, these players’ leverages work to the upside, leading to higher-than-industry gains. On the other hand, the most defensive stocks like Goldcorp (GG) and Agnico-Eagle (AEM) have underperformed their senior peers in 2016.

Kinross, Barrick Gold (ABX), and Newmont Mining (NEM) have outperformed the VanEck Vectors Gold Miners ETF (GDX) YTD with gains of 150%, 155%, and 118%, respectively. This is higher compared to GDX’s rise of 97%. Goldcorp, on the other hand, has underperformed the index with a rise of only 52%.

Highly leveraged miners

These two stocks are more leveraged to gold prices than other senior miners. While Barrick has higher financial leverage as compared to its peers, Kinross is a relatively higher cost producer. This higher leverage is the main reason that these stocks have outperformed the index. When gold prices were falling in 2015, Kinross fell by 35.5% as compared to gold’s 11% fall, and it underperformed peers.

Goldcorp has lower costs and a strong balance sheet. In addition, it downgraded its long-term production guidance at the start of the year, which led to a pullback in shares. Investors should, however, note that its fundamentals remain strong and the share price could catch up with its peers going forward.

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

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