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How Closely Are the Miners Correlated to Gold?

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Aug. 9 2016, Updated 2:12 p.m. ET

Miners’ correlations to gold

The precious metal market has skyrocketed in 2016. However, the strength of the labor markets shed some weakness in the otherwise stronger precious metals. Most of the mining shares saw a down day on Friday. It’s crucial for investors to know which mining stocks are overperforming and underperforming their peers to short-list the upstream and downstream stocks. In this part of the series, we’ll mainly look at precious metal miners and their correlations to gold.

Miners that have high correlations to gold include Randgold Resources (GOLD), Yamana Gold (AUY), Pan American Silver (PAAS), and Coeur Mining (CDE). These three stocks fell 3.3%, 3.1%, 3.1%, and 1.5%, respectively, on Friday.

On a YTD (year-to-date) basis, these stocks had considerable gains. The substantial returns for most miners are due to the same safe-haven bids that boosted gold and other precious metals.

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Correlation trends

As you can see in the above table, Randgold is the most correlated with gold among the four stocks on a YTD basis. Pan American is the least correlated to gold.

Randgold and Yamana have seen their correlations to gold rise. The correlation for Randgold rose from a 0.57 three-year correlation to a 0.66 one-year correlation. A correlation of 0.66 suggests that about 66% of the time, Randgold changed in the same direction as gold over the past year. A fall in gold leads to a drop in the price of mining shares. A rise in gold leads to an increase in mining stocks.

The relationship of Pan American and Coeur Mining with gold hasn’t been stable over the past three years. The correlation has seen upward and downward movements.

Together, these four stocks make up 11.1% of the VanEck Vectors Gold Miners ETF (GDX). The GDX ETF also fell 3.2% on Friday.

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