The correlation of miners to gold
The precious metal market has skyrocketed in 2016. However, the strength of the labor market has weakened an otherwise strong precious metal market. Most mining shares fell on Tuesday, August 16, 2016. It’s crucial for investors to know which mining stocks are overperforming and which are underperforming their peers in order to shortlist 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 Hecla Mining (HL), Kinross Gold (KGC), Eldorado Gold (EGO), and Alacer Gold (ASR). These four stocks have risen 273.1%, 187.9%, 43.1%, and 32.4%, respectively, YTD (year-to-date). The substantial returns for most miners are due to the same safe-haven bids that have boosted gold and other precious metals.
As you can see in the above table, Kinross Gold is the most correlated with gold among the four stocks on a YTD basis. Alacer Gold is the least correlated to gold.
Kinross Gold and Hecla Mining have seen their correlations to gold rise. Kinross Gold’s correlation increased from a 0.53 three-year correlation to a 0.59 one-year correlation. A correlation of 0.59 suggests that about 59% of the time, Kinross Gold changed in the same direction as gold over the past year. A fall in gold leads to a fall in the price of mining shares. A rise in gold leads to a rise in mining stocks.
The relationship of the other two miners 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 9.3% of the VanEck Vectors Gold Miners ETF (GDX).