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Reading the Correlation of Miners to Gold

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Mining companies and gold

So far, 2016 has been good news for precious metals. However, it’s important to know which mining stocks are overperforming and which are underperforming precious metals. Lately, precious metal prices have slowly been falling. As a result, mining stocks have also fallen.

Mining companies that have high correlations with gold include Kinross Gold (KGC), Eldorado Gold (EGO), Alacer Gold (ASR), and Iamgold (IAG). These companies have risen significantly YTD (year-to-date). Mining companies often amplify the returns of precious metals.

The substantial returns for most mining companies have been due to safe-haven bids that boosted gold and other precious metals. However, the demand for these mining companies seems to be in danger due to the recent fall in precious metal prices.

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Correlation trends

As you can see in the above table, Kinross Gold is the most correlated with gold on a YTD basis among the four stocks mentioned above. Alacer Gold is the least correlated with gold, mainly due to its YTD losses.

Kinross Gold and Iamgold have seen their correlations with gold rise. Kinross Gold’s correlation rose from a ~0.55 three-year correlation to a ~0.61 one-year correlation. A correlation of ~0.61 suggests that about 61.0% of the time, Kinross Gold has moved in the same direction as gold in the past year.

The relationships of Alacer Gold and Eldorado Gold to gold haven’t been stable because their correlations see upward and downward movements. A fall in gold leads to a fall in the prices of mining stocks, while a rise in gold leads to a rise in those stocks.

Most of the time, a fall in gold leads to a fall in the prices of mining stocks, while a rise in gold leads to a rise in those stocks. Leveraged mining funds such as the Direxion Daily Gold Miners Bull 3X ETF (NUGT) and the ProShares Ultra Silver (AGQ) have fallen due to the fall in precious metals.

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