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Understanding the Upstream and Downstream Correlation

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Mining companies and gold

The precious metal market rose in 2016. But it’s important to know which mining stocks are overperforming and underperforming precious metals. Lately, precious metal prices have been falling slowly. As a result, mining stocks have also fallen.

Mining companies that have high correlations with gold include Yamana Gold (AUY), Pan American Silver (PAAS), Coeur Mining (CDE), and Barrick Gold (ABX). These companies have risen significantly YTD (year-to-date). Mining companies are often known to 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 shares of 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, Yamana Gold is the most correlated with gold on a YTD basis among the four stocks mentioned above. Pan American is the least correlated with gold, mainly due to its YTD losses.

Yamana Gold, Coeur Mining, and Barrick Gold saw their correlations with gold rise. Yamana Gold’s correlation rose from a ~0.56 three-year correlation to a ~0.61 one-year correlation. A correlation of ~0.61 suggests that about 61.0% of the time, Yamana Gold has moved in the same direction as gold in the past year.

The relationships of the other two mining companies with gold may not be stable because their correlations see upward and downward movements. Remember, 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.

Mining funds such as the ETFS Physical Silver (SIVR) and the SPDR S&P Metals and Mining ETF (XME) have also fallen due to the fall in precious metals.

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