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Analyzing Miners’ Correlation with Gold

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Mining companies and gold

Precious metals saw some good news as 2016 started. However, it’s important to know which mining stocks are overperforming and which are underperforming precious metals. Lately, precious metal prices have been falling slowly. As a result, mining stocks have also fallen.

Mining companies that have a high correlation with gold include Yamana Gold (AUY), Pan American Silver (PAAS), Coeur Mining (CDE), and Barrick Gold (ABX). These companies have risen significantly year-to-date (or YTD). However, the past few weeks have been choppy for these mining companies. 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, on a YTD basis, Yamana Gold is the most correlated with gold among the four stocks we’ve mentioned. Pan American SilverCorp is the least correlated with gold.

All four mining companies saw their correlation with gold strengthen. Yamana Gold’s correlation rose from a ~0.5 three-year correlation to a ~0.51 one-year correlation. A correlation of ~0.51 suggests that about 51% of the time, Alamos Gold has moved in the same direction as gold in the past year.

Many other miners don’t have a stable correlation with gold. A fall in gold usually leads to a decline in the prices of mining stocks, while a rise in gold usually leads to an increase in those stocks. Leveraged mining funds such as the Direxion Daily Gold Miners ETF (NUGT) and the ProShares Ultra Silver ETF (AGQ) have also fallen due to the decline in precious metals.

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