Analyzing Mining Stocks’ Correlation with Gold



Mining companies and gold

Precious metals saw some good news at the beginning of 2016. However, it’s important to know which mining stocks overperformed and which underperformed precious metals. Lately, precious metal prices have been falling after the Donald Trump won the election. As a result, the mining stocks have also been falling.

Mining companies that have high correlations with gold include Sibanye Gold (SBGL), Gold Fields (GFI), Silver Wheaton (SLW), and Franco-Nevada (FNV). These companies rose significantly YTD (year-to-date). 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, Franco-Nevada is the most correlated with gold on a YTD basis among the four stocks we mentioned. Gold Fields is the least correlated with gold.

All of the above four mining companies saw their correlations to gold rise. Franco-Nevada’s correlation rose from an ~0.59 three-year correlation to an ~0.63 one-year correlation. A correlation of ~0.63 suggests that about 63% of the time, Franco-Nevada moved in the same direction as gold in the past year.

Many other miners don’t have a stable correlation to gold and see a fluctuating trend in their correlations with gold. A fall in gold usually leads to a fall in the prices of mining stocks, while a rise in gold usually leads to an increase in those stocks.

The leveraged mining funds such as the Direxion Daily Gold Miners ETF (NUGT) and the ProShares Ultra Silver ETF (AGQ) fell due to the decline in precious metals.


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