Analyzing the Correlation of Mining Stocks

Precious metals saw some good news as 2016 started. However, it’s important to know which mining stocks are overperforming or 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 Alamos Gold (AGI), First Majestic Silver (AG), B2Gold (BTG), and Royal Gold (RGLD). 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.

As you can see in the above table, Alamos Gold is the most correlated with gold on a YTD basis among the four stocks we’ve mentioned. Royal Gold is the least correlated with gold.

All the above four mining companies saw their correlations to gold rise. Alamos Gold’s correlation rose from an ~0.51 three-year correlation to an ~0.57 one-year correlation. Alamos Gold has moved in the same direction as gold in the past year.

Many other miners don’t have a stable correlation to gold and could see a fluctuating trend in their correlations 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.