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Reading the Upstream and Downstream Correlations of Mining Stocks

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Mining companies and gold

Precious metals were doing well at the beginning of 2016. But it’s also important to know which mining stocks overperformed and which ones underperformed precious metals.

Precious metal prices have been falling since Donald Trump won the US presidential election on November 8, 2016. As a result, mining stocks have also been falling.

Mining companies that have high correlations with gold include Primero Mining (PPP), Silver Wheaton (SLW), Franco-Nevada (FNV), and Randgold Resources (GOLD). These companies have risen significantly year-to-date (or YTD).

Mining companies often amplify the returns of precious metals. However, the past few weeks have been choppy for these mining companies. Mining companies often amplify the returns of precious metals.

The substantial returns of 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, Randgold is the most correlated with gold on a YTD basis among the four stocks under review. Primero Mining is the least correlated with gold, mainly due to its YTD losses.

Randgold, Silver Wheaton, and Franco-Nevada have seen their correlations with gold rise. Randgold’s correlation rose from a ~0.61 three-year correlation to a ~0.68 one-year correlation. A correlation of ~0.68 suggests that about 68.0% of the time, Randgold has moved in the same direction as gold in the last year.

The relationship between Primero Mining and gold may not be stable because their correlations see upward and downward movements. A fall in gold leads to falls in the prices of mining stocks, while a rise in gold leads to rises in mining stock prices.

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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