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Understanding the Correlation of Mining Stocks

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Mining companies and gold

Precious metals met with good news at the beginning of 2016. But it’s important to distinguish between which mining stocks have overperformed and which are underperforming precious metals. Lately, precious metal prices have been falling slowly, and 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 YTD (year-to-date), but the past few weeks have been choppy for these mining companies. Remember, 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. But demand for these mining stocks seems to be in danger, given 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.

That said, all four of these mining companies have seen their correlations 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.

But many other mining companies don’t have stable 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. Notably, the leveraged mining funds 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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