Analyzing Upward and Downward Correlations among Miners

Precious metals had a great start to 2016, but they’ve been falling since Donald Trump won the US presidential election. As a result, mining stocks have also been falling. It’s important to know which mining stocks have outperformed and which have underperformed precious metals. 

Mining companies that have high correlations with gold include Sibanye Gold (SBGL), Gold Fields (GFI), Silver Wheaton (SLW), and Franco-Nevada (FNV). These companies have risen significantly YTD (year-to-date). However, the past few weeks have been choppy for these 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 companies seems to be in danger due to the recent fall in precious metals prices.

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

All of the above four mining companies have seen their correlations with gold rise. Franco-Nevada’s correlation has risen from a ~0.59 three-year correlation to a ~0.63 one-year correlation. A correlation of ~0.63 suggests that about 63.0% of the time, Franco-Nevada has moved in the same direction as gold in the past year.

Many other miners don’t have stable correlations with gold, instead seeing fluctuating trends in their correlations with the precious metal. They may witness upstream-downstream correlations with gold. A fall in gold usually leads to falls in mining stocks, while a rise in gold usually leads to rises in mining stocks.

Leveraged mining funds such as the Direxion Daily Gold Miners Bull 3X ETF (NUGT) and the ProShares Ultra Silver ETF (AGQ) have fallen due to the falls in precious metals.