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Gold Miners Or Gold?

Analyzing the link between Gold Mining stocks and Gold Prices...

currently hovering near all-time record highs, it stands to reason that Gold Mining stocks would be closely tied to that of the yellow metal, writes Charles Armstrong at Hard Assets Investor.

But just how close is the connection?

Below, I've shown the price of four of the world's largest gold miner stocks by market capitalization, and compared it over the five-and-half-years to June 1, 2010 with the continuous front-month Comex Gold Futures price.

The big Gold Mining stocks are Barrick Gold (NYSE: ABX); Goldcorp (NYSE: GG); Newmont Mining Corporation (NYSE: NEM); and AngloGold Ashanti (NYSE: AU)...

Keep in mind that I had to use two different scales here, with gold itself (the big pink line) chasing prices above $1200 per ounce, and the big four miners bouncing between $10 and $60 per share (right and left axes, respectively).

But notice how truly divergent the Gold Mining stock prices are. If gold miner stock prices depended only on the price of gold, what should account for the variance...? Rather than look at each line over a time series, let's compare each company to the Gold Bullion price directly.

Quick refresher for statistical students: R-squared is the degree that the change in one factor in a system (in this case, the mining stock price) can be attributed to or explained by the change in the other factor in the system – that is, in this case, the Gold Price. Beta, on the other hand, is the amount by which these two factors are connected, whereby a beta of 1.0 would imply that if the company's stock price increases by $1, so too would the Gold Price.

First, the world's largest specialist Gold Mining stock, Barrick (ABX):
R_squared: 0.598
Beta: 24.146

Next up, GoldCorp (GG):
R_squared: 0.791
Beta: 22.592

Then Newmont (NEM):
R_squared: 0.043
Beta: 7.366

And fourth, AngloGold Ashanti (AU on the New York Stock Exchange):
R_squared: 0.026
Beta: -4.438

As you can see, Barrick and Goldcorp behave much like you'd expect, and are relatively correlated to the price of Comex Gold Futures.

But strangely enough, Newmont and AngloGold Ashanti appear to be entirely disconnected from it. Indeed, AU's negative beta means that when gold goes up, the price of AU actually goes down, and vice versa. (Although admittedly, with an R_squared under 0.03, I'd be hard-pressed to say there's any correlation at all.)

Many factors may account for this discrepancy: the effect of currency exchange on profits; mining taxes in the primary countries in which NEM and AU do business; the timing lag between high Gold Prices and ramped-up production – you name it. It's also worth remembering that, despite being primarily gold miners, AngloGold and Newmont also have sizable business segments in non-gold metals like copper, silver and uranium, all of which also impact revenues and, thus, share prices. [Ed. Note: Anglo also retains a small "hedge book" of forward gold sales, albeit drastically reduced and likely to fall further in 2010...]

Still, that doesn't make the complete disconnect of correlation any less surprising to new investors. The moral of the story is: If you plan to invest in a Gold Mining stock, make sure you aren't using it as a direct proxy for Gold Prices. As you can see, the two are not always equal, and sometimes, they don't even travel in the same direction.

It's best to think of miners as a leveraged play, and choose your investment options accordingly.

Want to buy gold, not leveraged risk, at the lowest cost possible today? Go to Bullion Vault now... is a research-oriented website devoted to sharing ideas about investing in the natural resources sector. Published by Van Eck Associates Corporation, the site offers an educational resource for both individual and institutional investors interested in learning more about commodity equities, commodity futures, and gold – the three major components of the hard assets marketplace.

See full archive of Hard Assests Investor.

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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