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1) Gold mining stocks generally have high price sensitivity to changes in gold price
For every 1% move in gold prices, we estimate that the largest gold miner ETF had a 2.25% move in the same direction on average, with high correlation.
2) And gold mining stocks generally have moderate price sensitivity to global equity movements
For every 1% move in global stock prices, we estimate that the largest gold miner ETF had a 0.68% move in the same direction on average, with low-to-moderate correlation.
3) Given that IQ is moderately bullish on gold, we have shortlisted 3 gold miners based on a quantitative screen
We looked at which US-listed large cap gold miner had the highest beta and correlation to gold prices, with lowest beta and correlation to global equities. Agnico Eagle Mines scored best on the basis of this screen, followed by Kinross Gold Corp and Anglogold Ashanti.
Recap of Go For Gold! (Part 1)
The InvestQuest’s View: We are moderately bullish on gold, with a view that it serves as an effective diversifier of portfolio risk, working well as a hedge during prior periods of the most severe stock sell offs. We see macro factors as currently favorable for gold, with a caveat that investor positioning is already relatively crowded, which may hamper short-term price gains.
For investors who have a positive view on gold, we will explore in this article if it is worth getting exposure to Gold Miner stocks and the risks involved. Gold miners have been known to exhibit more exaggerated price moves, compared to actual changes in gold prices. For investors who hold the view that gold prices will continue trending higher from here, buying into gold miners may result in a larger payoff.
However, unlike direct gold purchases, one downside of owning gold miner stocks is that it is also influenced by global stock market movements. We will reveal the results of a quantitative screen to see which gold miners have the highest sensitivity and correlation to gold prices, coupled with the lowest sensitivity and correlation to broad stock market movements.
(Optional) Quick recap of Beta and Correlation
Beta is a measure of the expected move of Asset X, relative to a price move in Asset Y. For example, if a stock has a beta of 2 relative to gold, it means that if gold prices increase by 1%, the stock is expected to increase by 2%.
We want to find a gold miner with high beta to gold and low beta to global stocks.
Correlation shows the strength of a relationship between two variables. It is given a numerical value of between -1 to +1. A high correlation close to +1 increases the chance that we are able to accurately predict the expected move of Asset X, relative to a price move in Asset Y.
We want to find a gold miner with high correlation to gold and low correlation to global stocks.
1) Gold Mining Stocks are strongly influenced by movements of gold prices
Gold mining stocks exhibit exaggerated price moves, relative to changes in gold prices. This may be evidenced from the below chart, where we plotted gold prices (black line) vs the price of the largest Gold Miner ETF (VanEck Vectors Gold Miners ETF) over the past five year period.
The periods highlighted in red and green both show periods of positive correlation between the Gold Price and the Gold Miner ETF. The difference between them is that the red highlight demarcates periods when both charts are falling, while the green highlight shows periods when both charts are rising.
To estimate the price sensitivity (beta) of the Gold Miner ETF against gold price movements, we ran a linear regression (below chart). This was done by plotting the weekly price change of the Gold Miner ETF (vertical y-axis) against the weekly price change of Gold (horizontal x-axis) over the past 5 years.
Results for price sensitivity (beta): For every 1% move in gold prices, the Gold Miner ETF had a 2.25% move in the same direction on average (beta was 2.25), which is indicated by the slope of the trendline.
Results for likeliness to move in same direction (correlation): The data below implies a high correlation of 0.81 between the Gold Miner ETF and Gold. We can see that the data points (red dots) are scattered close to the trend line.
2) Gold Mining Stocks are moderately influenced by movements of global stocks
Gold mining stocks are influenced by global stock market movements. This is perhaps the main reason why investors typically do not buy gold mining stocks as a hedge to their stock portfolio, as it is common to see gold miner stocks selling off together with the broader stock market. We have highlighted in red and green, the periods where we can observe a positive correlation.
To estimate the price sensitivity (beta) of the Gold Miner ETF against global stocks (we used MSCI All Country World Index for our analysis), we ran a linear regression (below chart), plotting the weekly price change of the Gold Miner ETF (vertical y-axis) against the weekly price change of stock index (horizontal x-axis) over the past 5 years.
Result for price sensitivity (beta): For every 1% move in the Global Stock Index, the Gold Miner ETF had a 0.68% move in the same direction on average (beta of 0.68), indicated by the slope of the trendline. This implies that gold miners have a tendency to sell off alongside the broader stock market.
Results for likeliness to move in same direction (correlation): The data below implies a low-to-moderate correlation of 0.29 between the Gold Miner ETF and the Global Stock Index. We observe that the data points (red dots) are scattered quite far apart from the trend line.
Which Gold Miners to buy?
We list the largest holdings in the Gold Miner ETF for reference below, which will be the basis of our analysis.
Stock weightage within the ETF was retrieved from the ETF factsheet, as of 30 April 2020.
The InvestQuest’s View: Our intention is to buy a gold miner stock that can enjoy a higher upside potential, based on the view that gold prices are set to trend higher. As a result, we are most interested in the gold miner that possesses: 1) the highest beta and correlation to Gold and 2) the lowest beta and correlation to global stock movements.
In other words, we want a gold miner that is sensitive to gold prices (both in terms of magnitude and direction) and not sensitive to global stock movements (in terms of magnitude and direction).
3A) US-listed Gold Miners with the most desirable beta metrics
In the below table, we show a list of gold miners and their price sensitivity (beta) against gold prices and against global stocks.
“A” is the price sensitivity against gold, while “B” is the price sensitivity against the MSCI All Country World Index.
Ideally we want “A” to be high and “B” to be low. But the gold miner with the highest “A” may have a high “B” too. For example, while Anglogold Ashanti has the highest price sensitivity to gold at 3.23 (which we want), it also has a relatively high sensitivity to broad stock market movements at 0.70 (which we don’t want).
Given this trade off, we added a 3rd column which divides “A” by “B”, to derive a simplistic scoring matrix where a higher value implies greater attractiveness.
Stocks that score well include Agnico Eagle Mines, Kinross Gold Corp and Anglogold Ashanti, in descending order of attractiveness.
Date range of study: 1 May 2015 to 29 May 2020
3B) US-listed Gold Miners with the most desirable correlation metrics
In the below table, we show a list of gold miners and their likeliness to move in the same direction (correlation) with gold prices and with global stocks.
“A” is the correlation with gold prices, while “B” is the correlation with the MSCI All Country World Index.
Ideally we want “A” to be high and “B” to be low. But the gold miner with the highest “A” may have a high “B” too.
Given this trade off, we added a 3rd column which divides “A” by “B”, to derive a simplistic scoring matrix, where a higher value implies greater attractiveness.
Stocks that score well happen to also be Agnico Eagle Mines, Kinross Gold Corp and Anglogold Ashanti, in descending order of attractiveness.
Date range of study: 1 May 2015 to 29 May 2020
Conclusion
The InvestQuest’s View: Given our positive view on gold and expectation that stock markets are likely to retrace downwards from current levels, our beta and correlation results point to Agnico Eagle Mines, Kinross Gold Corp and Anglogold Ashanti being the most attractive gold mining stocks. That said, given that this is just a quantitative screen, we would have to supplement with fundamental analysis before buying these stocks.
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