Wednesday, June 16, 2010

Gold To Gold Stock Correlation Not That Large

According to a report by Hard Assets Investor, which looks at four major gold stocks' correlation to gold, Barrick and GoldCorp have a fairly good link (R-squareds of 0.598 and 0.791 respectively) but Newmont and AngloGold Ashanti have hardly any correlation at all (R-squareds of 0.043 and 0.026 respectively.) Conclusion? Gold stocks sometimes move to the beat of their own drum, and some gold stocks do so almost completely. The last two have substantial interest in other metals, which does a lot to explain the near-zero correlation.

Mining companies are businesses, which also explains the partial disconnect overall. Revenues are affected by the price of gold, but costs are less affected. Meandering costs do help explain why the correlations for even pure gold stocks aren't that high. Also, stock-market-specific events, like the '08 financial crisis, further reduce the correlation.


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