Comparing Volatility of Gold to Its Price

It has been a turbulent year for both gold and gold stocks. After breaking the $1000 per ounce mark in mid-March and rising as high as $978 about four months later, the spot price of gold has fallen as low as $712. With the market volatility expected to continue for some time, investors continue to seek ways to play the discrepancy between bullion and related equities.

Analysts at RBC Capital Markets have looked at the beta, or volatility of gold stocks compared to the gold price, for Tier I and Tier II North American gold producers. For example, if a stock’s beta is 2.0 and the gold price moves 10%, the share price should theoretically move 20% in the same direction.

Stephen D. Walker and Michael Curran looked at two periods: the four-and-a-half months after gold’s July 15 interim high and the 12-month period that began on Nov. 30, 2007. They found that Kinross Gold Corp., Goldcorp Inc. (GG) and Barrick Gold Corp. (ABX) have similar betas for both periods – ranging from 1.95 to 2.11. Newmont Mining Corp.’s (NEM) betas were substantially lower, however, the analysts expected the opposite since it has higher-than-average cash costs.

“The explanation of a lower beta may be related to fewer surprises for investors, as management has delivered on its 2008 production and cost guidance,” they told clients, adding that Newmont has had no major M&A news or negative geopolitical developments in the past year.

The report also showed that Tier II producers tend to have a higher beta than their larger peers, which can be attributed to their greater risk and cost profiles. Eldorado Gold Corp. (EGO) stands out as a Tier II name with a high beta during both time periods.

So how can investors play the beta game? If they’re bullish on gold, RBC’s analysts suggest a focus on above-average beta-to-bullion names that have a high quality asset mix, such as the ones already mentioned. Another Tier II miner that fits this profile is Red Back Mining Inc. (RBIFF.PK).

Bullion bears should reduce their exposure to high beta names with low quality assets, as they should decline more quickly and severely if the gold price declines, the analysts said, highlighting Franco-Nevada Corp. [FNV.TO], Newmont and IAMGOLD Corp. (IAG) as stocks with a more defensive beta.

RBC expects a year-end rally for gold into 2009 and the Chinese New Year that begins on Jan. 26.

Comments

[US:]

If you are looking for leveraging gold's movements, then simply buy the new Proshares levered ETF for gold - this way you cut out operational risks.

2008 Dec 03 04:16 PM

[Smarty_Pants:]

Most tradable swings in gold last about a month or so. You can use options on GLD that are 3 months or more from expiration to trade them in the short term.

The options give you the same profit potential for a smaller cost. Just don't hang on to them too long or they will lose too much value in time decay.

If you don't understand what all that means, then you have some studying to do before attempting anything. You can lose a lot of money in a hurry if you don't know what you're doing in the option market.

You can also use a delta neutral position with GLD shares and options on GLD. That's even more complex and it requires a lot more money to establish. In theory the downside is limited and solid profits are possible with strong moves in the price of gold in either direction

Again, study and learn before you attempt anything.

2008 Dec 03 04:59 PM

[RealityvsPaper:]

Baloney. If you want the full benefit of gold then buy the physical real thing, and do NOT buy the ETF paper manipulated fake gold. They have always and will always be manipulated by futures which cost little to manipulate. Hold gold in your hands and you have value, hold paper in your account and you have a pipe dream. The only way gold will travel up to where it should be, inflation adjusted (well over $2000 oz) is if you lazy fools stop buying paper gold and get the real thing in your hands. When there is a failure to deliver, you will hold paper nothing, and we will hold gold worth thousands per ounce. By the way, just try to get physical gold this month and see what happens, THERE IS NONE. Mining expansions and operations are cut back, supply is sold out in the entire USA for physical gold, and you cant find it for less than 5% above comex, if you can find it at all. As of this week, even Kitco cannot ship gold to the USA, at ANY price. Comex is manipulated, physical gold cannot be manipulated.
END OF STORY.


On Dec 03 04:16 PM US wrote:

> If you are looking for leveraging gold's movements, then simply buy
> the new Proshares levered ETF for gold - this way you cut out operational
> risks.

2008 Dec 03 05:30 PM

[Greg Pinelli:]

Oh Reality man...please allow me to lay a little real world on you..No one..as in NO SINGLE PERSON EVER...wants to be called a fool or insulted into changing their conduct. So heres a little primer on how to move the unmoved...
Physical gold has several advantages..
1. It is in your hands..no small matter if there are those who manipulate the paper world.
2. Premiums have been very substantial..When I first started buying gold in 1979 a 3-5% markup..depending on the coin was typical. Very demanding to find now, unless one is buying in quantity.
The downside..
1. You'll need a 10-15% move up to make ANY money...and you have to find a dependable buyer.
2. You lose out on very quick moves..ad the markets are all about volatility...

The gold miners also have a place in one's portfolio..my personal take on the precious metals...as a % of total portfolio...
1. 5% physical gold...
2. 5% physical silver....
3. 5% paper gold..GLD works well..even DGP is a great wealth builder..
4. 5-7% SLV or SLW..the upside to both is dramatic..SLW is silver on the cheap....
5. Gold miners...AUY...GG...FC... (many metals)

2008 Dec 03 09:49 PM

[NOWHEREMAN:]

Oh Geo whatever: " No one ... as in NO SINGLE PERSON EVER...wants to be called a fool or insulted into changing their conduct."

But, here you are, in every article, some sort of insult to someone. The above quote is directly from your post.
Why don't you practice what you preach?

The person you are chiding this time around, RealityvsPaper was talking about buying and holding onto physical Gold. But did you bother to read his entire Post? Doubtful since you immediately launch into the trading aspects.

1979, 3%-5% markup on what? Specific types of Gold Coins, ingots, bars, where did you get your figures from or are you just making things up as you go along?

This article is about GOLD, talk about gold.

RealityvsPaper: you are absolutely right. With the physical metal in hand, you do not have to worry whether the stocks Geo lauds will turn into so much paper as they go through a Delationary period. Take CDE for instance, probably the world's largest silver producer, in March of 08 it was around $5 by November it had dropped to $0.36... all slated mining production combined is projected to be17 million Oz. of silver annually... 10K and news releases.

Only the ETFs have gone down less than 50%. Much better to hold physical gold. IMHO

2008 Dec 04 07:54 AM

[NOWHEREMAN:]

SLW up 40% off its lows at $3.53 but still Down over 80% from its annual high of $19.54.

Anyone who held onto mining shares is having nightmares.

IMHO

2008 Dec 04 08:02 AM

[Smarty_Pants:]

"Hold gold in your hands and you have value" - RealityvsPaper

Agreed. This is why I use a portion of my trading profits to buy physical. However, the article makes points about ways to trade gold and is authored by FP Trading Desk so it would seem discussions about ways to trade in paper gold would follow. 'Trading' in physical gold would be quite difficult as you would need huge swings to overcome premiums and transaction costs and we really aren't seeing that sort of price action at the moment.


"By the way, just try to get physical gold this month and see what happens, THERE IS NONE. Mining expansions and operations are cut back, supply is sold out in the entire USA for physical gold, and you cant find it for less than 5% above comex, if you can find it at all." - RealityvsPaper

Not true. I routinely buy or sell physical gold near spot through a second hand dealer who is an acquaintance of mine. He buys scrap gold off the street (others have ads on tv for the same sort of thing) and is happy to sell anything he buys to me at spot. That's more than he gets for sending it off to a smelter.

Granted my physical gold isn't a coin or bullion bar. It's broken chains, pins, and rings in different carat weights, but it IS gold, and I can convert to cash just below spot by having my friend send it to his smelter. Again, he is happy to do so as the 'extra' gold I give him increases the rate the smelter pays for his gold (send in more weight and they increase the rate they pay). My buy/sell spread is probably around 2% of spot.

I would think anyone out there can do the same as I do and buy scrap gold from local pawn shops or jewelers who buy it from the public every day at a price very near spot. My friend buys thousands of dollars of scrap every week in a modest sized city of around 100,000 people.

One word of caution however. I have known my friend for over 6 years and have no doubt that he is completely honest and won't try to cheat me in my purchases. If you are dealing with people you just met, you need to be able to figure out whether you are getting what you pay for when you buy scrap gold. Can you test gold to verify what the proper carat weight is? You better be able to if you want to get your money's worth in this sort of purchase. Being 'not sure' can cost you a lot of money.

2008 Dec 04 11:16 AM