Do Gold Betas Point The Way To Greater Profits?

by: Bennington Investment Ideas

Gold has continued its upward ascent with the recent price at $1,836.30 per troy ounce. I previous wrote an article about gold betas to identify the securities that should have the greatest exposure to gold price movements. A gold beta is similar in concept to beta in that as a security can have a certain exposure to market risk and provide a certain level of reward when the market rises, a security can also have a certain level of exposure to gold and reward long investors when gold rises.

Taking an analytical approach allows investors to quantify a given security's exposure to gold prices.

Gold Related Security Performance


Name April 11 Price September 12, 2011 Price % Price Change
GLD SPDR Gold Trust 142.64 176.67 23.9%
RGLD Royal Gold, Inc. 53.11 80.06 50.7%
DGP Deutsche Bank AG DB Gold Double 44.75 66.84 49.4%
AUY Yamana Gold, Inc. 12.89 16.54 28.3%
GOLD Randgold Resources Limited 85.85 108.56 26.5%
JAG Jaguar Mining Inc 5.37 6.33 17.9%
EGO Eldorado Gold Corp 17.59 20.5 16.5%
NEM Newmont Mining Corporation (Holding Company) 56.95 64.07 12.5%
ANV Allied Nevada Gold Corp 38.58 42.46 10.1%
KGC Kinross Gold Corporation 16.1 17.16 6.6%
GDX Market Vectors Gold Miners ETF 62.1 63.9 2.9%
ABX Barrick Gold Corporation 53.08 53.33 0.5%
SLV iShares Silver Trust 39.21 39.14 -0.2%
GG Goldcorp Incorporated 53.44 53.01 -0.8%
IAG Iamgold Corporation 22.57 21.91 -2.9%
AU AngloGold Ashanti Ltd. 49.25 45.48 -7.7%
GFI Gold Fields Ltd. 18.14 16.61 -8.4%
GDXJ Market Vectors Junior Gold Miners ETF 40.73 36.91 -9.4%
SPY SPDR S&P 500 Trust 132.46 116.67 -11.9%
HL Hecla Mining Company 9.13 7.65 -16.2%
CDE Coeur d'Alene Mines Corporation 35.58 28.6 -19.6%
IVN Ivanhoe Mines Ltd 27.52 20.61 -25.1%
DZZ PowerShares DB Gold Double Short ETN 7.39 4.37 -40.9%

Source: Yahoo Finance. It should be noted that dividends were not accounted for in this analysis. Since most gold mining stocks do not pay a meaningful dividend (some offer 1% annual or about .5% over this time period) it would be expected to have limited impact on the analysis.

The above table shows that GLD and DGP have had very strong performances while many mining companies have had was exciting performances, most likely leaving many investors frustrated. In fact, GDXJ has actually declined almost 10% over that time period.

While my previous article cited GDXJ as a good way to gain gold exposure, it did show a 12 month gold beta of 1.8. DGP as a 2x performer against GLD, offers a gold beta of 2.0. Furthermore, DGP does not have the added issue of company specific risk. Even if a company has strong exposure to gold, management can still make poor decisions resulting in poor company performance which translates into poor stock performance.

While GDXJ had a slight declined, junior miners showed an even broader range of performance with CDE at -25.1% while RGLD and JAG posted 50.7% and 17.9% returns respectively. However, even JAG at 17.9% return is disappointing given GLD return of 23.9%.

The following table compares the gold beta to the return:

Gold Betas and Recent Returns


Name recent Price Change Gold beta 36 Month Gold beta 12 Month
GLD SPDR Gold Trust 23.9% 1.0 1.0
RGLD Royal Gold, Inc. 50.7% 1.7 1.6
DGP Deutsche Bank AG DB Gold Double 49.4% 2.0 2.0
AUY Yamana Gold, Inc. 28.3% 2.4 1.7
GOLD Randgold Resources Limited 26.5% 1.6 0.9
JAG Jaguar Mining Inc 17.9% 2.1 0.4
EGO Eldorado Gold Corp 16.5% 1.7 1.7
NEM Newmont Mining Corporation (Holding Company) 12.5% 1.7 1.2
ANV Allied Nevada Gold Corp 10.1% 1.6 1.9
KGC Kinross Gold Corporation 6.6% 1.8 0.9
GDX Market Vectors Gold Miners ETF 2.9% 2.0 1.6
ABX Barrick Gold Corporation 0.5% 2.1 1.6
SLV iShares Silver Trust -0.2% 1.4 1.7
GG Goldcorp Incorporated -0.8% 2.2 1.9
IAG Iamgold Corporation -2.9% 2.4 0.8
AU AngloGold Ashanti Ltd. -7.7% 1.6 1.6
GFI Gold Fields Ltd. -8.4% 1.8 1.3
GDXJ Market Vectors Junior Gold Miners ETF -9.4% NA 1.8
SPY SPDR S&P 500 Trust -11.9% 0.1 -0.3
HL Hecla Mining Company -16.2% 2.4 2.3
CDE Coeur d'Alene Mines Corporation -19.6% 1.8 2.3
IVN Ivanhoe Mines Ltd -25.1% 0.1 -2.0
DZZ PowerShares DB Gold Double Short ETN -40.9% -2.0 -2.0

Source: Yahoo Finance, author calculations.

At first glance, this result does not seem great for gold betas. While some stocks aligned pretty well (IVN with a low to negative beta, showed a negative return, RGLD and AUY has matched their strong positive returns), others did not work out very well such as HL and CDE. However, mathematically, there was a 50% correlation between gold betas and recent price changes. There is a chance also that some companies hedged additional portions of the expected production and hence effectively reduced their exposure to gold prices.

So what should an investor do with this information?

If you have a perspective on gold price movements it is probably best to play them through directly linked ETFs, such as GLD, DZZ, and DGP. These ETFs eliminate company specific risk and mining risk and macro stock risk in GDXJ and GDX. Furthermore, while some of these junior companies may offer greater exposure as I've previously calculated, it is not substantially greater than the 2x returns provided by DGP. If you want to be against gold, DZZ would be a good option. However, I also believe that very marginal producers would suffer greatly if prices begin dropping.

However, there is the further interesting observation that while GLD has increased 23.9% since April 11, 2011, SLV has declined slightly by .2%. Perhaps there is a long short play going long SLV and short GLD. One question would be to look at the bigger picture and see whether this ratio is currently misaligned or that SLV had previously been overvalued, and this last 5 months only served to realign the relative values between GLD and SLV. Nevertheless, it is worth investigating further.

Disclosure: I am long SPY.

Disclaimer: This article is for informational and educational purposes only and shall not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security.