By Richard Bloch
Back on October 6, I suggested another way to view support and resistance points for Freeport McMoran (NYSE:FCX) – a major copper producer – by looking at the price of the stock against the price of copper itself.
For example, here’s a chart plotting the relationship between FCX and the price of copper (using a continuous contract) going back about 18 months (May of 2009):
As you can see, when copper has traded at around $3 per pound, the stock has traded from around 60 to 85. That’s a wide range, of course, since there is obviously a historical relationship between the stock and the metal.
The red line shows the linear regression line which best fits the data. I added the green lines to show potential support and resistance points.
The chart shows that the slope of the line is about 26, indicating that if the relationship holds, FCX could conceivably move up or down by that amount for every $1 move in the price of copper.
The R-squared value shows the strength of the correlation, in this case 0.84. (A value of 1 represents a perfect correlation.)
Here’s a similar chart for another copper miner, Southern Copper (NYSE:SCCO):
Silver miners: A strong relationship to the metal
After looking at these two copper miners, I decided to create similar charts for two silver mining companies, Silver Wheaton (SLW) and Pan American Silver (NASDAQ:PAAS):
Both of these charts show a very strong historical relationship to the price of silver (R-squared of over 0.9) – at least for the past 18 months.
Gold miners: More variation in correlation
Continuing along the same line of thinking, here’s a look at some of the larger gold miners:
It appears as if there’s a lot more variation in how the stock price of these companies moved based on the price of gold.
Some of this variation could be explained by each company’s costs to mine and refine an ounce of gold and how the company has hedged future sales.
For example, a company that sold some of its future output when gold was trading at $1,100 might trade differently than a company that has not hedged its future production.
Finally, here’s a few charts for a couple of the “junior” gold miners.
NovaGold (NYSEMKT:NG) has traded well above $12 since November 3 and seems to have broken through what I would have thought would be a resistance point – at least based on this chart.
One thing to keep in mind about some of these miners is that they’re often involved in more than just one metal. Freeport McMoran, for example, while well known for its 100 billion pounds of copper reserves, estimates its gold reserves at 40 million ounces.
Currency fluctuations could also impact this analysis. Although gold, silver and copper generally trade in US dollars, most of these companies have assets and customers outside the US.
So where could your favorite mining stock be headed? You’ll certainly want to look at a traditional price chart along with company-specific fundamental data, but plotting support and resistance points based on metal prices could also help you decide when to buy or sell.
Disclaimer: Charts of historical correlation data are for illustrative purposes only, and should not be construed as recommendations, projections, or guarantees of performance.