How Gold Mining Companies' Stock Prices Correlate With Gold and Stock Prices

Includes: ABX, AUY, GG, IAG, KGC, NEM
by: Benjamin Goldman

On August 10, the stock market plunged once again as many fear a European financial crisis. Several investors moved their money to so called “safe havens” including gold and creditworthy treasuries. Almost every stock took a huge loss, but gold mining companies experienced large gains across the industry. As more investors move towards gold as an investment, people will look for new ways to be long gold without actually holding gold bullion or buying an ETF like GLD or IAU. Gold mining companies are an obvious choice because the skyrocketing price of gold will in turn increase gold mining operations’ earnings. Below, I analyze which mining companies’ share prices correlate with gold prices and stock market prices and give a recommendation on how investors should look at gold mining firms. The stocks that I analyze are Kinross Gold Corporation (NYSE:KGC), Barrick Gold Corporation (NYSE:ABX), Goldcorp Incorporated (NYSE:GG), Yamana Gold Inc. (NYSE:AUY), Newmont Mining Company (NYSE:NEM), and Iamgold Corporation (NYSE:IAG).

Correlation With GLD in the Last Correlation With S&P 500 in the Last
Company Year 3 Months Month Week Year 3 Months Month Week
KGC -0.35 0.55 -0.55 0.20 -0.38 0.07 0.82 0.60
ABX 0.14 0.62 -0.01 0.65 0.38 0.08 0.42 0.06
GG 0.76 0.24 -0.58 0.77 0.62 0.38 0.70 -0.15
AUY 0.80 0.83 0.78 0.65 0.72 -0.27 -0.46 -0.24
NEM -0.48 0.55 -0.30 0.29 -0.56 0.17 0.67 0.49
IAG 0.53 0.41 -0.30 -0.43 0.66 0.11 0.63 0.57

As you can see, there is very little correlation between gold mining companies and gold prices, with the exception of Yamana Gold. Gold stocks actually have a much better correlation with the stock market over the last month, with the exception of Yamana once again. I cannot find a specific reason why Yamana sticks out, as its value proposition does not seem to be significantly different from its competitiors'. This study has shown how the gold mining company stock increases on August 10 were a new trend, and we will see over the coming days if it continues.

Gold companies in general are a good investment right now. All of the stocks I analyzed have one-year price targets between 24.4 percent (Yamana) and 38.8 (Goldcorp) percent higher than their current market prices. Every company that I analyzed except for Goldcorp is trading above its 50-day and 200-day moving averages and these companies’ P/E ratios are still reasonable between 12.4 (Newmont) and 20.9 (Yamana). My personal favorite is Barrick Gold Corp., which is an unhedged gold mining firm with the largest market cap in the industry at just over $48.5 billion. It's trading at its 200-day moving average, a P/E ratio of 13.9, and a forward P/E ratio of 9.5. In 2009, it experienced a $6.1 billion unusual loss due mainly to closed hedging positions from its decision to unhedge its position on gold. However, it's increased operating income every year for the past six years and is obviously expected to do so over the next two years. It will be interesting to see how high gold prices will get, but the one sure thing for now is that investors want to be long gold and will find new ways to take that position.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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