What Does the Correlation of Miners Indicate?
Mining stocks tend to move with gold prices. For our correlation analysis, we’ll compare four mining stocks to gold. We’ll look at New Gold (NGD), Newmont Mining (NEM), Agnico-Eagle Mines (AEM), and Franco-Nevada (FNV).
Mining-based funds are also known to have high correlations with precious metals. The Sprott Gold Miners ETF (SGDM) and the leveraged Direxion Daily Gold Miners Bull 3X ETF (NUGT) have fallen 8.4% and 20.1%, respectively, during the last five trading days. The slump in precious metals fueled the fall for these mining funds.
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The YTD (year-to-date) correlation readings of miners seem rather distorted. NEM has a huge 0.97 correlation to gold, while Franco-Nevada has a -0.59 correlation. A negative correlation indicates that an increase in gold could lead to a fall in FNV, while a decline in gold could lead to a surge. A smaller sample size could be the issue behind the relationship distortion.
AEM and NGD have seen their correlations to gold fall over the past three years. NGD had a three-year correlation of 0.56 and a one-year correlation of 0.21. A correlation of 0.21 suggests that about 21% of the time during the past year, NGD has moved in the direction of gold, and the rest of the time, its movement has been independent of the movement of gold. FNV and NEM have two-year correlations to gold above their three-year correlations.
Correlation trend readings are critical to investors since they could indicate the possible directional moves of these miners.