Tuesday, 21 August 2012

Gold Price vs. Mining Companies' Stock Prices

Correlation between Gold prices and Mining Companies Stock Prices

Given the bullish sentiment on gold due to concern on slowing economic growth, we decided to take a closer look at gold prices vs. stock prices of mining companies, specifically Barrick Gold.  Gold has risen 3.3 percent to $1618 this year, extending 11 consecutive annual gains!   One would assume a positive relationship between gold prices and shares of the mining company. However, we take a closer look at the Regression Analysis (please see excerpt below) and conclude that there is a negative correlation between 2 year trailing gold prices and Barrick Gold (ABX) share prices.
Barrick Gold’s share price does not follow the path of gold prices. One reason is the fact that the company has paid dividends, consequently causing the share price to decrease by the same amount.
 Also, extracting costs and higher wages will cause the profits to decrease.  However, this doesn’t fully explain the divergence between the two variables.  According to PWC’s Gold Report 2012, mining companies are struggling to take advantage of the benefits of a high gold price.  Through December 15, 2011 gold
has risen 11%, but gold stocks within the S&P/TSX Global Gold Index have declined 10.6%. 
Why?  Three letters: ETFs – the availability of ETFs has allowed investors to invest in gold rather than mining companies. This is a reason why Barrick has continued its dividend paying schedule and even increased it from 0.12 to 0.15 to 0.20 in order to retain investors and not lose them to these financial instruments.
Another issue faced by mining companies is the demand for higher wages as the price of gold increases. A few have even experiences strikes at their mine sites.
However, using our statistical analysis between share prices and the underliying commodity price, we deem Barrick Gold to be undervalued with an implied price to the line of best fit of $ 46.40.  This would translate to a potential return of 29%. Another source of income offered by holding the company is the increasing dividend.
As the global uncertainty continues - U.S Elections, Iran, Eurozone crisis, investors will continue to gain exposure to this metal that has given amazing returns in the past few years either through rally-gold Exchange Traded Funds or Gold Equity Funds - the latter investing in gold mining companies.  

 Regression Analysis - 2 Year Trailing Gold Prices vs. Mining Company (Barrick Gold) Share Prices 

Anna Nepravishta

1 comment:

  1. I really enjoyed this article. ETF's = diversification. Too many geopolitical risk in areas like Peru.