I was wondering if anyone here had come across good articles or white papers describing the relationship between precious metals (mainly gold and silver) and equity markets? Also, as a derivative, how about the relationship between mining companies and broader equity markets?
Any links or suggestions would be appreciated. Thanks.
Cue STL.
When I ran my own data, I found that there was a moderate correlation between gold prices and gold company returns, but not nearly as strong as you might expect. That’s partly because gold companies tend to use futures/forward markets to smooth out their revenue short tem, so short term price fluctuations don’t affect short term earnings as much. Long term, the effect on price is more option-like with the strike at the cost of production and the underlying at the gold price.
Most commodities have a floor at the price of marginal production, but companies don’t, since they can go bankrupt.
Or were you talking about equity market indexes, in which case the correlations (if I recall correctly) are pretty low, particularly since there is only one gold price and many equity markets. Gold performed well during stagflationary 1970s and badly in expansionary 1980s and 90s, but well during the boom in the 2000s so the correlation is fairly low or possibly negative.
But take this with a grain of salt, a Charterholder wrote this.
I used to have a very good white paper from a U of Chicago Economist from a presentation I attended. However, I left it in my desk at a company I was made redundant at…
Cute hate, but CAIA has very good resources regarding equity & commodity markets within its curriculum. I’m sure you could google the studies.
How about in the case of gold / silver miners? In your analysis, did you draw anything conclusive about just how far the price of gold or silver can fall below average variable costs before rebounding? Obviously there is a long-term shutdown point but in the near-term, the price of gold/silver can fall below AVC so I’m curious to hear what the stocks have done in these cases, and also what management teams ended up doing in these cases to the extent you’ve looked at this stuff.
STL has done his own due diligence and reported to us a production price of $1200 (a higher number than many think, according to him). That turned out to be fairly prescient, particularly since it was made while the gold price was still falling. Good job and thanks, STL.
As for me, I am more an index and asset allocation/macro guy so I look at indexes and ETFs more than individual companies. Obviously, AVC varies by company and region and technology employed whereas commodity prices are global - except to the extent that management locks in futures. So different companies are clearly differently sensitive to gold prices. Which are which is not something I have researched since that’s not my area of expertise.
I remember Sweep the Leg’s comments on that thread and thought they were useful. I think about unit economics a lot in mining too. I remember one thing that wasn’t really discussed at the time was that a lot of the gold mines are located in countries with high (sometimes very high) levels of inflation and unemployment. When you consider the lion’s share of cost components for this stuff – namely costs of treatment, refining, freight, and transportation – what that means is that in the short term, first tier producers can probably lower their variable costs to offset potential declines in precious metal prices. Longer term, what this means is that some of the smaller players will have to fold and eventually capacity will right-size itself so that the supply-demand imbalance leads to a higher equilibrium price, so I see more of a likelihood for prices to go up than down in the longer-term.
However, I do worry that in the short term it’s possible for gold prices to fall to $1,000/oz and silver to fall to $16-17/oz. I hate to sound so pessimistic but we’ve already seen that prices of these metals have fallen meaningfully as investors have lost faith in bullion as a store of value with the Fed posturing towards curbing stimulus, and the bigger mining companies can still stay afloat at these levels.
Anyway, didn’t mean to elaborate too much but those are my thoughts. Certainly I’m open to discussion and more optimistic scenarios, but as an investor I always start by wondering what my downside can be before thinking about what my upside might look like.
Damn, didn’t swing by this forum for a couple days and this thread pops up. I don’t have much to add besides what you guys have heard me say recently…other than this.
A big risk we’ve seen in any asset that’s been ramping up lately is hedge fund money comes piling in. The ramp up accelerates right up until there’s some bad news and the shorts are able to really pound the hell out of the “smart” money. Two very clear recent examples of this were Apple and gold. Both were hedge fund darlings over the last year topping the 13F filings of all the big boys. Then Apple cracked and all the hedge funds starting selling (and sometimes shorting) and the freefall began. Exact same thing happened to gold. It went from a top holding at the beginning of the year to completely absent from just about all hedge fund holdings as of two days ago (when 13Fs were released).
And, in both cases when the hedge fund money had been shaken out the fall stopped. People realized there were still reasons for owning Apple and gold and a floor was put in place and a gradual uptrend emerged. The situation in gold was even nicer because there was an unbelievable short position. Many of the hedge funds that got burned wanted to get their money back on what they perceived to be a bubble popping. What they didn’t expect was the huge physical demand for gold when the price dropped. Our friends in China and India don’t give two flying farks about the paper gold trade. They bought and the demand squeezed the shorts. Over the last week in particular we’ve seen some decent short covering on top of still strong physical demand.
Bottom line, it’s my best guess that the hedge funds are, for the most part, going to sit on the sidelines for a while and see what happens. Based on fundamentals the gold (and silver) scene is still in good shape so without the heavy hands swaying the market we should see prices trend up over the medium term and might get a few more short squeezes along the way (watch when we cross $1375).
(There is also some pretty interesting stuff happening at JPM right now. If you really want to dive into the market I suggest you head over to ZH or HarveyOrgan and read all about it. Basically they’re running out of gold.)
Sweep the Leg – good observations and thanks for the follow-up. This is very helpful. Quick question - I’m somewhat new to the sector so in the grand scheme of things, how credible is the Harvey Organ research? Any other sources you recommend that you personally find reliably good? Thank you.
HO is good for a few things:
Easily digestible COMEX data on a daily basis (Saturday is particularly important as you see the changes in the long and short positions).
Gold and silver ETF holdings and premium information. I keep an eye on the amount of gold and silver GLD and SLV are holding and what direction it’s trending. And, I keep an eye on the premiums, particularly on PSLV. It’s a good indicator of market sentiment. It’s reached over 20% in times of extreme bullishness. Anything below 4% and people are generally bearish on silver.
And I also check out the news stories he reposts. They’re all generally positive for gold and silver, but it’s easy enough to find plenty of bearish articles - pretty much everywhere else - to balance it out.
Disregard his commentary. No matter what he’ll find a bullish spin or say the banks raided the market. It gets old after a while.
As for other sources, Goldcore is good but I generally just read what’s reposted by ZH or HO. Read the links on the left hand side of ZH. http://www.tfmetalsreport.com/ is another good one…authored by one Turd Ferguson (mayhaps our very own?).
Sweep the Leg, thanks for your follow-up responses and reading recommendations. I’ve added them to my list.
Also, has anyone found any really good articles describing views on silver or gold? Here’s one I found in the Financial Analysts Journal recently… http://www.cfapubs.org/doi/pdf/10.2469/faj.v69.n4.1