The -7.9% collapse in gold prices in November is attributed to several factors. First, the growing expectation that the Federal Reserve will increase the interest rate. Also, a stronger U.S. dollar against the euro and other currencies was induced from assumptions based off an oil production agreement made by OPEC members at a meeting in Vienna on Nov. 30. Gold prices may have been affected by mounting expectations of President-elect Donald Trump and the impact his administration may have on the global economy. Finally, fears of negative repercussions on the financial markets from the result of a constitutional referendum Italians will vote on Dec. 4 have also had an influence.
Gold has not stopped weakening. Yesterday, the precious metal fell 1.4% from the previous trading day to $1,173 per troy ounce on the London Bullion Market.
Gold is still trading at higher prices than at the beginning of 2016. The precious metal was priced at $1,072.700 per troy ounce on the London Bullion Market on Jan. 4, but November has been a disappointing month for the precious metal. It fell from $1,189.422 per troy ounce on Nov. 1 to $1,187.400 per troy ounce on Nov. 30.
However, year-to-date, gold gained 9.4% or $100.300 per troy ounce.
Following the negative trend in the underlying precious metal, gold mining stocks and two of the most important gold stocks indexes, the SPDR Gold Trust (GLD) and the VanEck Vectors Gold Miners ETF (GDX), tumbled in November.
As seen in the chart below, the stocks all fell considerably – ranging from a 2% loss for Royal Gold Inc. (RGLD, Financial) to a 31% loss for Harmony Gold Mining Co. (HMY, Financial).
Inside the range are:Â Goldcorp Inc. (GG, Financial) -15%, Gold Fields Ltd. (GFI, Financial) -29%, Agnico Eagle Mines Ltd. (AEM, Financial) -22%, Barrick Gold Corp. (ABX, Financial) -18%, Yamana Gold Inc. (AUY, Financial) -19%, Newmont Mining Corp. (NEM, Financial) -15%, Kinross Gold Corp. (KGC, Financial) -16%, AngloGold Ashanti Ltd. (AU, Financial) -24%, Iamgold Corp. (IAG, Financial) -11%, Eldorado Gold Corp. (EGO, Financial) -17%, Royal Gold (RGLD, Financial) -2%, Randgold (GOLD) -19%, the SPDR Gold Trust (GLD) -9% and the VanEck Vectors Gold Miners ETF (GDX) -15%.
It is interesting to see how gold prices have influenced the stocks' performances over the last 12 months and into the month of November. To do so, a multiple regression has been used. The returns of each gold stock is the dependent variable and the change in the gold price, the returns of the stock market, the U.S. 10-Year Bond Yield change and U.S. Dollar Index (DXY) change are the independent variables in a multifactor model.
The data covers the period from Nov. 30, 2015 to Nov. 30, 2016, for a total of 253 daily observations. The results are shown in the table below:
The data in the column "coefficient" underneath the heading "Ret on Gold" concern beta.
The beta coefficient measures the exposure of the returns of the gold stock to the changes in the price of gold.
Harmony Gold Mining (HMY, Financial) has the highest beta of 2.74. It means that changes in the price of the precious metal have caused a higher change in the share price of this mid-tier gold producer, signalling the stock is much more volatile than gold. Harmony is followed by Yamana Gold Inc. with a beta of 2.52, Kinross Gold Corp. with 2.51 and Iamgold Corp. with 2.45.
The largest gold producers, Barrick Gold Corp., Newmont Mining Corp. and Goldcorp Inc., have been characterized by betas of 1.87, 1.67 and 1.68.
Franco-Nevada (FNV, Financial) closes the ranking with the lowest beta of 1.47.
The other variables, the S&P 500, U.S. 10-Year Bond Yield Change and the U.S. Dollar Index (DXY) change, have been included in the model to increase its statistical reliability and predictive power. As a proxy for the gold price, the Comex Gold Futures has been used.
Not surprisingly, Harmony Gold has the highest beta of 2.74 and has lost the most.
If these factors continue to pressure gold, we may see further decreases in the price of the precious metal and in the share price of gold stocks, with higher odds of bigger losses in those stocks with higher historical betas.
Disclosure: I have no positions in any securities mentioned in this article nor in the physical gold.
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