The chart below illustrates the relationship between the VanEck Vectors Gold Miners ETF (GDX, Financial) and gold futures for Dec. 18 (GCZ8, Financial) over the last 52 weeks through Oct. 19. These are the two vehicles available to investors to gain exposure to the precious metal -- the first one through publicly traded gold mining companies and the second one through legal agreements with which the commodity is traded.
The first impression that the reader will receive from the picture is that the VanEck Vectors Gold Miners ETF has moved within a thinner range, between $20 and $22.50 per share, compared to the gold futures, which traded between a wider range of $1,175 to $1,360 per ounce.
This aroused my curiosity about the volatility of the VanEck Vectors Gold Miners ETF in relation to changes in the daily price of the commodity, so I conducted a study.
Determination of the volatility of the VanEck Vectors Gold Miners ETF:
As a benchmark for the price of gold, I used the gold futures of Dec. 18. I also ran the specific analysis tool available in Excel and regressed the VanEck Vectors Gold Miners ETF on the gold futures over the 52 weeks through Oct. 19 for 252 observations of the daily price. I set the confidence level at 95%.
The result is considered statistically significant when the related t-stat is higher (lower) than 1.96 (-1.96). The coefficient of determination is about 0.46, reflecting an acceptable approximation of the analyzed variable. The data is presented in the below chart. At 95% confidence level, the regression coefficient of 1.35 is statistically significant because the t-stat of 14.52 is higher than 1.96.
The regression coefficient of 1.35 represents the volatility of the VanEck Vectors Gold Miners ETF in relation to changes in the daily price of the commodity. Therefore, when the daily price increased (decreased) $1, the VanEck Vectors Gold Miners ETF increased (decreased) $1.35.
The relation between the two securities has been positive over the period observed, but more than proportional. While the first part of the information is not saying anything new, the second part regarding the proportionality of the two variables means a lot.
The proportionality of the two variables, which is measured by the regression coefficient of 1.35, is suggesting that investors have been very active in the VanEck Vectors Gold Miners ETF. The fund is one of the most liquid vehicles available for managing exposure to the precious metal through miners. That characteristic has helped investors to unload their holdings in the VanEck Vectors Gold Miners ETF very quickly when necessary and gain access to the liquidity.
Gold investors used cash to add on higher risk securities:
Due also to tensions between the U.S., China and Iran on tariffs, the decline in the price of gold has dissuaded investors from allocating their financial resources to physical gold but created a rerouting towards higher risk investments. Because of the preference for higher-risk investments, total gold assets possessed by the gold-backed ETFs also declined 152 tons to 2,329 tons in September from 2,481 tons in April.
U.S. equity is an example of a higher-risk investment than gold. In fact, the chart below illustrates that for the period observed, while the gold futures declined, the S&P 500 index has increased and outperformed the contracts by about 11.2%. The S&P 500 index is usually used as a proxy for the U.S. stock market.
Over the same period, the bullion has fallen 7.8% with the major loss experienced over the last six months. From a monthly average of $1,330.65 per troy ounce over the first four months of 2018, the bullion has progressively fallen to $1,208.63 per troy ounce as of Oct. 19, reflecting a 9.2% decline.
About gold price in the near future:
Looking ahead, the persistence of tensions between the U.S., China and Iran, in addition to expected hikes in the interest rate by the U.S. Federal Reserve, will not be positive for gold. With its strengthening, the U.S. dollar will stay on sustained levels and will keep the commodity down.
I expect a near future for gold along the lines of what we have seen in the last six months of trading.
The precious metal shouldn’t trade outside the range of $1,205 to $1,245 per troy ounce until at least the beginning of 2019.
In addition, for the 52 weeks through Oct. 19, the VanEck Vectors Gold Miners ETF has declined 13.9%, the S&P 500 index has gained 7.5% and the Gold Futures for Dec. 18 have fallen 3.7%.
Disclosure: I have no positions in any security mentioned in this article.
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