Which Gold Miner ETF Has The Highest Correlation To Gold?

by on May 31, 2012

With the evolution of the ETF industry, investors now have numerous cost-efficient tools at their disposal to “fix” just about any financial objective. The growing popularity of commodities investing has also spawned a wave of interest in exchange-trade products targeting gold. As such, ETFs offering exposure to the precious yellow metal have found their way into many investors’ portfolios. Interest in gold miners ETFs has also been growing as some prefer indirect exposure to gold by tapping into commodity producers equities [see also GLD-Free Gold Bug ETFdb Portfolio].

The profitability of gold miners generally depends on the price they are able to sell their product at, similar to just about every other business out there. Running a gold mine entails a fairly fixed cost structure, and as such, swings in gold spot prices can have a material impact on profitability. Because of this, some investors have grown to believe that gold mining companies tend to have a very positive correlation with the price of gold. Unfortunately, this is not always the case for one simple reason: gold mining companies hedge [see How To Find The Best Gold Miner ETF].

Many, but not all, gold miners hedge out their exposure, essentially locking in a price to sell their product in the future to ensure stable cash-flows. This is one of the big reasons why when gold prices jump, or plunge, gold mining stocks don’t always follow their metallic leader so to speak. To further demonstrate this point, below we take a closer look at the price correlation between the gold miners ETFs and the price of gold. Note that the time frame used starts at the inception date of RING: 1/31/2012-5/24/2012:

  SPDR Gold Trust (GLD)
Van Eck Market Vectors Gold Miners ETF (GDX) 0.67
Van Eck Market Vectors Junior Gold Miners (GDXJ) 0.72
PowerShares Global Gold And Precious Metals Portfolio (PSAU) 0.66
Global X Pure Gold Miners Fund (GGGG) 0.57
iShares MSCI Global Gold Miners Fund (RING) 0.73
Source: AssetCorrelation

The table below offers the same comparison with the exclusion of the youngest fund over the trailing 1-year period:

  GLD
GDX 0.71
GDXJ 0.72
PSAU 0.66
GGGG 0.12
As of 5/24/2012

The takeaway is fairly obvious: gold miner ETFs do have a mild to high positive correlation with gold prices. However, keep in mind that correlation only considers relative direction of price movements, it does not shed light on performance. For example, in 2011, gold posted roughly a 10% gain on the year, while gold miners lagged far behind. In fact, GDXJ shed losses upwards of 35%, while GGGG, PSAU, and GDX all suffered double-digit losses as well [see ETF Technical Trading FAQ]. 

Furthermore, the correlation readings fluctuate based on the time horizon. GGGG for example holds an 0.81 correlation with GLD over the past month, which is by far the highest reading from any of these tables. Traders should keep in mind that gold mining stocks and ETFs alike may serve as viable tools to gain indirect exposure to spot prices in certain situations. Over the long-haul however, there’s really no substitute for the real thing as they say. 

Another important consideration that investors should keep in mind is to ask what’s under the hood. GDX is the biggest and most popular of the pack, although it holds a handful of companies who mine for metals other than gold. GGGG on the other hand offers “pure” play exposure to this segment of the mining industry. Investors should do their research before buying into a position and keep in mind that gold mining ETFs are not always perfectly correlated with spot prices, although the relationship between the two is fairly positive. 

Follow me on Twitter @SBojinov

[For more ETF analysis, make sure to sign up for our free ETF newsletter or try a free seven day trial to ETFdb Pro]

Disclosure: No positions at time of writing.